SCHWEITZER MAUDUIT INTERNATIONAL INC, 10-K, 1997-03-20

SCHWEITZER MAUDUIT INTERNATIONAL INC
10-K, 1997-03-20
PAPER MILLS

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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, 1996

[ ] 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 30202-8246
ALPHARETTA, GEORGIA (Zip Code)
(Address of principal executive offices)

(Registrant's telephone number, including area code): 1-800-514-0186

Securities registered pursuant to Section 12(b) of the Act:

<TABLE>
TITLE OF EACH CLASS:
- --------------------
NAME OF EACH EXCHANGE ON WHICH REGISTERED:
-----------------------------------------
<S> <C>
Common stock, par value $.10 per share New York Stock Exchange, Inc.
(together with associated preferred stock
purchase rights)
</TABLE>

Securities registered pursuant to Section 12(g) of the Act:
None

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No .
--- ----
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of the Form 10-K or any amendment to this
Form 10-K. [ ]

As of December 31, 1996, 16,052,621 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 $508 million.

(Continued)

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FACING SHEET
(Continued)

DOCUMENTS INCORPORATED BY REFERENCE

Schweitzer-Mauduit International, Inc.'s 1996 Annual Report to Stockholders and
1997 Proxy Statement, filed with the Commission dated March 19, 1997, contain
much of the information required in this Form 10-K, and portions of those
documents 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 1996 Annual Report to
Stockholders and 1997 Proxy Statement. The Items of this Form 10-K, where
applicable, specify which portions of such documents are incorporated by
reference. The portions of such documents that are not incorporated by reference
shall not be deemed to be filed with the Commission as part of this Form 10-K.

DOCUMENT OF WHICH PORTIONS ITEMS OF THIS FORM 10-K
ARE INCORPORATED BY REFERENCE IN WHICH INCORPORATED
- ----------------------------- -----------------------
<S> <C>
1996 Annual Report to Stockholders (for Part I
the year ended December 31, 1996)
Item 1. Business

Item 3. Legal Proceedings

Part II

Item 5. Market for the Registrant's Common Stock
and Related Stockholder Matters

Item 6. Selected Financial Data

Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations

Item 8. Financial Statements and Supplementary Data

Part IV

Item 14. Exhibits, Financial Statement Schedules,
and Reports on Form 8-K

1997 Proxy Statement Part III

Item 10. Directors and Executive Officers of the
Registrant

Item 11. Executive Compensation

Item 12. Security Ownership of Certain Beneficial
Owners and Management

Item 13. Certain Relationships and Related
Transactions
</TABLE>

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SCHWEITZER-MAUDUIT INTERNATIONAL, INC.
TABLE OF CONTENTS

<TABLE>
<CAPTION>
PART I.

<S> <C> <C>
Item 1. BUSINESS.............................................................. 4

Item 2. PROPERTIES............................................................ 10

Item 3. LEGAL PROCEEDINGS..................................................... 12

Item 4. SUBMISSION OF MATTERS TO A VOTE
OF SECURITY HOLDERS.............................................. 15

PART II.

Item 5. MARKET FOR THE REGISTRANT'S COMMON STOCK
AND RELATED STOCKHOLDER MATTERS.................................. 16

Item 6. SELECTED FINANCIAL DATA............................................... 16

Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS.................... 16

Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA........................... 16

Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE........................... 16

PART III.

Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT................... 17

Item 11. EXECUTIVE COMPENSATION................................................ 17

Item 12. SECURITY OWNERSHIP AND CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT................................................... 17

Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS........................ 17

PART IV.

Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND
REPORTS ON FORM 8-K.............................................. 18

SIGNATURES............................................................ 19

INDEX TO EXHIBITS..................................................... 20
</TABLE>

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PART I

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ITEM 1. BUSINESS

BACKGROUND

Schweitzer-Mauduit International, Inc. ("SWM" or the "Company") was incorporated
in Delaware on August 21, 1995 as a wholly-owned subsidiary of Kimberly-Clark
Corporation ("Kimberly-Clark") for the purpose of effectuating the tax-free
spin-off of Kimberly-Clark's U.S., French and Canadian business operations that
manufacture and sell tobacco-related papers and other specialty paper products
(the "Businesses"). Pursuant to a distribution agreement dated October 23, 1995,
Kimberly-Clark agreed to distribute in the form of a dividend to its
stockholders all of the common stock of SWM and on November 30, 1995, each
Kimberly-Clark stockholder of record on November 13, 1995 received one share of
SWM common stock for every ten shares of Kimberly-Clark common stock held on the
date of record (the "Distribution"). As a result of the Distribution, SWM became
an independent public company.

Financial information about foreign and domestic operations, contained under the
caption "Management's Discussion and Analysis - Results of Operations" and in
Note 15 to Consolidated Financial Statements contained in the 1996 Annual Report
to Stockholders, are incorporated in this Item 1 by reference.

DESCRIPTION OF THE BUSINESS

GENERAL. The Company manufactures and sells paper and reconstituted tobacco
products to the tobacco industry as well as specialized paper products for use
in other applications. Tobacco industry products, which comprised 94 percent of
the Company's 1996 net sales, include cigarette, tipping and plug wrap papers
used to wrap various parts of a cigarette ("Cigarette Papers"), reconstituted
tobacco wrappers and binders for cigars, and reconstituted tobacco leaf for use
as filler in cigarettes and cigars. These products are sold directly to the
major tobacco companies or their designated converters in North America, Western
Europe, China, and elsewhere.

Non-tobacco industry products accounted for six to seven percent of the
Company's net sales in 1996, 1995 and 1994. These products included drinking
straw wrap, lightweight printing papers, tea bag, coffee and other filter
papers, battery separator paper and other specialized papers primarily for the
North American and Western European markets. These products are generally sold
directly to converters and other end-users. In 1996, the Company phased out its
production of tea bag and coffee filter papers to focus on its core market
growth opportunities.

PRODUCTS. Each of the three principal types of paper used in cigarettes -
cigarette, tipping and plug wrap papers - serves a distinct purpose in the
function of a cigarette.

Cigarette paper wraps the column of tobacco in a cigarette. Certain properties
of cigarette paper, such as basis weight, porosity, opacity, tensile strength,
texture and whiteness must be closely controlled to tight tolerances. Many of
these characteristics are critical to meet runnability standards of the
high-speed cigarette machines utilized by premium cigarette manufacturers.

Plug wrap paper forms the outer layer of a cigarette filter and is used to hold
the filter materials in a cylindrical form. Conventional plug wrap is
manufactured on flat wire paper machines using wood pulp. Porous plug wrap, a
highly porous paper, is manufactured on inclined wire paper machines from "long
fibers", such as abaca and wood pulp. Porosity 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.

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Tipping paper, produced in white or buff color, joins the cigarette's filter
element to the tobacco section of the cigarette. The ability to produce tipping
paper which is both printable and glueable at high speeds is critical to
producing a cigarette with a distinctive finished appearance.

Reconstituted tobacco is used by manufacturers of cigarettes, cigars and other
tobacco products primarily as a filler that is blended with virgin tobacco in
order to utilize otherwise wasted parts of the tobacco leaf. The Company
currently produces reconstituted tobacco in two forms: leaf in France and
wrapper and binder in the U.S. The Company exited the reconstituted tobacco leaf
product line in the U.S. at the beginning of the second quarter of 1996. (See
"Markets and Customers" below.) The Company's decision to exit the U.S.
reconstituted tobacco leaf business did not impact its U.S. wrapper and binder
business, its reconstituted tobacco leaf business in France, or the Company's
commitment to reconstituted tobacco worldwide.

MARKETS AND CUSTOMERS. The Company's U.S. business primarily supplies customers
in North America, but also has substantial sales in South America and Japan. The
customer base for the U.S. operations consists of most of the major, and many of
the smaller, cigarette manufacturers in North America, several cigar
manufacturers and approximately 70 manufacturers in 35 countries outside North
America. The Company's French operations rely predominantly on worldwide
exports, primarily to Western Europe and China, and, in lesser but substantial
amounts, to Asia other than China, Africa, the Middle East, Eastern Europe, and
Australia. The customer base for the French operations consists of a diverse
group of approximately 180 customers in over 80 countries. Customers of both
units include international tobacco companies, regional tobacco manufacturers
and government monopolies.

Between the U.S. and France, Philip Morris accounts for approximately 36
percent of the Company's net sales.

Philip Morris and B.A.T. Industries PLC ("B.A.T."), including its U.S.
subsidiary Brown & Williamson Tobacco Corporation ("Brown & Williamson"), are
the Company's two largest customers of Cigarette Papers.

The Company's French operations are the largest exporter of cigarette paper to
China with an estimated 40 percent share of that country's cigarette paper
imports.

LTR Industries, S.A. ("LTRI") is a 72-percent owned subsidiary of the Company
which manufactures reconstituted tobacco leaf in France. LTRI's three largest
customers for reconstituted tobacco leaf are Philip Morris, SEITA (a 28 percent
stockholder of LTRI), and Rothmans Companies in Europe, each representing 10
percent or more of LTRI's sales volumes.

In the second half of 1995, the Company learned that it would lose its two
largest reconstituted tobacco leaf customers in the U.S., Brown & Williamson and
Lorillard, Inc. ("Lorillard"). Brown & Williamson elected to utilize idle
internal reconstituted tobacco leaf capacity, which it obtained in B.A.T.'s
acquisition of American Tobacco Company. Lorillard advised the Company that it
would phase out its purchases of reconstituted tobacco leaf from the Company due
to its concern that the Company could not afford to continue producing
reconstituted tobacco leaf in the U.S. in the absence of the Brown & Williamson
volumes. The loss of Lorillard and Brown & Williamson as customers reduced
utilization of the Company's reconstituted tobacco leaf capacity in the U.S.
from approximately 70 percent to an unacceptable level. As a result, in December
1995, the Company made the decision to exit the U.S. reconstituted tobacco leaf
business and ceased operations early in the second quarter of 1996. (See
discussion regarding the financial impact of this decision under the caption
"Management's Discussion and Analysis - Results of Operations" appearing in the
Company's 1996 Annual Report to Stockholders.)

PHILIP MORRIS SUPPLY AGREEMENT. In 1991 and 1992, Philip Morris decided to form
strategic supply arrangements with some of its U.S. suppliers. With respect to
Cigarette Papers, the Company's U.S. unit was chosen to be the single source of
supply to Philip Morris's U.S. operations. The initial five year term of the
governing supply agreement (the "Supply Agreement") would have ended on December
31, 1997, but, as

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part of the assignment of the Supply Agreement from Kimberly-Clark to SWM,
Philip Morris and SWM agreed to extend the initial term of the contract until
December 31, 1998. The contract automatically renews for successive terms of
three years each unless either party gives notice of non-renewal 24 months
before the end of the then current term. On December 20, 1996, the Company
announced that Philip Morris and the Company agreed to extend the initial term
of the Supply Agreement for an additional six months until June 30, 1999,
thereby extending the December 31, 1996 deadline for notice of non-renewal to
June 30, 1997. The extension is intended to allow both parties additional time
to reach agreement on changes to the Supply Agreement which will make it
acceptable to both parties. The Company has no reason to believe that an
acceptable agreement will not be negotiated; however, the Company can provide no
assurances that the Supply Agreement will be so renewed. While the Company has
no reason to believe that it would lose Philip Morris as a customer in the U.S.,
such loss would have a material adverse effect on the Company.

EMPLOYEE AND LABOR RELATIONS. As of December 31, 1996, the Company had
approximately 2,400 regular full-time active employees of whom approximately 785
hourly employees and 305 salaried employees were located in the U.S. and Canada,
and approximately 790 hourly employees and 520 salaried employees were located
in France.

North American Operations - Hourly employees at the Lee, Massachusetts,
Spotswood, New Jersey and Ancram, New York mills are represented by locals of
the United Paperworkers International Union. The current five-year collective
bargaining agreements expire at the Spotswood mill on June 15, 1997, at the Lee
mills on August 1, 1997, and at the Ancram mill on September 30, 1998. There
have been no strikes or work stoppages at any of these locations for
approximately 17 years and the Company believes employee and union relations are
positive.

The Company's fiber operations in Canada are non-union. The Company believes
that employee relations are positive.

French Operations - Hourly employees at the Company's mills in Quimperle,
Malaucene, and Spay, France are union represented. During 1996, the Company
entered into new collective bargaining agreements at Quimperle and Malaucene
which expire on December 31, 1997. During February 1997, a new collective
bargaining agreement was entered into at Spay which expires on February 24,
1998. 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.

RAW MATERIALS. Wood pulp is the primary fiber used by the Company. The Company
consumed approximately 65,000 and 68,000 metric tons of wood pulp in 1996 and
1995, respectively, all of which was purchased. The Company also uses other
cellulose fibers, the most significant of which are in the form of flax fiber
and tobacco stems and scraps, as the primary raw materials for the Company's
paper and reconstituted tobacco products. While tobacco stems and scraps are
generally the property of the cigarette manufacturer for whom the reconstitution
is contracted, the Company does purchase some tobacco materials for use in the
production of reconstituted tobacco leaf and wrapper and binder products.

Flax straw is purchased and subsequently processed into flax tow at
Company-owned processing facilities in Canada and France. The flax tow is then
converted into flax pulp at pulping facilities in the U.S. and France. Flax tow
and flax pulp are also purchased externally but these purchases only represent
approximately 20 percent of the flax pulp currently consumed by the Company.

Certain specialty papers are manufactured with other cellulose fibers such as
abaca and sisal fibers and small amounts of secondary and recycled fibers. The
Company purchases all of these secondary and recycled fibers.

To ensure an adequate supply of wood pulp at competitive prices, the Company and
Kimberly-Clark agreed that Kimberly-Clark will, for a fee, make available to the
Company its pulp sourcing services. The Company continues to utilize these
services.

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The Company believes that the fibers identified above and the remaining raw
materials purchased by the Company are readily available from several sources
and that the loss of a single supplier would not have a material adverse effect
on the Company's ability to procure needed raw materials.

COMPETITION. The Company is the leading producer of Cigarette Papers in the
world. It also is the leading independent producer of reconstituted tobacco leaf
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 56
percent share of the U.S. and Canadian cigarette paper markets. The Ecusta
division of P.H. Glatfelter Company ("Ecusta") is the Company's major competitor
in the sale of cigarette paper in the U.S. and Canada. European suppliers, such
as Miquel y Costas & Miquel S.A., a Spanish corporation ("Miquel y Costas"),
also compete in this market but, to-date, have achieved no more than an
estimated 10 percent market share. The Company's U.S. operations are in the
process of expanding their efforts related to sales of cigarette paper to Asia
and Latin America. Management believes that the bases of cigarette paper
competition are price, consistent quality, level of technical service, and
performance requirements of the customer's cigarette making equipment.

The principal competitors of the Company's French cigarette paper operations are
Wattens, Schoeller & Hoesch GmbH ("Schoeller & Hoesch"), Robert Fletcher
(Greenfield) Limited, Miquel y Costas, and Julius Glatz GmbH. Papeteries de
Mauduit, S.A. ("PdM"), an indirect wholly-owned subsidiary of the Company in
France, sells approximately 70 percent of its products (cigarette paper and
porous and conventional plug wrap) in Western Europe and China. Management
believes that the bases of competition for PdM's products are the same as for
the Company's U.S. operations.

Plug Wrap Paper - Management believes that the Company's U.S. operations have a
75 percent share of the North American plug wrap market. The remaining 25
percent is shared by four competitors: Ecusta, Miquel y Costas, Wattens and
Schoeller & Hoesch. The Company's French operations hold an estimated 56 percent
of the Western European high porosity plug wrap market. Schoeller & Hoesch is
the Company's principal competitor in that market.

Management believes that the primary basis of competition for high porosity plug
wrap is technical capability with price being a secondary 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. operations have an
estimated 58 percent share of the U.S. and Canadian markets for base tipping
paper which is subsequently printed by converters. Its principal competitors in
North America are Ecusta and Tervakoski Oy, a Finnish exporter. Management
believes that the bases for competition are consistent quality, price and, most
importantly, the ability to meet the runnability and printability requirements
of converting equipment and high-speed cigarette making machines.

Papeteries de Malaucene S.A. ("PdMal"), another of the Company's indirect
wholly-owned French subsidiaries, operates a tipping paper mill in Malaucene,
France, and is among the largest converted tipping paper producers in Europe.
PdMal produces printed and unprinted, and laser and electrostatically perforated
tipping papers. The Company's principal European competitors are Tann-Papier
GmbH (Austria), Benkert GmbH (Germany) and Miquel y Costas. Management believes
that the bases of competition for perforated tipping paper in Europe are
perforation technology, consistent quality and price.

Reconstituted Tobacco - LTRI is the leading independent producer of
reconstituted tobacco leaf. Management believes that the basis of competition in
this market is primarily quality, with price being a

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much less important factor. However, sales volumes are influenced by worldwide
virgin tobacco prices (lower prices of virgin tobacco may result in lower
reconstituted tobacco sales volumes).

LTRI's principal competitors are (i) B.V. Deli-HTL Tabak Maatschappiji B.V., an
independent producer which operates in Holland, (ii) Elets, an affiliate of R.J.
Reynolds Tobacco Company which operates in the Commonwealth of Independent
States, and (iii) cigarette companies such as Philip Morris, R.J. Reynolds and
Brown & Williamson, which produce reconstituted tobacco leaf primarily for
internal use.

The Company exited the reconstituted tobacco leaf business in the U.S. at the
beginning of the second quarter of 1996 (see "Markets and Customers"), where its
operations had previously produced an estimated 10-15 percent of the
reconstituted tobacco used in U.S. cigarette production. The remaining 85-90
percent had been produced internally by U.S. cigarette companies for use in U.S.
produced cigarettes and for export to their overseas affiliates. After the
Company's exit of this business in the U.S., virtually all of the reconstituted
tobacco used in U.S. cigarette production is being produced by U.S. cigarette
companies.

Management estimates that 85-90 percent of cigar wrapper and binder used in the
U.S. market is produced internally by domestic cigar manufacturers. The
Company's Ancram Mill and Nuway Microflake Partnership, a cast process
manufacturer, produce the balance.

Other Products - As noted above, the Company also produces wrapping paper for
drinking straws, filter papers, as well as papers for lightweight printing,
business forms and battery separators. Management believes that price is the
primary basis of competition for drinking straw wrap and filter papers
(collectively, "Filler Papers"), while consistent quality and customer service
are believed to be the primary competitive factors for battery separator and
business forms papers. The Company does not possess a significant market share
in any of the above segments, except for drinking straw wrap, where management
estimates the Company holds between 30 and 50 percent of the U.S. market, and
battery separator papers, where it holds approximately 20 percent of the
worldwide market. The Company continues, to the extent feasible, to convert its
production of less profitable Filler Papers to more profitable niche
applications.

RESEARCH AND DEVELOPMENT; PATENTS AND TRADEMARKS. The Company has research and
laboratory facilities in Spay, France and Alpharetta, Georgia and employs 45
research personnel. The Company is dedicated to developing Cigarette Papers and
reconstituted tobacco product innovations and improvements to meet the needs of
individual customers. The development of new components for tobacco products is
the primary focus of the Company's research and development function, which is
working on several development projects for its major customers. The Company's
U.S. and French operations spent in the aggregate on product research and
development $6.4 million in 1994, $4.5 million in 1995 and $6.0 million in 1996.
Research expenses were lower in 1995 due to an increased amount of machine time
and other trial expenses shared with customers. The actual staffing for research
activity was comparable to the level in the other periods.

The Company believes that its research and product development capabilities are
unsurpassed in the industry and have played an important role in establishing
the Company's reputation for high quality, superior products. The Company's
commitment to research and development has enabled the Company, for example, to
(i) produce high-performance papers designed to run on the high-speed
manufacturing machines of its customers, (ii) produce papers to exacting
specifications with very high uniformity, (iii) produce cigarette paper with
extremely low basis weights, and (iv) have an acceptance rate by its customers
in excess of 99 percent. The Company also believes it is in the forefront of the
manufacturing process, having invested heavily in modern technology, including
laser technology and modern paper slitting equipment. The Company believes that
its commitment to research and development, coupled with its investment in new
technology, 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, 1996, the Company owned approximately 76 patents and had
pending 39 patent applications covering a variety of Cigarette Papers,
reconstituted tobacco leaf and cigar wrapper and binder

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products and processes in the United States, Western Europe and several other
countries. The Company believes that such patents, together with its papermaking
know-how and technical sales support, have been instrumental in establishing it
as the leading worldwide supplier of Cigarette Papers, reconstituted tobacco
leaf and reconstituted wrapper and binder made by the papermaking process.

Management believes that the Company's POROWRAP(R) trademark, the "PdM" logo and
the Papeteries de Mauduit and Schweitzer trade names also have been significant
contributors to the marketing of the Company's products.

BACKLOG; SEASONALITY. The Company has historically enjoyed a steady flow of
orders. Its mills typically receive and ship orders within a 30-day period,
except in the case of reconstituted tobacco leaf where orders are generally
placed well in advance of delivery. The Company plans its manufacturing
schedules and raw material purchases based on its evaluation of customer
forecasts and current market conditions.

The U.S. business does not calculate or maintain records of order backlogs.
Philip Morris, its largest customer, provides forecasts of future demand, but
actual orders for cigarette paper are typically placed two weeks in advance of
shipment. Approximately 5 percent of the U.S. sales are on a consignment basis.

The French business unit does maintain records of order backlogs. For Cigarette
Papers, the order backlog was approximately $24.2 million and $11.7 million on
December 31, 1996 and December 31, 1995, respectively. This represented between
40 and 50 days of Cigarette Paper sales in 1996 and between 20 and 25 days of
Cigarette Paper sales in 1995. The French unit's reconstituted tobacco leaf
business operates under a number of annual supply agreements. The order backlog
for reconstituted tobacco leaf was approximately $33.0 million and $24.6 million
on December 31, 1996 and December 31, 1995, respectively.

Sales of the Company's products are not subject to seasonal fluctuations, except
in the U.S. where customer shutdowns of one to two weeks in duration typically
occur in July and December.

SALES AND DISTRIBUTION. Essentially all of the Company's tobacco-related
products are sold through 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 non-tobacco related products are also sold on a direct basis.

ENVIRONMENTAL MATTERS. Capital expenditures for environmental controls to meet
legal requirements and otherwise relating to the protection of the environment
at the Company's facilities in the United States and France are estimated to be
$2 million in 1997 and $5 million to $10 million in 1998. These estimates
include amounts associated with the first phase of the proposed Cluster Rules.
The 1998 estimate includes amounts previously planned for earlier periods but
which have been postponed in order to ensure compliance with final governmental
regulations, once issued, and to take advantage of emerging enhanced
technologies. These expenditures have been anticipated for several years and are
not expected to have a material effect on the Company's total capital
expenditures, consolidated earnings 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 and Canada. Products made in France or in
the U.S. are marketed in more than 80 countries. Because these countries are so
numerous, it is not feasible to generally characterize the risks involved. Such
risks vary from country to country and include such factors as tariffs, trade
restrictions, changes in currency value, economic conditions, and international
relations. See "Management's Discussion and Analysis - Factors That May Affect
Future Results" appearing in the Company's 1996 Annual Report to Stockholders.

INSURANCE. The Company maintains coverage for most insurable risks that are
incident to its operations.

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PART I

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ITEM 2. PROPERTIES

The Company operates six paper mills (which include two fiber pulping
operations) in the U.S. and France. The Company also operates flax fiber
processing operations in France and Canada. The Company owns each of these
facilities except for a flax tow storage facility in Killarney, Manitoba, which
is leased. The Company maintains administrative and sales offices in Alpharetta,
Georgia and in Quimperle and Paris, France. The Company's world headquarters are
also located in Alpharetta. All of these offices are leased except for the
Quimperle office, which is owned by PdM.

Management believes that each of these facilities is well-maintained, suitable
for conducting the Company's operations and business, and adequately insured.

The mills are operating at or close to capacity, except for the reconstituted
tobacco leaf operations in France and the wrapper and binder operations in the
U.S. On December 1, 1995, the Company's Board of Directors took action to
approve capital spending of $24 million to install a new paper machine at the
Quimperle, France mill which will increase the capacity for production of long
fiber products, such as highly porous plug wrap papers, alkaline battery
separators, and liners for vacuum cleaner bags. This new paper machine began
operation during March 1997. The output of LTRI's reconstituted tobacco leaf
operations could be materially increased by operating the second machine to a
greater extent.

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The following are the locations of the Company's principal facilities as of the
date hereof:

Location Equipment/Office Space Products/Function
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Lee Mills 4 Paper Machines (plus one idle) Base Tipping and Specialty Papers,
Lee, Massachusetts Pulping Equipment Plug Wrap Paper
(4 mill sites)

Spotswood Mill 6 Paper Machines Cigarette Paper, Plug Wrap Paper
Spotswood, New Jersey 1 Reconstituted Tobacco Leaf
Machine (mothballed in 1996)
Pulping Equipment

Ancram Mill 1 Paper Machine Reconstituted Tobacco Wrapper and Binder,
Ancram, New York 1 Reconstituted Tobacco Porous Plug Wrap and Specialty Papers
Wrapper and Binder Machine

Fiber Operations 5 Movable Fiber Mills Flax Fiber Processing
Manitoba, Canada

Alpharetta, Georgia Leased Office Space Company World Headquarters,
Administration, Sales and
Research & Development
- U.S. Operations

Papeteries de Mauduit Mill 11 Paper Machines * Cigarette Paper, Plug Wrap Paper and
Quimperle, France Pulping Equipment Long Fiber Specialties

Quimperle, France Owned Office Space Administrative Offices for
French Operations

Papeteries de Malaucene Mill 1 Paper Machine Tipping and Specialty Papers
Malaucene, France 3 Printing Presses
11 Laser Perforating Lines

LTR Industries 2 Reconstituted Tobacco Leaf Reconstituted Tobacco Leaf, Flax Fiber
Spay, France Machines Processing, Research & Development
1 Fiber Mill

Paris, France Leased Office Space Administrative and Sales Offices
for French Operations

</TABLE>

* Includes the new paper machine which began operation during March 1997.

11
<PAGE> 12

PART I

- --------------------------------------------------------------------------------
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 January 31, 1997, James E. McCune on behalf of himself and other "nicotine
dependent" West Virginia cigarette smokers filed, in the Circuit Court of
Kanawha County, West Virginia, a purported class action against several tobacco
companies, industry trade associations and consultants, tobacco wholesalers and
cigarette component manufacturers, including Kimberly-Clark, seeking equitable
relief and compensatory and punitive damages in an unspecified amount for mental
suffering and physical injuries allegedly sustained as a result of having smoked
cigarettes. Under the terms of the Distribution, the Company assumed liability
for and agreed to indemnify Kimberly-Clark in litigation arising out of the
operations of the Businesses, including this case. The nine-count complaint sets
forth several theories of liability, including intentional and negligent
misrepresentation, negligence, product liability, breach of warranty and
conspiracy. Among other things, the complaint alleges that nicotine is an
addictive substance, that the tobacco companies, by using reconstituted tobacco,
are able to control the precise amount of nicotine in their cigarettes and that
LTR Industries, a French subsidiary of the Company, specializes in the
reconstitution process to help the tobacco companies control nicotine levels. As
a component supplier, the Company believes that it has meritorious defenses to
this case, but due to the uncertainties of litigation, the Company cannot
predict its outcome. The Company is unable to make a meaningful estimate of the
amount or range of loss which could result from an unfavorable outcome of this
action. This case will be vigorously defended.

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

ENVIRONMENTAL MATTERS

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

Kimberly-Clark was named a potentially responsible party ("PRP") under the
provisions of the U.S. Comprehensive Environmental Response, Compensation and
Liability Act ("CERCLA"), or analogous state statutes, at two waste disposal
sites utilized by the Company's Spotswood mill and one site used by the
Company's former Mt. Holly Springs, Pennsylvania mill. Under the terms of the
Transfer and Assumption Agreement between Kimberly-Clark and the Company (the
"Transfer Agreement"), the Company assumed all liabilities associated with each
of the following matters:

- In August 1992, the Spotswood mill received an information request from
the New Jersey Department of Environmental Protection and Energy
("NJDEPE"), now known as the New Jersey Department of

<PAGE> 13

Environmental Protection ("NJDEP"), with respect to the Jones Industrial
Service Landfill. Neither Kimberly-Clark nor the Company have any internal
records indicating that the mill used the site. However, the Spotswood mill
received routing sheets completed by a nonhazardous waste disposal
transporter used by the mill which indicate that the transporter may have
sent three loads of Spotswood mill waste to the site in September 1980. The
NJDEP issued a draft Record of Decision ("ROD") in June 1995 which
evaluated remedial alternatives. The draft ROD included a NJDEP list of
PRPs, but Kimberly-Clark was not named on the list. Although the amount of
the Company's liability, if any, cannot yet be determined, the Company does
not believe that it will be material.

- On February 6, 1991, the NJDEPE identified Kimberly-Clark as a PRP under
the provisions of the New Jersey Spill Compensation and Control Act for
remediation of the Global Sanitary Landfill waste disposal site located in
Old Bridge Township, New Jersey based on the Spotswood mill's disposal of
waste at such site. The United States Environmental Protection Agency
("EPA") has designated the disposal site as a state-led site under CERCLA
with the NJDEP acting as lead agency. In May 1991, Kimberly-Clark signed a
PRP agreement and paid an administrative assessment. In August 1993, a
consent decree was executed by the State of New Jersey and the PRPs
pursuant to which Kimberly-Clark agreed to pay $0.6 million for its share
of Phase I cleanup costs. This amount has been reflected in the Company's
financial statements. In December 1996, NJDEP issued a proposed remedial
action plan for Phase II cleanup costs. Although the Spotswood mill's share
of Phase II cleanup costs cannot yet be determined, the Company does not
believe its liability will be material.

- In April 1995, Kimberly-Clark received a letter from the Industrial
Solvents and Chemical Company ("ISCC") Site PRP Steering Committee stating
that it had been identified by the Pennsylvania Department of Environmental
Protection as a generator of waste at a nine acre site in Newberry
Township, York County, Pennsylvania. The PRP group believes that the
Company's former Mt. Holly Springs, Pennsylvania facility sent 825 gallons
of waste to the ISCC site. The PRP group has determined that the waste
allegedly sent by the Company represents 0.0185 percent of the total amount
of waste sent to the ISCC site and, therefore, has assigned to the Company
a 0.0185 percent share of the response costs. The PRP Steering Committee
has committed to incur up to $13.5 million in interim response costs and
expects future remedial costs to range from an additional $20 million to
$30 million. The Company does not believe its liability will be material.

The Company also assumed responsibility to administer a consent order between
Kimberly-Clark and the Massachusetts Department of Environmental Protection
("MDEP") governing the post-closure care of the Willow Hill Landfill in Lee,
Massachusetts. The Company is obligated to maintain the integrity of the cover
and sample groundwater monitoring wells, in addition to other long-term
maintenance responsibilities for this former non-hazardous waste disposal
facility. Under the terms of a consent order signed on January 24, 1997 with
MDEP resulting from a Comprehensive Site Assessment and a Corrective Action
Alternative Assessment ("CAAA") submitted by the Company to MDEP, the Company
has until September 10, 1997 to correct a gas migration problem by means of a
passive gas venting system, as the Company recommended in its CAAA, at a cost of
$0.1 million. If the passive venting system does not bring the site into
compliance by September 10, 1997, the Company must submit to MDEP, no later than
December 1, 1997, a revised compliance plan which employs technologies other
than passive gas venting. If the site is not in full compliance by February 10,
1998, the Company must then implement, subject to MDEP's possible modification,
the compliance plan which it would have submitted. The cost of such a plan could
range from $0.3 million to $1.5 million in addition to an estimated $0.1 million
for annual operating expenses.

The Company, under the Transfer Agreement, became owner of and assumed
responsibility from Kimberly-Clark Corporation for the Valley Mill Landfill site
in Lee, Massachusetts. The landfill was operated by the Company from 1968 to
1969 and was capped in 1970. On December 23, 1996 the Company received a Notice
of Responsibility ("Notice") from MDEP under Section 21E of the Massachusetts
Oil and Material Release Prevention and Response Act stating that an
electro-magnetic survey ("Survey") performed by a contractor of EPA at the site
indicated that buried metallic objects may

13
<PAGE> 14

be present in the subsurface. The Survey was conducted following an anonymous
call to MDEP alleging the site contains buried metal drums. The Company will
respond to the Notice and will investigate the information reported in the
Survey. Based on information currently available, the Company believes the
Survey only indicates the presence of crushed drums disposed of at the site in
1968 and 1969 and previously reported to MDEP. Although the Company can give no
assurances as to the ultimate cost of addressing this matter, the Company does
not believe such costs will be material.

Some or all of the Company's U.S. facilities may be subject to revised air
emissions and wastewater discharge standards under rules commonly known as the
"Cluster Rules". The first phase of the Cluster Rules, proposed by the EPA in
1993, would affect only wastewater discharges from the Ancram and Lee mills and
would require compliance by late 1999. The Spotswood mill discharges its
effluent to a publicly-owned treatment works. Although the EPA originally
indicated that the proposed rules would be finalized in 1996, final rules have
not yet been issued. The estimated capital expenditures for compliance at the
Ancram and Lee mills is between $6 million and $9 million in the aggregate.
However, due to uncertainty concerning applicable requirements under the final
Cluster Rules, the Company can give no assurance that this estimate will
accurately reflect the actual cost of compliance.

In addition, the later phases of the Cluster Rules (and/or Title III of the
Clean Air Act Amendments of 1990) may further regulate air emissions and
wastewater discharges from the Spotswood mill and require the Company to install
additional air pollution controls at its other U.S. facilities sometime after
the year 2000. Potential capital expenditures to comply with this subsequent
phase of the Cluster Rules and/or Title III of the Clean Air Act Amendments
cannot be estimated until after the EPA proposes applicable requirements, if
any.

The Company incurs spending necessary to meet legal requirements and otherwise
relating to the protection of the environment at the Company's facilities in the
United States and France, including the aforementioned estimated capital
spending through 1998 associated with the first phase of the proposed Cluster
Rules. For these purposes, the Company incurred total capital expenditures of
$2.5 million in 1996, and anticipates that it will incur approximately $2
million in capital expenditures in 1997 and approximately $5 million to $10
million in 1998. The major projects included in these estimates include
upgrading wastewater treatment facilities at various locations and installation
of equipment to treat volatile organic compound emissions in France.
Approximately $3 million of the total environmental capital spending estimates
for 1997 and 1998 relates to projects anticipated as necessary to comply with
the wastewater discharge requirements of the proposed Cluster Rules. The balance
of expenditures required for compliance with the initial phase of the Cluster
Rules is expected to occur in 1999. The foregoing capital expenditures are not
expected to reduce the Company's ability to invest in capacity expansion,
quality improvements, capital replacements, productivity improvements, or cost
containment projects, and are not expected to have a material adverse effect on
the Company's financial condition or results of operations.

<PAGE> 15

PART I

- --------------------------------------------------------------------------------
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

No matters were submitted to a vote of the stockholders of the Company during
the fourth quarter of 1996.

EXECUTIVE OFFICERS OF THE REGISTRANT

The names and ages of the executive officers of the Company as of March 4, 1997,
together with certain biographical information, are as follows:

NAME POSITION
------------------------------------- ---------------------
<S> <C>
Wayne H. Deitrich .......................... Chief Executive Officer

Jean-Pierre Le Hetet ....................... President - French Operations

N. Daniel Whitfield ........................ President - U.S. Operations

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

William J. Sharkey ......................... General Counsel and Secretary

Wayne L. Grunewald ......................... Controller
</TABLE>

MR. WAYNE H. DEITRICH, 53, has served as Chief Executive Officer of the Company
since August 1995 and was elected Chairman of the Board of Directors immediately
after the spin-off of the Company from Kimberly-Clark. 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, 53, has served as President - French Operations of the
Company since August 1995 and was elected to the Board of Directors immediately
after the spin-off of the Company from Kimberly-Clark. 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. N. DANIEL WHITFIELD, 49, has served as President - U.S. Operations of the
Company since August 1995. From May 1995 through August 1995, Mr. Whitfield
served as President - Specialty Products U.S. of Kimberly-Clark. From 1991
through April 1995, he was Director - Business Planning and Analysis, Pulp and
Paper Sector of Kimberly-Clark. From 1989 through 1990, Mr. Whitfield was
Director - Operations Analysis and Control, Household Products Sector of
Kimberly-Clark.

MR. PAUL C. ROBERTS, 48, has served as Chief Financial Officer and Treasurer of
the Company since August 1995. From June 1995 through August 1995, he served as
Chief Financial Officer - Specialty Products Sector of Kimberly-Clark. From
January 1995 through May 1995, he was Director - Corporate Strategic Analysis of
Kimberly-Clark, and from 1988 through 1994, Mr. Roberts was Director -
Operations Analysis and Control, Pulp and Paper Sector of Kimberly-Clark.

MR. WILLIAM J. SHARKEY, 65, has served as General Counsel and Secretary of
the Company since August 1995. Prior to that time, Mr. Sharkey was Senior
Counsel for Kimberly-Clark.

MR. WAYNE L. GRUNEWALD, 45, 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
<PAGE> 16

PART II

- --------------------------------------------------------------------------------
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER
MATTERS

PRINCIPAL MARKET

Since the Distribution of the Company's Common Stock by Kimberly-Clark on
November 30, 1995, the Common Stock has been traded on the New York Stock
Exchange ("NYSE") under the trading symbol "SWM".

APPROXIMATE NUMBER OF HOLDERS OF COMMON STOCK

As of March 4, 1997, there were 9,702 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 17 to Consolidated Financial
Statements contained in the 1996 Annual Report to Stockholders is incorporated
in this Item 5 by reference.

- --------------------------------------------------------------------------------
ITEM 6. SELECTED FINANCIAL DATA

The information set forth under the caption "Selected Financial Data" contained
in the 1996 Annual Report to Stockholders is incorporated in this Item 6 by
reference.

- --------------------------------------------------------------------------------
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS

The information set forth under the caption "Management's Discussion and
Analysis" contained in the 1996 Annual Report to Stockholders is incorporated in
this Item 7 by reference.

- --------------------------------------------------------------------------------
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The financial statements and related notes thereto of the Company and its
consolidated subsidiaries, the independent auditors' report thereon, and
management's letter regarding responsibility for financial reporting, contained
in the 1996 Annual Report to Stockholders, are incorporated in this Item 8 by
reference.

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

None.

<PAGE> 17

PART III

- --------------------------------------------------------------------------------
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

The section of the Company's Proxy Statement dated March 19, 1997 (the "1997
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 1997 Proxy Statement captioned "Executive
Compensation" under "Proposal 1. Election of Directors" is incorporated in this
Item 11 by reference.

- --------------------------------------------------------------------------------
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT

The information in the sections of the 1997 Proxy Statement captioned "Security
Ownership of Management" and "Security Ownership of Certain Beneficial Holders"
under "Proposal 1. Election of Directors" is incorporated in this Item 12 by
reference.

- --------------------------------------------------------------------------------
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The information in the section captioned "Certain Transactions and Business
Relationships" under "Proposal 1. Election of Directors" of the 1997 Proxy
Statement is incorporated in this Item 13 by reference.

17
<PAGE> 18

PART IV

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

(a) Documents filed as part of this report.

(1) Financial Statements:

The Consolidated Balance Sheets as of December 31, 1996
and 1995, the related statements of Consolidated Income
and Consolidated Cash Flow for the years ended December
31, 1996, 1995 and 1994, the related Notes thereto, and
the Independent Auditors' Report of Deloitte & Touche
LLP thereon are incorporated in Part II, Item 8 of this
Form 10-K by reference to the financial statements
contained in the 1996 Annual Report to Stockholders.

(2) Financial Statement Schedules:

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

(3) Exhibits:

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

(b) Reports on Form 8-K

(i) The Company filed a Current Report on Form 8-K dated
December 20, 1996, which reported the six month
extension of the fine papers Supply Agreement between
the Company and Philip Morris - U.S.

18
<PAGE> 19

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
Dated: March 19, 1997 (principal executive officer)

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.

<TABLE>
<CAPTION>
NAME POSITION DATE
---- -------- ----
<S> <C> <C>
/s/WAYNE H. DEITRICH Chairman of the Board and March 19, 1997
- ------------------------------------------------- Chief Executive Officer
Wayne H. Deitrich (principal executive officer)

/s/PAUL C. ROBERTS Chief Financial Officer March 19, 1997
- ------------------------------------------------- and Treasurer
Paul C. Roberts (principal financial officer)

/s/WAYNE L. GRUNEWALD Controller March 19, 1997
- ------------------------------------------------- (principal accounting officer)
Wayne L. Grunewald

* Director March 19, 1997
- -------------------------------------------------
Claire L. Arnold

* Director March 19, 1997
- -------------------------------------------------
K.C. Caldabaugh

* Director March 19, 1997
- -------------------------------------------------
Laurent G. Chambaz

* Director March 19, 1997
- -------------------------------------------------
Richard D. Jackson

* Director March 19, 1997
- -------------------------------------------------
Leonard J. Kujawa

* Director March 19, 1997
- -------------------------------------------------
Jean-Pierre Le Hetet

* Director March 19, 1997
- -------------------------------------------------
Larry B. Stillman

*By: /s/WILLIAM J. SHARKEY March 19, 1997
- -------------------------------------------------
William J. Sharkey
Attorney-In-Fact
</TABLE>

19
<PAGE> 20

SCHWEITZER-MAUDUIT INTERNATIONAL, INC.
ANNUAL REPORT ON FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 1996

INDEX TO EXHIBITS

<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- ------------------------------------------------
<S> <C>
2.1 Distribution Agreement (incorporated by reference to Exhibit 2.1 to Form 10/A Amendment 2,
dated October 27, 1995).

3.1 Certificate of Incorporation (incorporated by reference to Exhibit 3.1 to Form 10, dated
September 12, 1995).

3.2 By-Laws, as amended on and through February 27, 1996 (incorporated by reference to Exhibit
3.2 to the Company's Form 10-K for the year ended December 31, 1995).

4.1 Form of Common Stock Certificate (incorporated by reference to Exhibit 4.1 to Form 10/A
Amendment 2, dated October 27, 1995).

4.2 Rights Agreement (incorporated by reference to Exhibit 4.2 to Form 10/A Amendment 2, dated
October 27, 1995).

10.1 Transfer, Contribution and Assumption Agreement (incorporated by reference to Exhibit 10.1 to
Form 10/A Amendment 2, dated October 27, 1995).

10.2 Corporate Services Agreement (incorporated by reference to Exhibit 10.2 to Form 10/A
Amendment 2, dated October 27, 1995).

10.3 Employee Matters Agreement (incorporated by reference to Exhibit 10.3 to Form 10/A Amendment
2, dated October 27, 1995).

10.4 Tax Sharing Agreement (incorporated by reference to Exhibit 10.4 to Form 10/A Amendment 2,
dated October 27, 1995).

10.5 Outside Directors' Stock Plan (incorporated by reference to Exhibit 10.5 to Form 10/A
Amendment 2, dated October 27, 1995).

10.6.1 Annual Incentive Plan as Amended and Restated (incorporated by reference to Exhibit 10.6 to
the Company's Form 10-K for the year ended December 31, 1995).

10.6.2* Amendments to the Annual Incentive Plan dated December 5, 1996.

10.7.1 Equity Participation Plan (incorporated by reference to Exhibit 10.7 to Form 10/A Amendment
2, dated October 27, 1995).

10.7.2 First Amendment to Equity Participation Plan
(incorporated by reference to Exhibit 10.7.2 to the
Company's Form 10-K for the year ended December 31,
1995).

10.8.1 Long-Term Incentive Plan (incorporated by reference to Exhibit 10.8 to Form 10/A Amendment 2,
dated October 27, 1995).

10.8.2 First Amendment to Long-Term Incentive Plan
(incorporated by reference to Exhibit 10.7.2 to the
Company's Form 10-K for the year ended December 31,
1995).

10.8.3* Amendment to Long-Term Incentive Plan dated December 5, 1996.
</TABLE>

20
<PAGE> 21

INDEX TO EXHIBITS (Continued)
- --------------------------------------------------------------------------------

EXHIBIT NO. DESCRIPTION
- ----------- -----------------------------------
<S> <C>
10.9.1 Philip Morris Supply Agreement+ (incorporated by reference to Exhibit 10.9.1 to Form 10/A Amendment 2,
dated October 27, 1995).

10.9.2 Amendment No. 1 to Philip Morris Supply Agreement (incorporated by reference to Exhibit
10.9.2 to Form 10, dated September 12, 1995).

10.9.3* Amendment No. 2 to Philip Morris Supply Agreement+.

10.10.1 Supplemental Benefit Plan (incorporated by reference to Exhibit 10.10 to Form 10/A Amendment
2, dated October 27, 1995).

10.10.2 First Amendment to Supplemental Benefit Plan
(incorporated by reference to Exhibit 10.10.2 to the
Company's Form 10-K for the year ended December 31,
1995).

10.11* Amended and Restated Executive Severance Plan as of February 27, 1997.

10.12.1 Credit Agreement dated as of November 27, 1995, between
the Company, as Borrower and Guarantor, SMF, as
Borrower, PdM Industries, as Borrower, the Banks named
therein and Societe Generale, as Agent (the "Credit
Agreement") (incorporated by reference to Exhibit 4 to
the Company's Form 10-Q dated December 13, 1995).

10.12.2* Amendment No. 1 to Credit Agreement.

11.1 The following statement is filed as an exhibit to Part II of this Form 10-K:

The net income per common share computation included in
the Selected Financial Data and the Consolidated
Statements of Income in the Company's 1996 Annual
Report to Stockholders incorporated by reference in
Part II, Item 6 and Item 8, respectively, of this Form
10-K are based on the average number of shares of
common stock outstanding. The only "common stock
equivalents" or other potentially dilutive securities
or agreements (as defined in Accounting Principles
Board Opinion No. 15) which were contained in the
Company's capital structure during the periods
presented were options outstanding under the Company's
Equity Participation Plan.

Alternative computations of "primary" and "fully
diluted" net income per common share amounts for 1996
and 1995 assume the exercise of outstanding stock
options using the "treasury stock method". There is no
significant difference between net income per common
share presented in the Company's 1996 Annual Report to
Stockholders and net income per common share calculated
on a "primary" and "fully diluted" basis.

13.1* Portions of the Schweitzer-Mauduit International, Inc. 1996 Annual Report to Stockholders
incorporated by reference in this Form 10-K.

21.1* Subsidiaries of the Company.

23.1* Independent Auditors' Consent.
</TABLE>

21
<PAGE> 22

INDEX TO EXHIBITS (Continued)
- --------------------------------------------------------------------------------

EXHIBIT NO. DESCRIPTION
- ----------- ------------------------------------------
<S> <C>
24.1* Powers of Attorney.

27.1* Financial Data Schedule (for SEC use only).

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

* Filed herewith.

+ Exhibit has been redacted pursuant to a Confidentiality Request under Rule

24(b)-2 of the Securities Exchange Act of 1934.

</TABLE>

<PAGE> 1
EXHIBIT 10.6.2

AMENDMENTS TO THE ANNUAL INCENTIVE PLAN

SCHWEITZER-MAUDUIT INTERNATIONAL, INC.

Secretary's Certificate

I, the undersigned, Secretary of Schweitzer-Mauduit International,
Inc., a Delaware corporation (the "Company"), DO HEREBY CERTIFY that the
following is a true and correct copy of a Resolution approved and adopted by the
Board of Directors of Schweitzer-Mauduit International, Inc. at its meeting on
December 5 and 6, 1996.

AMENDMENTS TO THE ANNUAL INCENTIVE PLAN

RESOLVED, That, pursuant to the recommendation of the Compensation
Committee of this Board of Directors, the Corporation does hereby approve and
adopt the following amendments to the Schweitzer-Mauduit International, Inc.
Annual Incentive Plan, the amendment of Section 5 to be effective as of January
1, 1996 and the amendments to Sections 3 and 6 to be effective as of December 5,
1996; and the Compensation Committee of the Corporation and the proper officers
of the Corporation, and any of them acting alone, be, and they hereby are,
authorized and directed on behalf of the Corporation to take such actions in
connection with such amendments as are necessary or appropriate in the
discretion of the Compensation Committee or any of such officers to carry out
fully the terms thereof.

Section 3, Definitions, is amended to read as follows:

"`Performance Percentage' means the respective percentages
applicable to achievement of the following benchmark
Performance Levels for a given Objective as follows: Threshold
50%, Target 100%, Outstanding 150%, Maximum 200%; and, if
actual performance of such Objective falls between any two of
such benchmark Performance Levels, the percentage amount
applicable to the performance level actually achieved will be
prorated."

Section 5, Eligibility, is amended as follows:

Insert "or any Affiliate" after "Company" in line 4.

1
<PAGE> 2

Section 6, Objective Areas and Performance Levels is amended as
follows:

The third unnumbered paragraph is amended to read as follows:

"For each objective, there shall be established performance
levels ("Performance Levels") which, whenever possible, shall
consist of successively better standards or ranges, taking
into consideration actual progress in the Measurement Period,
in accomplishing the objective(s). These Performance Levels
shall be defined as "Threshold", "Target", "Outstanding", and
"Maximum". Performance below the "Threshold" level shall not
result in the payment of an award."

After the last unnumbered paragraph of Section 6, add a new
unnumbered paragraph which reads as follows:

"If during a Measurement Period, the Company, or any of its
Affiliates, purchases substantially all of the assets or
shares of a business owned by any other person or entity
("Business"), the earnings attributable to such Business,
which are included in the Company's consolidated income
statement for the Measurement Period, shall be taken into
account in calculating achievement of any earnings Objective
for the Measurement Period only if the Target Performance
Level for the Measurement Period would have been achieved for
the Measurement Period without taking the earnings of such
Business into account."

Except as stated above, the Plan shall remain in full force and
effect as adopted by the Corporation prior to this Amendment.

IN WITNESS WHEREOF, I have hereunto set my hand this 12th day of
March, 1997.

SCHWEITZER-MAUDUIT INTERNATIONAL, INC.

By: /s/ WILLIAM J. SHARKEY
-----------------------------
William J. Sharkey, Secretary

<PAGE> 1

EXHIBIT 10.8.3

AMENDMENT TO LONG-TERM INCENTIVE PLAN

SCHWEITZER-MAUDUIT INTERNATIONAL, INC.

Secretary's Certificate

AMENDMENT TO THE LONG-TERM INCENTIVE PLAN

RESOLVED FURTHER, That, pursuant to the recommendation of the
Compensation Committee of this Board of Directors, the Corporation does hereby
approve and adopt the following amendment to the Schweitzer-Mauduit
International, Inc. Long-Term Incentive Plan to be effective as of January 1,
1996; and the Compensation Committee of the Corporation and the proper officers
of the Corporation, and any of them acting alone, be, and they hereby are,
authorized and directed on behalf of the Corporation to take such actions in
connection with such amendment as are necessary or appropriate in the discretion
of the Compensation Committee or any of such officers to carry out fully the
terms thereof.

Section 5, Eligibility, is amended as follows:

Add "or any Affiliate" after "Company" in line 2.

Except as stated above, the Plan shall remain in full force and
effect as adopted and amended by the Corporation prior to this Amendment.

IN WITNESS WHEREOF, I have hereunto set my hand this 12th day of
March, 1997.

SCHWEITZER-MAUDUIT INTERNATIONAL, INC.

By: /s/ WILLIAM J. SHARKEY
-----------------------------
William J. Sharkey, Secretary

<PAGE> 1

EXHIBIT 10.9.3

COMPANY CONFIDENTIAL

AMENDMENT NO. 2 TO
PHILIP MORRIS SUPPLY AGREEMENT

CONFIDENTIAL MATERIAL APPEARING IN THIS DOCUMENT HAS BEEN OMITTED AND FILED
SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION IN ACCORDANCE WITH
RULE 24b-2, PROMULGATED UNDER THE SECURITIES EXCHANGE ACT OF 1934, AS
AMENDED. OMITTED INFORMATION HAS BEEN REPLACED WITH
ASTERISKS.

<PAGE> 2

COMPANY CONFIDENTIAL

Amendment No. 2 to the Agreement
between
Philip Morris Incorporated
and
Schweitzer-Mauduit International, Inc.
for
Fine Papers Supply

This Amendment No. 2, effective December 20, 1996, is by and between
Philip Morris Incorporated, a Virginia Corporation doing business as Philip
Morris U.S.A. ("Philip Morris"), and Schweitzer-Mauduit International, Inc., a
Delaware corporation ("SWM").

RECITALS

WHEREAS, Kimberly-Clark Corporation ("Kimberly-Clark") and Philip
Morris entered into a certain agreement, effective January 1, 1993, for the
manufacture and sale by Kimberly-Clark and the purchase by Philip Morris of Fine
Papers and entered into Amendment No. 1 to such agreement, effective September
12, 1995 (such agreement, as amended, is hereinafter referred to as the "Supply
Agreement");

WHEREAS, Kimberly-Clark assigned its rights and obligations under the
Supply Agreement to SWM, effective as of the close of business on November 30,
1995; and

WHEREAS, Philip Morris and SWM now desire to amend the Supply Agreement
as set forth hereinbelow.

NOW THEREFORE, in consideration of the foregoing and other good and
valuable consideration, the exchange and sufficiency of which are hereby
acknowledged, Philip Morris and SWM agree as follows:

1. Capitalized terms herein shall have the same meaning as in
the Supply Agreement.

2. The first sentence of Article II.A of the Supply Agreement
shall be amended by replacing December 31, 1998 with June 30, 1999. The purpose
of this change is to allow the

<PAGE> 3

COMPANY CONFIDENTIAL

parties up to six additional months (until June 30, 1997) to reach agreement on
changes to the Supply Agreement that will make it acceptable to both for the
Supply Agreement to extend beyond the initial term for at least one renewal
term.

3. Article III.F.1 of the Supply Agreement shall be amended in
its entirety to read as follows:

Following the provision of notice to terminate pursuant to
Article II.A by either party, Buyer, its Contractors and Converter may
purchase up to (1) *** of their collective requirements for each
Category of Fine Papers from suppliers other than Seller during the
first 12 of the final 24 months of the term, and (2) *** of their
collective requirements for each Category of Fine Papers from suppliers
other than Seller during the final 12 months of the term.

4. Article VII.D.1 shall be amended by adding the following new
paragraph after the "Percentage Decrease" table: "Notwithstanding the preceding
paragraph, for the *** the GSP for each Grade of Fine Paper that is identified
in Exhibit A-1 shall be the applicable GSP as indicated in such exhibit. If no
GSP for a Grade is indicated on Exhibit A-1, then the GSP for that Grade shall
be determined as provided in the preceding paragraph."

5. Exhibit A-1 hereto, entitled "Guaranteed Selling Price for
selected Grades of Fine Papers *** " is hereby incorporated into and made a
part of the Supply Agreement as Exhibit A-1 hereto.

6. All other terms and conditions of the Supply Agreement shall
remain unchanged.

7. The Supply Agreement and this Amendment No. 2 constitute
the entire agreement of the parties with respect to their subject matter and
supersede any prior or contemporaneous agreements or understandings between
Philip Morris and SWM regarding their subject matter.

<PAGE> 4

COMPANY CONFIDENTIAL

EXHIBIT A-1

GUARANTEED SELLING
PRICES OF FLAX CIGARETTE PAPER
GROUP ***

During the period ***, the Guaranteed Selling Price ("GSP") for each
Grade in the Flax Cigarette Paper Group shall be ***, as set forth on Schedule I
to this Exhibit A-1.

CONFIDENTIAL MATERIAL APPEARING IN THIS DOCUMENT HAS BEEN OMITTED AND FILED
SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION IN ACCORDANCE WITH
RULE 24b-2, PROMULGATED UNDER THE SECURITIES
EXCHANGE ACT OF 1934, AS AMENDED. OMITTED INFORMATION HAS BEEN
REPLACED WITH ASTERISKS.

4
<PAGE> 5

COMPANY CONFIDENTIAL

IN WITNESS WHEREOF, the parties have caused this Amendment No. 2 to be
executed by their duly authorized representatives effective as of the date first
set forth above.

PHILIP MORRIS INCORPORATED

BY /s/ A.D. LATSHAW
---------------------
TITLE Director, Purchasing
---------------------

SCHWEITZER-MAUDUIT INTERNATIONAL, INC.

BY /s/ N. DANIEL WHITFIELD
---------------------------
TITLE President - U.S. Operations
---------------------------

CONFIDENTIAL MATERIAL APPEARING IN THIS DOCUMENT HAS BEEN OMITTED AND FILED
SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION IN ACCORDANCE WITH
RULE 24b-2, PROMULGATED UNDER THE SECURITIES
EXCHANGE ACT OF 1934, AS AMENDED. OMITTED INFORMATION HAS BEEN
REPLACED WITH ASTERISKS.

5
<PAGE> 6

STRICTLY CONFIDENTIAL Printed: ***
TITLE: PHILIP MORRIS USA - PRICES BY GRADE
Effective Date: *** PAGE 1 OF 1

File Name: ***
GSP PRICE ADJUSTTMENT OF *** ON EACH GRADE
IN THE FLAX CIGARETTE PAPER GROUP.

****

CONFIDENTIAL MATERIAL APPEARING IN THIS DOCUMENT HAS BEEN OMITTED
AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION IN
ACCORDANCE WITH RULE 24b-2, PROMULGATED UNDER THE SECURITIES
EXCHANGE ACT OF 1934, AS AMENDED. OMITTED INFORMATION HAS BEEN
REPLACED WITH ASTERISKS.

<PAGE> 1

EXHIBIT 10.11

SCHWEITZER-MAUDUIT INTERNATIONAL, INC.
EXECUTIVE SEVERANCE PLAN

AS AMENDED AND RESTATED
EFFECTIVE AS OF FEBRUARY 27, 1997

<PAGE> 2

SCHWEITZER-MAUDUIT INTERNATIONAL, INC.
EXECUTIVE SEVERANCE PLAN FOR KEY EMPLOYEES

ARTICLE 1 - PURPOSE AND ADOPTION OF PLAN

1.1 Adoption of Plan. Schweitzer-Mauduit International, Inc.
("Company") hereby amends and restates the Schweitzer-Mauduit International,
Inc. Executive Severance Plan effective as of February 27, 1997. The Company
intends that this Plan qualify as and come within the various exceptions and
exemptions under the Employee Retirement Income Security Act of 1974 ("ERISA"),
as amended, for an unfunded plan maintained primarily for a select group of
management or highly compensated employees, and any ambiguities in this Plan
shall be construed to effect that intent. The benefits of this Plan for U.S.
Employees (as hereinafter defined) shall be paid solely from the general assets
of the Company. The benefits of this Plan for French Employees (as hereinafter
defined) shall be paid by the French Employer (as hereinafter defined) but, if
as a result of applicable French laws, a French Employer would be prohibited
from paying the benefits of this Plan to a French Employee, any such benefits
shall be paid by the Company to such French Employee.
1.2 Purpose. The Plan is primarily designed to provide benefits to
certain Key Employees (as hereinafter defined) upon termination of employment as
a result of a Change of Control or otherwise.
1.3 Effect on Other Plans Sponsored by the Company or by a French
Employer. The benefits payable under the Plan are in addition to the coverage
and benefits generally afforded by Other Plans (as hereinafter defined) to Key
Employees terminating from the service of the Company or, as the case may be,
from the service of a French Employer and any other programs sponsored by the
Company or provided to Participants who are French Employees including, but not
limited to, vested benefits under any qualified employee benefit plans. However,
nothing herein is intended to or shall be construed to require the Company or a
French Employer to institute or continue in effect any particular plan or
benefit sponsored by the Company or such French Employer, and the Company and
each French Employer hereby reserve the right to amend or terminate any of their
Other Plans or benefit programs at any time in accordance with the procedures
set forth in each such plan or program and any applicable law.
The masculine pronoun shall be construed to include the feminine
pronoun and singular shall include the plural where the context so requires.

ARTICLE 2 - DEFINITIONS

2.1 "Administrator" shall mean the Compensation Committee
of the Board.
2.2 "Agreement" shall mean the participation agreement provided to
a Key Employee by the Administrator as provided in Section 3.2.
2.3 "Annual Compensation" shall mean:
a) For U.S. Employees, a Participant's rate of base
salary paid or payable for a calendar year by the
Company and any incentive award paid or payable to
such Participant pursuant to the Schweitzer-Mauduit
International, Inc. Annual Incentive Plan (the "SMI
Annual Incentive Plan") or any replacement or
successor to such plan for such calendar year. b) For
French Employees, a Participant's rate of base salary
paid or payable for a calendar year by his French
Employer, plus any incentive award paid or payable to
such Participant pursuant to the SMI Annual Incentive
Plan or any replacement or successor to such plan for
such calendar year, plus any profit-sharing paid or
payable by his French Employer attributable to such
calendar year minus the aggregate amount of (i) any
Convention Collective payments, (ii) Assedic
Payments, or (iii) private insurance payments paid or
payable to such Participant as a result of a Change
of Control Termination.

1
<PAGE> 3

2.4 "Basic Plan" shall mean the Securite Sociale retirement benefit
plan sponsored by the French Government.
2.5 "Board" shall mean the Board of Directors of
Schweitzer-Mauduit International, Inc.
2.6 "Cause" shall mean the termination of the Participant's
employment by the Company or by
his French Employer, as the case may be on the basis of criminal or civil fraud
on the part of the Participant.
2.7 "Change of Control" shall mean the date as of which:
(a) a third person, including a "group" as defined in Section 13(d)(3) of the
Securities Exchange Act of 1934, acquires actual or beneficial ownership of
shares of the Company having 15% or more of the total number of votes that may
be cast for the election of Directors of the Company; or (b) as the result of
any cash tender or exchange offer, merger or other business combination, sale of
assets or contested election, or any combination of the foregoing transactions
(a "Transaction"), the persons who were directors of the Company before the
Transaction shall cease to constitute a majority of the Board of Directors of
the Company or any successor to the Company.
2.8 "Change of Control Termination" shall mean the termination of a
Participant's employment by the Company or his French Employer, as the case may
be, within two years of a Change of Control for any reason other than
Retirement, Disability or the Participant's death.
2.9 "Code" shall mean the Internal Revenue Code of 1986,
as amended.
2.10 "Company" shall mean Schweitzer-Mauduit International,
Inc. and each of its successors and assigns.
2.11 "Complementary Plan" shall mean the national pension plans for
French Employees and workers sponsored by the Association des Regimes de
Retraite Complementaires ("ARRCO") and the Association Generale des Institutions
de Retraite des Cadres ("AGIRC"), respectively.
2.12 "Disability" shall mean Totally and Permanently Disabled,
within the meaning of the Retirement Plan, provided that the Administrator shall
make any such determination with respect to a Participant hereunder.
2.13 "French Employee" shall mean an individual employed by one
of the French Employers.
2.14 "French Employer(s)" mean Schweitzer-Mauduit France,
S.A.R.L. or LTR Industries, S.A.
and their respective subsidiaries.
2.15 "French Supplementary Plans" shall mean the
supplementary pension benefit plans provided, respectively, by Papeteries
de Mauduit, S.A. and LTR Industries, S.A. to their employees.
2.16 "Key Employee" shall mean an individual who is a member of a
select group of management or highly compensated French Employees and/or U.S.
Employees, as determined from time to time by the Administrator.
2.17 "Other Plans" shall mean other plans of the Company
or of the French Employer, including but not limited to the Schweitzer-Mauduit
International, Inc. Annual Incentive Plan, the Schweitzer-Mauduit International,
Inc. Equity Participation Plan, the Schweitzer-Mauduit International, Inc.
Long-Term Incentive Plan, and the Supplemental Plan.
2.18 "Participant" shall mean a Key Employee who has entered into
an Agreement with the Administrator in accordance with Section 3.2.
2.19 "Plan" shall mean this Schweitzer-Mauduit
International, Inc. Executive Severance Plan.
2.20 "Retirement" shall mean
a. For U.S. Employees, the voluntary termination of the
Participant's employment by the Company pursuant to the terms
of the qualified defined benefit pension plan of the Company,
which termination was initiated by such Participant in writing
pursuant to the procedures of such qualified defined benefit
pension plan prior to a Change of Control notwithstanding the
Participant's actual retirement date occurs after a Change of
Control.
b. For French Employees, the voluntary termination of
the Participant's employment by his French Employer as a
result of such Participant's retirement pursuant to the terms
of the Basic Plan, the Complementary Plan and, if applicable,
the French Supplementary Plan, which termination was initiated
by such Participant in writing pursuant to the

2
<PAGE> 4

procedures of such Basic Plan, Complementary Plan and, if
applicable, French Supplementary Plan prior to a Change of
Control, notwithstanding that the Participant's actual
retirement date occurs after a Change of Control.
2.21 "Retirement Plan" shall mean the Schweitzer-Mauduit
International, Inc. Retirement Plan.
2.22 "Supplemental Plan" shall mean the Supplemental
Benefit Plan to the Schweitzer-Mauduit International, Inc. Retirement Plan.
2.23 "U.S. Employee" shall mean individuals employed by the
Company.

ARTICLE 3 - ELIGIBILITY

3.1 Eligibility to Participate. The Administrator shall
from time to time determine in writing the Key Employees who are eligible to
participate in this Plan. A list of current Participants shall be set forth on
Appendix A hereto, as updated by the Committee from time to time.
3.2 Agreement. The Administrator shall enter into a participation
agreement with each Key Employee the Administrator determines to be eligible
for participation in this Plan. Such Agreement shall identify the Key Employee
as a Participant in this Plan and shall contain such terms as deemed
appropriate by the Administrator, but shall be consistent with and governed by
the terms of this Plan.

ARTICLE 4 - SEVERANCE BENEFITS

4.1 Termination Following Change of Control. (a) If a Participant's
employment with the Company or his French Employer, as the case may be, shall
terminate within two years of a Change of Control for any reason other than
Retirement, Disability or the Participant's death, the Company or, subject to
the provisions of Section 1.1, the French Employer, as the case may be, shall
pay or, with respect to certain benefits hereinafter described, shall cause to
be paid to the Participant the following benefits:
(1) an amount equal to three times the Participant's
highest Annual Compensation for any calendar year
beginning with or within the three-year period
terminating on the date of termination of the
Participant's employment, which amount shall be paid
to the Participant in cash on or before the fifth day
following the date of termination;
(2) for a period of three years following the date of
termination of employment, the Participant and anyone
entitled to claim under or through the Participant
shall be entitled to benefits as follows:
i) for U.S. Employees, all benefits under
the group health care plan, dental care
plan, life or other insurance or death
benefit plan, or other present or future
similar group employee benefit plan or
program of the Company for which key
executives are eligible at the date of a
Change of Control, to the same extent as if
the Participant had continued to be an
employee of the Company during such period
and such benefits shall, to the extent not
fully paid under any such plan or program,
be paid by the Company; and ii) for French
Employees, all medical and dental benefits
provided by "Social Securite", medical,
dental and life insurance or death benefit
plans, or other present or future similar
medical, dental, life or other insurance or
death benefit plans or programs generally
available to French Employees for which such
Participant is eligible at the date of the
Change of Control, to the same extent as if
the Participant had continued to be a French
Employee during such period and such
benefits shall, to the extent not fully paid
under any such plan or program, be paid by
the French Employer.
(3) for U.S. Employees, an amount equal to the Actuarial
Equivalent (as defined in the Retirement Plan) of the
accrued benefit the Participant would have earned
under

<PAGE> 5

the Retirement Plan and the Supplemental Plan
for the three-year period following the date of the
termination of his employment with the Company based
on the Participant's earnings in effect for purposes
of the Retirement Plan and the Supplemental Plan on
the date of such termination, which amount shall be
paid to the Participant in cash on or before the
fifth day following the date of termination; and
(4) for French Employees; a lump sum equal
to the sum of the following amounts which sum shall
be payable in cash on or before the tenth day
following the date of termination:
(i) the cost of purchasing
any pension credits lost by a Participant
under the Basic Plan as a result of a Change
of Control Termination, but in no event
shall the pension credits so purchased
exceed 12 quarters of pension credits;
(ii) a lump sum equal to
(x) the purchase price of any pension
credits lost by a Participant under the
Complementary Plan plus (y) the present
value of any portion of lost pension credits
which may not be purchased back from the
Complementary Plan, each as a result of a
Change of Control Termination provided,
however, that in no event shall such lost
Complementary Plan benefits exceed the
present worth of three years of such lost
pension benefits; and
(iii) for pension benefits
lost under the French Supplementary Plan as
a result of a Change of Control Termination,
payment of a lump sum calculated as follows:
a) if the Participant is
terminated between ages 62
and 65, a lump sum equal to
the present worth of the
difference between the
pension benefits the
Participant would have
received at age 65 absent
the Change of Control
Termination and the reduced
pension benefit such
Participant will receive at
age 65 as a result of such
termination;
b) if the Participant is
terminated between ages 60
and 62, payment of a lump
sum as calculated in (a)
above multiplied by the
ratio of A to B where A =
three years and B = the
number of years between the
Change of Control
Termination and attainment
of age 65.
c) if the Participant is
terminated before age 60 or
with less than 20 years
service with a French
Employer, a lump sum equal
to the present worth of the
pension benefit the
Participant would have
received at age 65, absent
the Change of Control
Termination multiplied by
the ratio of A to B where A
= three years and B = the
number of years between the
Change of Control
Termination and the date on
which the Participant would
attain age 65 provided,
however, that no such lump
sum shall be payable unless
such Participant could have
earned 20 years service
with a French Employer on
or before attainment of age
65, absent a Change of
Control Termination.
(b) If a Participant is or may be liable for Federal income taxes
in the United States, such Participant's Agreement shall provide that the
parties agree that the payments provided in Section 4.1(a) hereof are reasonable
compensation in light of the Participant's services rendered to the Company or
the French Employer, as the case may be, and that neither party shall contest
the payment of such benefits as constituting an "excess parachute payment"
within the meaning of Section 280G(b)(1) of the Code.

4
<PAGE> 6

(c) In the event that (i) the Participant becomes entitled to the
compensation and benefits described in Section 4.1(a) hereof ("Compensation
Payments"), (ii) the Company determines, based upon the advice of tax counsel
selected by the Company's independent auditors and acceptable to the
Participant, that, as a result of such Compensation Payments and any other
benefits or payments required to be taken into account under Code Section
280G(b)(2) ("Parachute Payments"), any of such Parachute Payments must be
reported by the Company as "excess parachute payments", and (iii) such Parachute
Payments are 3.5 or more times the "base amount" as defined in Code Section
280G(b)(3) with respect to such Participant ("Base Amount"), the Company shall
pay to the Participant at the time specified in Section 4.1(a) above an
additional amount ("Gross-Up Payment") such that the net amount retained by the
Participant, after deduction of any of the tax imposed on the Participant by
Section 4999 of the Code ("Excise Tax") and any Federal, state and local income
tax and Excise Tax upon the Gross-Up Payment, shall be equal to the Parachute
Payments determined prior to the application of this paragraph. The value of any
non-cash benefits or any deferred payment or benefit shall be determined by the
Company's independent auditors. For purposes of determining the amount of the
Gross-Up Payment, the Participant shall be deemed to pay Federal income taxes at
the highest marginal rate of Federal income taxation in the calendar year in
which the Gross-Up Payment is to be made and state and local income taxes at the
highest marginal rates of taxation in the state and locality of the
Participant's residence on the date of termination of his employment, net of the
maximum reduction in Federal income taxes which could be obtained from deduction
of such state and local taxes. In the event that the Excise Tax payable by the
Participant is subsequently determined to be less than the amount, if any, taken
into account hereunder at the time of termination of the Participant's
employment, the Participant shall repay to the Company at the time that the
amount of such reduction in Excise Tax is finally determined the portion of the
Gross-Up Payment attributable to such reduction plus interest on the amount of
such repayment at the rate provided for in Section 1274(b)(2)(B) of the Code
("Repayment Amount"). In the event that the Excise Tax payable by the
Participant is determined to exceed the amount, if any, taken into account
hereunder at the time of the termination of the Participant's employment
(including by reason of any payment the existence or amount of which cannot be
determined at the time of the Gross-Up Payment), the Company shall make an
additional Gross-Up Payment in respect of such excess (plus any interest and
penalty payable with respect to such excess) immediately prior to the time that
the amount of such excess is required to be paid by Participant (regardless of
any contest of such payment pursuant to Section 4.1(e)) ("Additional Gross-up
Payment"), such that the net amount retained by the Participant, after deduction
of any Excise Tax on the Parachute Payments and any Federal, state and local
income tax and Excise Tax upon the Additional Gross-Up Payment, shall be equal
to the Parachute Payments determined prior to the application of this paragraph.
In the event that the Excise Tax payable by the Participant is subsequently
determined to be less than the amount of the Additional Gross-up Payment paid to
the participant, the Participant shall repay to the Company at the time that the
amount of such reduction in the Additional Gross-up Payment is determined the
portion of the Additional Gross-up Payment attributable to such reduction plus
interest on the amount of such repayment at the rate provided for in Section
1274(h)(2)(B) of the Code ("Additional Repayment Amount"). The obligation to pay
any Repayment Amount, Additional Gross-up or Additional Repayment Amount shall
remain in effect under this Agreement for the entire period during which the
Participant remains liable for the Excise Tax, including the period during which
any applicable statute of limitation remains open.
(d) In the event the Participant's Parachute Payments are less than
3.5 times the Base Amount, the Company shall limit the Compensation Payments
provided hereunder to the extent necessary so that the Participant's Parachute
Payments do not exceed 2.99 times the Base Amount.
(e) Unless the Company determines that any Parachute Payments made
hereunder must be reported as "excess parachute payments" in accordance with
Section 4.1(c) above, neither party shall file any return taking the position
that the payment of such benefits constitutes an "excess parachute payment"
within the meaning of Section 280G(b)(1) of the Code. If the Internal Revenue
Service proposes an assessment of Excise Tax against the Participant in excess
of the amount, if any, taken into account at the time specified in Section
4.1(c) and the Company notifies the Participant in writing that the Company
elects to contest such assessment at its own expense, the Participant shall
cooperate in good faith with the Company in contesting such proposed assessment
and agrees not to settle such contest without the written consent of the
Company. Any such contest shall be controlled by the Company, provided, however,
that the

5
<PAGE> 7

Participant shall have the right to participate in such contest. Notwithstanding
the Company's election to contest the assessment of an Excise Tax, the
Participant shall be entitled to an Additional Gross-Up Payment under Section
4.1(c) at the time set forth therein.
4.2 Termination of Employment. If a Participant's employment
with the Company or his French Employer shall terminate during the term of his
Agreement for any reason other than Cause, the Company or (if such payment is
not inconsistent with any relevant French law) his French Employer, shall pay
the Participant or the Participant's beneficiary, as the case may be, in cash a
lump sum payment in the amount set forth in the Agreement with such Participant
under this Plan within 30 days of his termination of employment. Such amount
shall be set forth on Appendix A hereto and shall not be more than the
Participant's monthly base salary multiplied by 24. No benefits shall be payable
pursuant to this Section 4.2 in the event a Participant is entitled to severance
payments under Section 4.1 hereof.

ARTICLE 5 - ADMINISTRATION

5.1 Administrator. The Administrator is responsible
for the general administration of the Plan.
5.2 Duties of the Administrator. The Administrator shall be
responsible for the daily administration of the Plan and may appoint other
persons or entities to perform or assist in the performance of any of its
duties, subject to its review and approval. The Administrator shall have the
right to remove any such appointee from his position without cause upon notice.
5.3 Powers. The Administrator shall administer the Plan in
accordance with its terms and shall have all powers necessary to carry out the
provisions of the Plan as more particularly set forth herein. The Administrator
shall have discretionary authority to interpret the Plan, and to determine all
questions arising in the administration, interpretation, and application of the
Plan; provided, however, that such discretionary authority shall be exercised in
good faith in order to achieve the principal purposes of the Plan to provide
severance benefits, including enhanced severance benefits upon a Change of
Control, as described in Article 4. All such determinations shall be conclusive
and binding on all interested persons. The Administrator shall adopt such
procedures and regulations necessary and/or desirable for the discharge of its
duties hereunder and may appoint such accountants, counsel, actuaries,
specialists, and other agents as it deems necessary and/or desirable in
connection with the administration of this Plan.

5.4 Compensation of the Administrator. The Administrator
shall not receive any compensation from the Plan for its services.

5.5 Indemnification. The Company shall indemnify the
Administrator against any and all claims, losses, damages, expenses, and
liability arising from its actions or omissions, except when the same is
finally adjudicated to be due to the Administrator's gross negligence or
willful misconduct. The Company may purchase at its own expense sufficient
liability insurance for the Administrator to cover any and all claims, losses,
damages, and expenses arising from any action or omission in connection with
the execution of the duties as the Administrator.

ARTICLE 6 - SUCCESSOR TO THE COMPANY

6.1 The Company will require any successor or assign
(whether direct or indirect, by purchase, merger, consolidation or otherwise) to
all or substantially all of the business and/or assets of the Company,
expressly, absolutely and unconditionally to assume this Plan and agree to
perform the obligations of the Company under this Plan and each Participant's
Agreement in the same manner and to the same extent that the Company would be
required to perform such obligations if no such succession or assignment had
taken place.

ARTICLE 7 - MISCELLANEOUS

7.1 Funding of Benefits. The benefits payable to a
Participant under the Plan shall not be funded in any manner and shall be paid
by the Company or the French employer, as the case may be, out

6
<PAGE> 8

of its general assets, which assets are subject to the claims of the Company's
or the French Employer's creditors.
7.2 Settlement of Accounts. Except as prohibited by
applicable law, there shall be deducted from the payment of any benefit due
under the Plan the amount of any uncontested indebtedness, obligation, or
liability which the Participant has acknowledged in writing as owing to the
Company or the French Employer as the case may be, or any of their respective
subsidiaries and the amount of which has been agreed to by the Participant.
7.3 Withholding. There shall be deducted from the payment
of any benefit due under the Plan the amount of any tax required by any
governmental authority to be withheld and paid over by the Company or the
French Employer, as the case may be, to such governmental authority for the
account of the Participant entitled to such payment.
7.4 Assignment by the Participant. Unless required by court
order, no Participant or beneficiary shall have any rights to sell, assign,
transfer, encumber, or otherwise convey the right to receive the payment of any
benefit due hereunder, which payment and the rights thereto are expressly
declared to be nonassignable and nontransferable. Any attempt to do so shall be
null and void and of no effect.
7.5 Amendment and Termination. The Plan may be amended or
terminated at any time by the Company, by resolution of the Board; provided
that no termination or amendment reducing the severance benefits provided
hereunder shall be effective until the expiration of the two-year period
following the date of the Board resolution providing for such termination.
Further, no amendment or termination shall be effective during the two-year
period following the date of a Change of Control of the Company without the
consent of all the Participants. Any termination of this Plan shall cause the
immediate termination of all outstanding Agreements hereunder. No amendment or
termination shall affect the rights of any Participant who is entitled to
severance benefits pursuant to Article 4 at the time of such amendment or
termination.
7.6 No Guarantee of Employment. Participation hereunder
shall not be construed as creating any contract of employment between the
Company or a French Employer and any Key Employee, nor shall it limit the right
of the Company or such French Employer to terminate a Key Employee's employment
at any time for any reason whatsoever.
7.7 Construction. This Plan shall be construed
in accordance with and governed by the laws of the State of Georgia, to the
extent such laws are not otherwise superseded by the laws of the United States.

<PAGE> 1

EXHIBIT 10.12.2

AMENDMENT NO. 1 TO CREDIT AGREEMENT

This Amendment No. 1 dated as of November 25, 1996 ("Amendment") is
among Schweitzer-Mauduit International, Inc., a Delaware corporation ("Company"
or "Guarantor"), Schweitzer-Mauduit France S.A.R.L., a French corporation
("SMF"), PDM Industries, S.N.C., a French corporation ("PDM", together with the
Company and SMF, the "Borrowers"), the banks party hereto ("Banks") and Societe
Generale, as agent for the Banks ("Agent").

INTRODUCTION

A. The Borrowers, the Guarantor, the Banks and the Agent
are party to the Credit Agreement dated as of November 27, 1995.

B. The Borrowers have requested that the Banks agree
to extend the Maturity Date of the U.S. Revolving Commitments and the French
Revolving Commitments under the Credit Agreement from November 25, 1996 to
November 24, 1997.

THEREFORE, the Borrowers, the Guarantor, the Agent and the Banks
hereby agree as follows:

Section 1. Definitions; References. Unless otherwise defined in
this Amendment, terms used in this Amendment which are defined in the Credit
Agreement shall have the meanings assigned to such terms in the Credit
Agreement.

Section 2. Amendments. Section 1.01 of the Credit Agreement is
hereby amended by deleting the date "November 25, 1996" in the definition of
"Maturity Date" and replacing it with the date "November 24, 1997".

Section 3. Representations and Warranties. The Borrowers and the
Guarantor represent and warrant to the Agent and the Banks that:

(a) Any representations and warranties set forth in the
Credit Agreement and in the other Credit Documents (other than those made as of
a specific date) are true and correct in all material respects as of the date
of this Agreement;

(b) (i) The execution, delivery and performance of this
Agreement are within the corporate power and authority of the Borrowers and the
Guarantor and have been duly authorized by appropriate proceedings and (ii)
this Agreement constitutes a legal, valid, and binding obligation of the
Borrowers and the Guarantor enforceable in accordance with its terms, except as
limited by applicable bankruptcy, insolvency, reorganization, moratorium, or
similar laws affecting the rights of creditors generally and general principles
of equity.

(d) As of the effectiveness of this Agreement, no
Potential Phaseout Event has occurred.

<PAGE> 2

Section 4. Effectiveness. This Agreement shall become effective
and the Credit Agreement shall be amended as provided in this Agreement upon the
occurrence of the following conditions precedent:

(a) The Borrowers, the Guarantor, the Agent, and the Banks
shall have delivered duly and validly executed originals of this Agreement to
the Agent; and

(b) The representations and warranties in this Agreement
shall be true and correct in all material respects.

Section 5. Choice of Law. This Agreement shall be governed by
and construed and enforced in accordance with the laws of the State of New York.

Section 6. Counterparts. This Agreement may be signed in any
number of counterparts, each of which shall be an original.

EXECUTED as of the 25th day of November, 1996.

BORROWERS:

SCHWEITZER-MAUDUIT INTERNATIONAL, INC.

By: /s/ WAYNE H. DEITRICH
-----------------------
Name: Wayne H. Deitrich
-----------------------
Title: Chairman & CEO
-----------------------

SCHWEITZER-MAUDUIT FRANCE S.A.R.L.

By: /s/ JEAN-PIERRE LEHETET
-----------------------
Name: Jean-Pierre LeHetet
-----------------------
Title: Manager (Gerant)
-----------------------

PDM INDUSTRIES S.N.C.

By: /s/ JEAN-PIERRE LEHETET
-----------------------
Name: Jean-Pierre LeHetet
-----------------------
Title: Legal Representative of Papeteries de Mauduit S.A.
--------------------------------------------------
(PDM S.A. being Manager or Gerant of PDM Industries
S.N.C.)

<PAGE> 3

GUARANTOR:

SCHWEITZER-MAUDUIT INTERNATIONAL, INC.

By: /s/ WAYNE H. DEITRICH
-----------------------
Name: Wayne H. Deitrich
-----------------------
Title: Chairman & CEO
-----------------------

AGENT

SOCIETE GENERALE

By: /s/ RICHARD M. LEWIS
-----------------------
Name: Richard M. Lewis
-----------------------
Title: Vice President
-----------------------

BANKS

SOCIETE GENERALE

By: /s/ RICHARD M. LEWIS
-----------------------
Name: Richard M. Lewis
-----------------------
Title: Vice President
-----------------------

BANQUE NATIONALE DE PARIS

By: /s/ GAISNON FRANCOIS
-----------------------
Name: Gaisnon Francois
-----------------------
Title: Sous Directeur
-----------------------

BANQUE FRANCAISE DUE COMMERCE EXTERIEUR

By: /s/ BERNARD DE QUILLACQ
-----------------------
Name: Bernard de Quillacq
-----------------------
Title: Directeur Adjoint
-----------------------

By: /s/ HELENE BERNIER
-----------------------
Name: Helene Bernier
-----------------------
Title: Attache de Direction
-----------------------

<PAGE> 4

CREDIT NATIONAL

By: /s/ CLAUDE LOT
-----------------------
Name: Claude Lot
-----------------------
Title: Executive Vice President
-----------------------
Dept. of Financing for Major Corporations
-----------------------------------------

SUNTRUST BANK, ATLANTA

By: /s/ MIKE SMITH
-----------------------
Name: C. Michael Smith Jr.
-----------------------
Title: Bank Officer
-----------------------

By: /s/ R. MICHAEL DUNLAP
-----------------------
Name: R. Michael Dunlap
-----------------------
Title: Vice President
-----------------------

THE BANK OF NOVA SCOTIA

By: /s/ ANN K. LALLEMAND
-----------------------
Name: Ann K. Lallemand
-----------------------
Title: Relationship Manager
-----------------------

WACHOVIA BANK OF GEORGIA, N.A.

By: /s/ KATHERINE W. GLISTA
-----------------------
Name: Katherine W. Glista
-----------------------
Title: Vice President
-----------------------

<PAGE> 1
EXHIBIT 13.1

PORTIONS OF
THE SCHWIETZER-MAUDUIT INTERNATIONAL, INC. 1996 ANNUAL REPORT TO STOCKHOLDERS
INCORPORATED BY REFERENCE IN FORM 10-K

<PAGE> 2

SELECTED FINANCIAL DATA
Schweitzer-Mauduit International, Inc. and Subsidiaries
- --------------------------------------------------------------------------------

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 Schweitzer-Mauduit International, Inc. and Subsidiaries ("SWM" or
the "Company") and the notes thereto included elsewhere in this Annual Report.
The financial statement data as of and for the year ended December 31, 1996 and
the balance sheet data as of December 31, 1995 are on a consolidated basis. The
income statement data for the year ended December 31, 1995 has been derived from
historical combined financial statements for the eleven months ended November
30, 1995, and the consolidated results of the Company for the one month ended
December 31, 1995, which have been audited by Deloitte & Touche LLP, independent
auditors. The income statement data for the years ended December 31, 1994, 1993
and 1992 and balance sheet data as of December 31, 1994 and 1993 have been
derived from historical combined financial statements audited by Deloitte &
Touche LLP, independent auditors. The balance sheet data as of December 31, 1992
has been derived from unaudited historical combined financial statements. In the
opinion of management, the unaudited combined financial statements reflect all
adjustments necessary to present fairly the financial position of the Company
and the results of operations for the periods referenced. The historical
combined financial statements of SWM and predecessors do not reflect the results
of operations or financial position that would have been obtained had SWM been a
separate, independent company and are not indicative of SWM's future performance
as a separate, independent company.

- ---------------------------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31
- ---------------------------------------------------------------------------------------------------------------------------
(U.S. $ in millions, except per share amounts) 1996 1995 1994 1993 1992
- ---------------------------------------------------------------------------------------------------------------------------
INCOME STATEMENT DATA
<S> <C> <C> <C> <C> <C>
Net Sales....................................... $471.3 $462.9 $404.2 $376.2 $398.6
Gross Profit.................................... 114.2 101.2 92.1 89.0 95.5
Operating Profit.............................. 74.0 58.7 58.7 57.8 64.6
Interest income (expense) from affiliates, Net (1) - 3.3 5.1 6.1 6.0
Income From Continuing Operations Before
Accounting Changes......................... 38.7 36.8 35.1 31.9 35.2
Net Income...................................... 38.7 36.8 35.1 31.9 24.6 (2)
PER SHARE BASIS
Income From Continuing Operations............... $ 2.41
Net Income...................................... $ 2.41
Unaudited Pro Forma Net Income (3).............. $1.81 $1.66
Cash Dividends Declared and Paid................ $ .45
CASH FLOW AND BALANCE SHEET DATA
Capital Spending................................ $ 51.5 $ 22.5 $ 16.8 $ 30.0 $ 19.9
Depreciation.................................... 13.4 13.4 11.7 10.3 10.0
Cash Provided By Operations..................... 90.4 64.9 53.7 55.5 36.7
Receivables from affiliated companies (1) (4)... - - 210.1 161.1 135.5
Payables to affiliated companies (1)............ - - 157.9 128.2 142.8
Total Assets (4)................................ 380.6 347.0 527.3 436.6 385.1
Long-Term Debt (4).............................. 86.6 91.6 13.4 13.2 13.2
Equity (4)...................................... 156.0 129.9 245.1 196.9 127.6
</TABLE>

(1) Receivables and payables with affiliates and related interest income and
expense with affiliates reflect financing activities related to other
operations of Kimberly-Clark Corporation ("Kimberly-Clark") and certain of
its affiliates, primarily in France, up to November 30, 1995, the date of
the spin-off ("Distribution"), at which time the Company became a separate
independent company. See Note 1 of the Notes to Consolidated Financial
Statements.
(2) Net income in 1992 includes net after-tax charges of $10.6 million for the
cumulative effects of adopting the required accounting rules for
postretirement health care and life insurance benefits and for income
taxes.
(3) See Note 2 of Notes to Consolidated Financial Statements.
(4) On July 27, 1995, the stockholders of Schweitzer-Mauduit France S.A.R.L., a
wholly-owned subsidiary of Kimberly-Clark, approved the conversion of $65.0
million of receivables due from an affiliated company to an equity
investment. Such affiliated company was merged with another Kimberly-Clark
wholly-owned consumer and service products subsidiary, and the shares of
the merged entity were distributed to Kimberly-Clark prior to the
Distribution. Balances at December 31, 1995, reflect this transaction as a
reduction of receivables and deduction from owners' equity. Additionally,
various payments were made to and debt was assumed from Kimberly-Clark in
connection with the Distribution, totaling $89.2 million, that also reduced
the amount of equity. See Notes 1 and 5 of the Notes to Consolidated
Financial Statements.

1
<PAGE> 3

MANAGEMENT'S DISCUSSION AND ANALYSIS
Schweitzer-Mauduit International, Inc. and Subsidiaries
- --------------------------------------------------------------------------------

CERTAIN BACKGROUND INFORMATION

Schweitzer-Mauduit International, Inc. ("SWM" or the "Company") was incorporated
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 (the
"Distribution") of Kimberly-Clark's U.S., French and Canadian business
operations that manufacture and sell tobacco-related papers and other specialty
paper products (the "Businesses"). Through the November 30, 1995 Distribution
date, the Businesses in the U.S. and Canada were conducted as operating
divisions of Kimberly-Clark and one of its Canadian subsidiaries, respectively.
The Businesses in France were conducted by LTR Industries, S.A. ("LTRI"), a 72
percent-owned subsidiary of Kimberly-Clark, and two indirect wholly-owned
Kimberly-Clark subsidiaries, Papeteries de Mauduit, S.A. ("PdM") and Papeteries
de Malaucene, S.A. ("PdMal"). These latter two companies are owned by
Schweitzer-Mauduit France S.A.R.L. ("SMF"), previously named Kimberly-Clark
France S.A.R.L., which prior to the Distribution was a wholly-owned subsidiary
of Kimberly-Clark.

Two Kimberly-Clark consumer and service products ("C&S") businesses located in
France, which were unrelated to the Company and the Businesses, were also
subsidiaries of SMF's predecessor. The French C&S subsidiaries were merged
together and the shares of the merged entity were distributed to Kimberly-Clark
prior to the Distribution. SMF, however, remained part of the Company in order
to permit PdM and PdMal to utilize substantial net operating loss carryforwards
previously generated by the French C&S operations.

The French C&S businesses were operated and managed independently of the
Businesses, with totally separate facilities, no common sales forces or
purchasing functions, no substantive intercompany transactions (except in the
ordinary course of managing Kimberly-Clark's intercompany financing activities)
and no other commonalities. Accordingly, the French C&S operations have been
excluded from the consolidated financial statements of the Company included
herein and from the following discussion of results of operations.

Management believes that the following commentary and tables appropriately
discuss and analyze the comparative results of operations and the financial
condition of the Company for the periods covered.

OVERVIEW

The Company operates principally in one industry segment, which consists of
papers used in the tobacco industry ("Cigarette Papers") and reconstituted
tobacco products. The Company's non-tobacco industry products represented six
percent of the Company's net sales in 1996.

Interest expense, interest income and other nonoperating expenses reported for
the periods prior to the Distribution relate primarily to financing activities
associated with the French C&S operations. See Note 10 of the Notes to
Consolidated Financial Statements.

For purposes of the geographic disclosure in the following tables, the term
"United States" includes operations in the U.S. and Canada. The Canadian
operations exist solely to produce flax fiber used as raw material in the U.S.
operations and have no material effect on such geographic disclosure.

Adjustments to net sales set forth in the following tables consist of
eliminations of intercompany sales of products between geographic areas.
Adjustments to operating profit consist of unallocated overhead expenses not
associated with geographic areas and eliminations of intercompany transactions.

Certain 1995 and 1994 geographical amounts have been restated from amounts
previously reported to better reflect how management internally manages the
businesses and reported its results in 1996. The restatements were to deduct
royalties paid by the French operations to the U.S. operations after, rather
than before, operating profit, consistent with the way the U.S. operations
report such income, and to charge certain overhead expenses to "Unallocated"
rather than to the French and U.S. operations. Consolidated operating profit
amounts were not affected.

This section should be read in conjunction with the Company's financial
statements included herein.

<PAGE> 4
<TABLE>
<CAPTION>
RESULTS OF OPERATIONS

1996 COMPARED TO 1995

By Geography for the Years Ended December 31, 1996 and 1995
(U.S. $ in millions)
% CHANGE % OF 1996
NET SALES 1996 1995 VS. 1995 CONSOLIDATED
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
United States............................ $ 212.3 $ 219.9 - 3.5% 45.0%
Outside United States.................... 263.5 251.7 + 4.7 55.9
Eliminations............................. (4.5) (8.7) (0.9)
-------- -------- -----
Consolidated ............................ $ 471.3 $ 462.9 + 1.8% 100.0%
======== ======== =====
</TABLE>

<TABLE>
<CAPTION>
% RETURN
ON SALES
% CHANGE % OF 1996 -------------
OPERATING PROFIT 1996 1995 VS. 1995 CONSOLIDATED 1996 1995
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
United States............................ $ 23.7 $ 16.1 +47.2% 32.0% 11.2% 7.3%
Outside United States.................... 55.5 44.3 +25.3 75.0 21.1 17.6
Unallocated/Eliminations................. (5.2) (1.7) (7.0)
------- ------- -----
Consolidated ............................ $ 74.0 $ 58.7 +26.1% 100.0% 15.7% 12.7%
======= ======= =====
- -------------------------------------------------------------------------------------------------------------------
</TABLE>

Net Sales

Net sales increased by $8.4 million due primarily to changes in sales volumes.
However, 1996 net sales were unfavorably affected by exiting the reconstituted
tobacco leaf ("RTL") product line in the U.S. at the beginning of the second
quarter of 1996 ($10.4 million). Excluding the U.S. RTL product line, sales
volumes increased in every major product line and worldwide sales volumes
increased by seven percent, thereby adding $24.7 million to net sales. Excluding
RTL volumes in the U.S., sales volumes improved at the U.S. business unit by six
percent, with volumes from the French businesses up seven percent for the year.
Changes in currency exchange rates decreased net sales by $4.7 million.
Additionally, changes in average worldwide selling prices and sales mix had an
unfavorable effect of $1.2 million for the year. Average selling prices declined
in the U.S. compared to the prior year primarily because of contractual price
reductions related to a decline in the per ton cost of wood pulp. Average
worldwide selling prices increased for most major product lines produced in
France compared to the prior year because of price increases implemented in late
1995 and the early part of 1996.

Operating Profit

Operating profit improved by $15.3 million for 1996 compared to 1995. The
improvement was primarily a result of the increased worldwide sales volumes in
product lines other than RTL in the U.S., higher selling prices in France, a
decline in per ton wood pulp costs and a one-time $7.3 million restructuring
charge taken in 1995 (see "Restructuring Charge" in the following discussion
related to the "Results of Operations - 1995 Compared to 1994" below). Decreases
in per ton wood pulp costs favorably impacted operating profit by $16.2 million
compared to the prior year.

The above favorable effects for the year were partially offset by lower selling
prices in the U.S. and higher research and general expenses. Research expenses
were higher primarily because of differences in the amount of machine time and
other trial costs shared with customers. General expenses increased due to
additional administrative costs incurred to operate as an independent company.
These stand-alone costs are primarily reflected in the above table as
Unallocated expenses. Changes in currency exchange rates had a nominal impact on
the operating profit change.

<PAGE> 5

1995 COMPARED TO 1994

By Geography for the Years Ended December 31, 1995 and 1994
(U.S. $ in millions)

% CHANGE % OF 1995
NET SALES 1995 1994 VS. 1994 CONSOLIDATED
- ---------------------------------------------------------------------------------------------------------------

<S> <C> <C> <C> <C>
United States............................ $ 219.9 $ 201.2 + 9.3% 47.5%
Outside United States.................... 251.7 207.9 +21.1 54.4
Eliminations............................. (8.7) (4.9) (1.9)
-------- -------- -----
Consolidated............................. $ 462.9 $ 404.2 +14.5% 100.0%
======== ======== =====
</TABLE>

% RETURN
ON SALES
% CHANGE % OF 1995 -----------------
OPERATING PROFIT 1995 1994 VS. 1994 CONSOLIDATED 1995 1994
- ------------------------------------------------------------------------------------------------------------------

<S> <C> <C> <C> <C> <C> <C>
United States.................. $ 16.1 $ 20.6 -21.8% 27.4% 7.3% 10.2%
Outside United States.......... 44.3 38.7 +14.5 75.5 17.6 18.6
Unallocated/Eliminations....... (1.7) (0.6) (2.9)
------- ------- -----
Consolidated .................. $ 58.7 $ 58.7 - % 100.0% 12.7% 14.5%
======= ======= =====
- ------------------------------------------------------------------------------------------------------------------
</TABLE>

Net Sales

Net sales increased by $58.7 million as a result of higher worldwide sales
volumes ($20.1 million), favorable currency translation ($25.1 million), and
higher selling prices and improved sales mix ($13.5 million). Sales volumes
improved by six percent, with all major U.S. and French product lines, except
for tipping paper, contributing to the increase. Average selling prices
increased in all major product lines, in part in response to higher per ton wood
pulp costs.

Operating Profit

Operating profit was unchanged compared to the prior year because of the
unfavorable effect of a $7.3 million restructuring charge taken in the U.S. and
France (see "Restructuring Charge" below). Excluding the restructuring charge,
operating profit would have improved by $7.3 million, or 12 percent, as a result
of selling price increases, higher sales volumes, improved manufacturing
efficiencies, lower research expenses and favorable currency translation, all of
which were partially offset by raw material cost increases, primarily for wood
pulp, and higher general expenses. Efficiency gains associated with higher
production volumes, particularly at the mills in Spotswood, New Jersey, Lee,
Massachusetts, and in Quimperle and Spay, France, contributed to the operating
profit improvement. Research expenses were lower due to an increased amount of
machine time and other trial expenses shared with customers. The actual staffing
for research activity was comparable to the level in the prior period. Per ton
wood pulp cost increases negatively impacted operating profit by $19.9 million
due to increased worldwide pulp demand. General expenses increased due to
expenses incurred in the fourth quarter to accomplish the spin-off from
Kimberly-Clark and to operate as an independent company. Changes in currency
exchange rates are estimated to have increased operating profit by $4.4 million.

Restructuring Charge

In December 1995, the Company decided to exit the RTL product line in the U.S.
The Company's decision was driven by the loss of its two largest RTL customers
in the U.S., which represented 85 percent of the U.S. RTL revenues. One of the
customers elected to utilize available internal RTL capacity obtained through a
recent acquisition. Due to the other customer's concern over the Company's loss
of this RTL volume, the other of the two largest customers decided to phase out
its RTL purchases from the Company. The loss of this business, which was
entirely phased out by the beginning of the second quarter of 1996, would have
reduced utilization of the Company's RTL capacity in the U.S. to an unacceptably
low level. Substantially all the remaining RTL business in the U.S. was already
being produced by the large U.S. tobacco companies.

<PAGE> 6

The Company's decision to exit the RTL product line in the U.S. has had no
impact on the Company's U.S. wrapper and binder business, its RTL business in
France, or the Company's commitment to reconstituted tobacco worldwide. A
pre-tax charge of $5.9 million and an associated reserve were recorded in 1995
to exit the U.S. RTL product line, of which $4.7 million was utilized for a
1996 non-cash write-down of assets related to the manufacture of this product in
the U.S. Annual net sales will be reduced by an estimated $13 million ($10.4
million reduction in 1996), and operating profit from continuing operations will
be reduced by an estimated $2.5 million annually, related to unabsorbed fixed
costs.

The Company also decided to restructure its manufacturing facility at Malaucene,
France. This restructuring streamlined operations, improved productivity,
reduced manufacturing costs and increased sales volumes. A pre-tax charge of
$1.4 million and an associated reserve were recorded in 1995 to implement this
restructuring program, which was fully in place by mid-1996. Annual pre-tax
savings as a result of this restructuring program will exceed $1.4 million, with
more than half of that amount realized in 1996.

The Company incurred all costs associated with these restructuring plans during
1996, and the associated reserve has been closed out.

NON-OPERATING EXPENSES

Interest expense in 1996 was primarily associated with the debt incurred in
connection with the Distribution (see "Liquidity and Capital Resources"). Other
income, net in 1996 consisted primarily of interest income from investment of
cash generated by operations of the Company.

Prior to the Distribution, overall net interest income principally resulted from
the Company's financing activities in connection with the Kimberly-Clark
European cash management program (see Note 10 of the Notes to Consolidated
Financial Statements). Overall net interest income decreased to $0.2 million in
1995 from $3.6 million in 1994 partially due to a $1.6 million increase in
non-affiliate interest expense, a portion of which related to financing of the
cash distribution to Kimberly-Clark in connection with the spin-off. This
decline also reflected a decrease in the average balance of loans to affiliates
net of average borrowings from affiliates, along with changes in the spread
between the average interest rates earned on loans to affiliates and the average
rates paid on borrowings from affiliates. Other expense, net decreased by $1.9
million in 1995 primarily as a result of reduced foreign currency losses and
lower hedging costs.

INCOME TAXES

The noncurrent deferred income tax asset is principally due to the previously
mentioned net operating loss carryforwards incurred through December 31, 1994 by
the C&S operations in France. Under French tax law, these net operating losses
were retained by SMF. The SMF consolidated tax group in France has not paid
income taxes, except nominal amounts of minimum required income taxes, in the
periods presented in the financial statements and is not expected to pay normal
income taxes until the net operating loss carryforwards have been fully
utilized. Additional information concerning these net operating loss
carryforwards is disclosed in Note 6 to Consolidated Financial Statements.

The effective tax rates for the years ended December 31, 1996, 1995 and 1994
were 37.2 percent, 30.1 percent and 35.5 percent, respectively. The provision
for income taxes is higher in 1996 and lower in 1995 primarily due to an
increase in the effective statutory income tax rate enacted in France in July
1995 from 33.33 percent to 36.67 percent, retroactive to January 1, 1995. The
net effect of the tax rate increase was favorable for 1995 because it increased
the value of the tax benefits recognized from the net operating loss
carryforwards retained by SMF. The impact in 1995 attributable to deferred tax
assets, net of liabilities, was a favorable $4.5 million on the deferred
provision for income taxes, partially offset by an unfavorable impact on the
current provision for income taxes of $1.3 million, including a retroactive
adjustment for the six-month period ended June 30, 1995.

5
<PAGE> 7

LIQUIDITY AND CAPITAL RESOURCES

Net cash provided by operations, that portion attributable to changes in
operating working capital, and the amount of cash used for capital expenditures
for the years ended December 31, 1996, 1995 and 1994 were as follows:

YEAR ENDED DECEMBER 31
----------------------
1996 1995 1994
---- ---- ----
(U.S. $ in millions)
--------------------
<S> <C> <C> <C>
NET CASH PROVIDED BY OPERATIONS $90.4 $64.9 $53.7
DECREASE (INCREASE) IN OPERATING WORKING CAPITAL 18.5 10.4 (5.4)
CAPITAL EXPENDITURES 51.5 22.5 16.8
</TABLE>

The Company's primary source of liquidity is cash flow from operations, which is
principally obtained through operating earnings. Impacting the cash flow from
operations are changes in operating working capital. In 1996, changes in
operating working capital contributed favorably to cash flow by $18.5 million
primarily due to decreases in inventories as a result of lower inventory levels
and lower per ton wood pulp costs, decreases in accounts receivable due to the
timing of collections, and increases in accounts payable primarily for several
large capital expenditures included in accounts payable at December 31, 1996. In
1995, changes in operating working capital contributed favorably to cash flow by
$10.4 million due principally to increases in accrued expenses and accounts
payable primarily associated with the establishment of a restructuring reserve,
spin-off related activities settled after the 1995 year-end, higher raw material
purchase costs and increased capital expenditures, partially offset by increases
in inventories from reduced December 1995 sales and higher raw material costs,
and in accounts receivable. In 1994, changes in operating working capital
contributed unfavorably to cash flow by $5.4 million due principally to higher
trade receivables associated with increased 1994 sales volumes.

Cash flow from operations during these periods exceeded the level of capital
spending. Capital spending for 1996 increased over the more traditional levels
of 1995 and 1994 as the Company upgraded equipment to enhance capacity and
efficiency at its U.S. and French mills. Spending in 1996 included (i) $18.8
million for the new $24 million long fiber paper machine in France, (ii) $3.6
million at the Quimperle, France mill for the production reorganization project,
(iii) $3.4 million to complete the installation of new high-speed cigarette
paper converting equipment at the Spotswood mill, (iv) $2.7 million toward
upgrading the flax pulping operations at the Spotswood mill, and (v) $2.1
million to furnish the Company's newly leased corporate and U.S. business unit
headquarters and U.S. research facilities. Spending in 1995 included (i) $2.5
million toward installation of new high-speed cigarette paper converting
equipment at the Spotswood mill, (ii) $1.7 million for upgrades to a tipping
paper machine at the Lee mills, (iii) $0.6 million of initial spending for the
mill production reorganization project at Quimperle, and (iv) $0.5 million
toward the new paper machine in France, authorized in December 1995. Spending in
1994 included (i) $3.2 million for the installation of high-speed cigarette
paper converting equipment in France, and (ii) $2.4 million for upgrades to a
Lee mills tipping paper machine in the U.S. and a reconstituted tobacco machine
in France.

The Company's ongoing requirements for cash consist principally of amounts
required for capital expenditures, stockholder dividends and working capital.
The Company declared and paid quarterly dividends each amounting to $2.4 million
($0.15 per share) beginning in the second quarter of 1996. Management currently
expects to continue this level of quarterly dividend. Other than expenditures
associated with environmental matters (see Note 14 of the Notes to Consolidated
Financial Statements), as of December 31, 1996 the Company had unrecorded
outstanding commitments for capital expenditures of approximately $7.6 million.
In addition to capital spending, the Company has begun to incur software
development costs related to a new company-wide integrated computer system that
will replace the currently used

6
<PAGE> 8

Kimberly-Clark systems by January 1998. These software development costs totaled
$3.6 million in 1996, of which $2.7 million was deferred on the balance sheet.
The Company currently expects to incur approximately $10 million of such costs
in 1997, most of which will also be deferred until such systems are placed in
service.

As discussed in greater detail in Note 5 of the Notes to Consolidated Financial
Statements, the Company and its subsidiaries, SMF and PdM Industries, entered
into a Credit Agreement dated November 27, 1995 which provides for term and
revolving credit loans totaling approximately $75 million and $40 million,
respectively. On the Distribution date, the Company assumed $25 million of
Kimberly-Clark debt, which it repaid with borrowings of the full amount under
the U.S. term loan facility. Immediately prior to the Distribution, SMF made a
cash payment to Kimberly-Clark of approximately $56 million, principally
financed by borrowings of the full amount (approximately $50 million) by SMF
under the French term loan facility. Additionally, in connection with the
Distribution (i) SMF also retained $10.8 million of debt related to other
Kimberly-Clark businesses, and (ii) LTRI paid an $8.2 million cash dividend to
Kimberly-Clark.

The Company believes its cash flow from operations, together with borrowings
available under its revolving credit facilities, will be sufficient to fund its
ongoing cash requirements.

OUTLOOK

During 1997, the Company expects to benefit from continued growth in sales
volumes, reflecting increased demand for the Company's products, and from cost
savings as a result of capital projects. The per ton cost of wood pulp was
relatively stable the latter half of 1996, and the wood pulp market appears
stable entering 1997. The Company does not expect significant increases or
decreases in the per ton cost of wood pulp during 1997. The Company will
continue incurring costs, as it did beginning in late 1995, necessary to operate
as an independent, stand-alone organization. These incremental stand-alone costs
are expected to total approximately the same amount in 1997 as in 1996.

The Company expects capital spending for 1997 to be less than that of 1996, but
still higher than the historical average. Capital spending for 1997 is estimated
at approximately $35 million, focused primarily on internal capacity expansion,
cost reduction opportunities and upgrades to environmental treatment facilities
(see Note 14 of the Notes to Consolidated Financial Statements). Included in
this spending is the completion of the new paper machine being installed at the
Company's mill in Quimperle, France.

FACTORS THAT MAY AFFECT FUTURE RESULTS

Certain sections of this report, particularly the foregoing discussion regarding
the "Outlook" of the Company, contain certain forward-looking statements,
generally identified by phrases such as "the Company expects" or words of
similar effect. Forward-looking statements are made based upon management's
expectations and beliefs concerning future events impacting the Company. There
can be no assurances that such events will occur or that the results of the
Company will be as estimated. Many factors outside the control of the Company
also could impact the realization of such estimates. The following important
factors, among others, in some cases have affected, and in the future could
affect, the Company's actual results and could cause the Company's actual
results for 1997 and beyond, to differ materially from those expressed in any
forward-looking statements made by, or on behalf of, the Company.

International Business Risks

The Company's international operations are subject to international business
risks, including unsettled political conditions, expropriation, import and
export restrictions, exchange controls, inflationary economies and currency
risks and risks related to the restrictions of repatriation of earnings or
proceeds from liquidated assets of foreign subsidiaries.

Tax and Repatriation Matters

The Company and its subsidiaries are subject to income tax laws in each of the
countries in which it does business through wholly-owned subsidiaries and
through affiliates. The Company makes a comprehensive review of the income tax
requirements of each of its operations, files appropriate returns and

<PAGE> 9

makes appropriate income tax planning analyses directed toward the minimization
of its income tax obligations in these countries. Appropriate income tax
provisions are determined on an individual subsidiary level and at the
corporate level on both an interim and annual basis. These processes are
followed using an appropriate combination of internal staff at both the
subsidiary and corporate levels as well as independent outside advisors in
review of the various tax laws and in compliance reporting for the various
operations.

Dividend distributions are regularly made to the U.S. from certain foreign
subsidiaries and are appropriately considered in the provision for U.S. income
taxes. The Company intends for the undistributed earnings of certain other
foreign subsidiaries to be reinvested indefinitely. These undistributed earnings
are not subject to either additional foreign income taxes or U.S. income taxes
unless remitted as dividends. Accordingly, no provision has been made for U.S.
taxes on those earnings. The Company regularly reviews the status of the
accumulated earnings of each of its foreign subsidiaries and reevaluates the
aforementioned dividend policy as part of its overall financing plans.

Hedging Activities and Foreign Currency Exchange Risks

Management selectively hedges the Company's foreign currency risks, as well as
its exposure to interest rate increases on its variable rate long-term debt,
when it is practical and economical to do so. The instruments used to hedge
foreign currency risks are forward contracts and, to a lesser extent, option
contracts. The Company utilizes various forms of interest rate hedge agreements,
including interest rate swap agreements and forward rate agreements. These
instruments are purchased from well-known money center banks, insurance
companies or government agencies (counterparties). Usually, the contracts extend
for no more than 12 months, although their contractual term has been as long as
18 months. Management believes that credit risks with respect to the
counterparties and the foreign currency risks that would not be hedged, were the
counterparties to fail to fulfill their obligations under the contracts, are
minimal in view of the financial strength of the counterparties.

In addition to the effect of changes in currency exchange rates on operating
profit, foreign currency losses have arisen from the remeasurement of non-local
currency denominated monetary assets and liabilities into the currency of the
country in which the operation is domiciled. These losses, most of which related
to receivables from and payables to affiliated companies unrelated to the
Businesses prior to the spin-off, are included in other income (expense) net.
These receivables from and payables to such affiliated companies were settled as
of the Distribution date.

Additional information concerning foreign currency related matters is disclosed
in Note 11 to Consolidated Financial Statements.

Inflation

In recent years, inflation has not had a significant impact on the Company's
cost structure.

Effect of Changing Pulp Costs

Pulp costs tend to be cyclical in nature and are a large component of product
costs. The Company consumed approximately 65,000 and 68,000 metric tons of wood
pulp in 1996 and 1995, respectively. During the period from January 1994 through
December 1996, the list price of the primary pulp grade used by the Company,
northern softwood kraft pulp, ranged from a low of $450 per metric ton to a high
of $985 per metric ton. Generally, over time, the Company has been able to
increase its selling prices in response to increased pulp costs and has
generally reduced them when pulp costs have significantly declined. The Company
may or may not be able to fully recover future pulp cost increases, or fully
retain future pulp cost decreases, in its sales pricing structure.

Seasonality

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

Environmental Matters

The Company is subject to federal, state, local and foreign environmental
protection laws and regulations

<PAGE> 10

with respect to the environmental impact of air and water emissions and noise
from its mills as well as its disposal of solid waste generated by its
operations. The Company believes it is operating in compliance with, or is
taking action aimed at ensuring compliance with, such laws and regulations.
While the Company has incurred in the past several years, and will continue to
incur, capital and operating expenditures in order to comply with these laws and
regulations, these costs are not expected to materially affect the Company's
business or results of operations. The Company, or its predecessor, has been
named as a potentially responsible party at several waste disposal sites, none
of which, individually, or in the aggregate, in management's opinion, is likely
to have a material adverse effect on the Company's financial condition, results
of operations or liquidity. However, there can be no assurance that such an
effect will not occur at some future time. Additional information concerning
environmental matters is disclosed in Note 14 to Consolidated Financial
Statements and in the Company's annual report to the Securities and Exchange
Commission on Form 10-K for the year ended December 31, 1996 under the "Legal
Proceedings" section. See the back inside cover of this report for instructions
on how to obtain a copy of the Form 10-K.

Legal Proceedings

On January 31, 1997, James E. McCune on behalf of himself and other "nicotine
dependent" West Virginia cigarette smokers filed, in the Circuit Court of
Kanawha County, West Virginia, a purported class action against several tobacco
companies, industry trade associations and consultants, tobacco wholesalers and
cigarette component manufacturers, including Kimberly-Clark, seeking equitable
relief and compensatory and punitive damages in an unspecified amount for mental
suffering and physical injuries allegedly sustained as a result of having smoked
cigarettes. Under the terms of the Distribution, the Company assumed liability
for and agreed to indemnify Kimberly-Clark in litigation arising out of the
operations of the Businesses, including this case. The nine-count complaint sets
forth several theories of liability, including intentional and negligent
misrepresentation, negligence, product liability and breach of warranty. Among
other things, the complaint alleges that nicotine is an addictive substance,
that the tobacco companies, by using reconstituted tobacco, are able to control
the precise amount of nicotine in their cigarettes and that LTR Industries, a
French subsidiary of the Company, specializes in the reconstitution process to
help the tobacco companies control nicotine levels. As a component supplier, the
Company believes that it has meritorious defenses to this case, but due to the
uncertainties of litigation, the Company cannot predict its outcome and is
unable to make a meaningful estimate of the amount or range of loss which could
result from an unfavorable outcome of this action.

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

Reliance on Significant Customers

Most of the Company's customers are manufacturers of tobacco products located in
approximately 80 countries around the world. One such customer has accounted for
a significant portion of the Company's net sales in each of the last several
years, and the loss of such customer, or a significant reduction in that
customer's purchases, could, at least temporarily, have a material adverse
effect on the Company's results of operations. See Note 16 to Consolidated
Financial Statements.

Tobacco Products and Governmental Actions

In recent years, governmental entities, particularly in the U.S., have taken or
have proposed actions that may have the effect of reducing consumption of
tobacco products. Reports and speculation with respect to the alleged harmful
physical effects of cigarette smoking and use of tobacco products have been
publicized for many years and, together with actions to restrict or prohibit
advertising and promotion of cigarettes or other tobacco products and to
increase taxes on such products, are intended to discourage the consumption of
cigarettes and other such products. In addition, litigation is pending against
the major manufacturers of consumer tobacco products seeking damages for health
problems allegedly resulting from the use of tobacco in various forms. It is not
possible to predict the outcome of such litigation or what effect adverse
developments in pending or future litigation may have on the tobacco industry.
Nor is it possible to predict what additional legislation or regulations
relating to tobacco products will be enacted, or to what extent, if any, such

9
<PAGE> 11

legislation or regulations might affect the consumer tobacco products industry
in general.

Approximately 94 percent of the Company's net sales are from products used by
the tobacco industry in the making 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.

10
<PAGE> 12

CONSOLIDATED STATEMENTS OF INCOME
Schweitzer-Mauduit International, Inc. and Subsidiaries

For the years ended December 31
------------------------------------------
(U.S. $ in millions, except per share amounts) 1996 1995 1994
- ----------------------------------------------------------------------------------------------------------------------

<S> <C> <C> <C>
NET SALES.............................................................. $ 471.3 $ 462.9 $ 404.2
Cost of products sold................................................ 357.1 361.7 312.1
-------- --------- ---------
GROSS PROFIT........................................................... 114.2 101.2 92.1
Selling expense...................................................... 18.2 17.4 16.4
Research expense..................................................... 6.0 4.5 6.4
General expense...................................................... 16.0 13.3 10.6
Restructuring charge................................................. - 7.3 -
-------- --------- ---------
OPERATING PROFIT....................................................... 74.0 58.7 58.7
Interest expense..................................................... (5.3) (3.1) (1.5)
Interest expense to affiliated companies............................. - (10.4) (6.8)
Interest income from affiliated companies............................ - 13.7 11.9
Other income (expense), net.......................................... 1.2 (0.4) (2.3)
-------- --------- ---------
INCOME BEFORE INCOME TAXES AND MINORITY INTEREST....................... 69.9 58.5 60.0
Provision for income taxes........................................... 26.0 17.6 21.3
-------- --------- ---------
INCOME BEFORE MINORITY INTEREST........................................ 43.9 40.9 38.7
Minority interest in earnings of subsidiary.......................... 5.2 4.1 3.6
-------- --------- ---------
NET INCOME............................................................. $ 38.7 $ 36.8 $ 35.1
======== ========= =========

NET INCOME PER COMMON SHARE............................................ $ 2.41
========
UNAUDITED PRO FORMA NET INCOME PER COMMON SHARE (SEE NOTE 2)........... $ 1.81 $ 1.66
========= =========
</TABLE>

SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

11
<PAGE> 13
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEETS
Schweitzer-Mauduit International, Inc. and Subsidiaries

AS OF DECEMBER 31
------------------------------------
(U.S. $ in millions) 1996 1995
- ---------------------------------------------------------------------------------------------------------------------------

ASSETS
CURRENT ASSETS
<S> <C> <C>
Cash and cash equivalents............................................... $ 30.9 $ 5.9
Accounts receivable..................................................... 65.1 69.5
Inventories............................................................. 49.2 56.0
Deferred income tax benefits............................................ 3.3 5.1
Prepaid expenses........................................................ 2.1 1.0
--------- ---------
TOTAL CURRENT ASSETS................................................ 150.6 137.5
--------- ---------
PROPERTY
Land and improvements................................................... 5.4 4.5
Buildings and improvements.............................................. 42.2 41.7
Machinery and equipment................................................. 272.0 262.2
Construction in progress................................................ 41.4 13.6
--------- ---------
Gross Property..................................................... 361.0 322.0
Less accumulated depreciation........................................... 166.8 155.5
--------- ---------
NET PROPERTY........................................................ 194.2 166.5
--------- ---------
NONCURRENT DEFERRED INCOME TAX BENEFITS...................................... 30.2 40.1
--------- ---------
DEFERRED CHARGES AND OTHER ASSETS............................................ 5.6 2.9
--------- ---------
TOTAL ASSETS................................................................. $ 380.6 $ 347.0
========= =========

LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Current portion of long-term debt....................................... $ 2.9 $ 2.4
Other short-term debt................................................... 1.3 2.5
Accounts payable........................................................ 54.5 44.3
Accrued expenses........................................................ 42.5 43.6
Income taxes payable.................................................... 0.6 1.3
--------- ---------
TOTAL CURRENT LIABILITIES........................................... 101.8 94.1
--------- ---------

LONG-TERM DEBT............................................................... 86.6 91.6
--------- ---------
DEFERRED INCOME TAXES........................................................ 9.5 10.1
--------- ---------
OTHER NONCURRENT LIABILITIES................................................. 19.7 18.3
--------- ---------
MINORITY INTEREST............................................................ 7.0 3.0
--------- ---------
CONTINGENCIES (SEE NOTES 6, 13 AND 14)
STOCKHOLDERS' EQUITY
PREFERRED STOCK -$.10 par value - 10,000,000 shares authorized, none issued - -
COMMON STOCK -$.10 par value - 100,000,000 shares authorized, 16,052,621
and 16,051,109 shares issued and outstanding at
December 31, 1996 and 1995, respectively.............................. 1.6 1.6
Additional paid-in capital.............................................. 60.0 60.0
Retained earnings....................................................... 77.8 46.3
Unrealized currency translation adjustments............................. 16.6 22.0
--------- ---------

TOTAL STOCKHOLDERS' EQUITY.......................................... 156.0 129.9
--------- ---------

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY................................... $ 380.6 $ 347.0
========= =========
</TABLE>

SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

<PAGE> 14

<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOW
Schweitzer-Mauduit International, Inc. and Subsidiaries

FOR THE YEARS ENDED DECEMBER 31
(U.S. $ in millions) 1996 1995 1994
- ----------------------------------------------------------------------------------------------------------------
OPERATIONS
<S> <C> <C> <C>
Net Income............................................... $ 38.7 $ 36.8 $ 35.1
Depreciation............................................. 13.4 13.4 11.7
Deferred income tax provision (benefit).................. 8.6 (0.1) 8.6
Minority interest in earnings of subsidiary.............. 5.2 4.1 3.6
Non-cash utilization of restructuring reserve............ 4.7 - -
Other.................................................... 1.3 0.3 0.1
Changes in operating working capital:
Accounts receivable................................. 4.4 (5.1) (13.2)
Inventories......................................... 6.8 (7.9) (3.4)
Accounts payable.................................... 10.2 8.5 10.9
Accrued expenses.................................... (1.1) 12.2 1.8
Prepaid expenses.................................... (1.1) 1.4 (1.5)
Income taxes payable................................ (0.7) 1.3 -
------ ------ ------
CASH PROVIDED BY OPERATIONS..................... 90.4 64.9 53.7
------ ------ ------
INVESTING
Capital spending......................................... (51.5) (22.5) (16.8)
Capitalized software costs............................... (2.7) - -
Advances to affiliates................................... - (2.5) (9.6)
Other.................................................... (1.7) 3.6 3.4
------ ------ ------
CASH USED FOR INVESTING......................... (55.9) (21.4) (23.0)
------ ------ ------
FINANCING
Cash dividends paid to SWM stockholders.................. (7.2) - -
Cash dividends paid to affiliates........................ (18.5) (12.0)
Issuance of capital stock................................ - - 49.5
Return of capital........................................ - (56.0) (37.1)
Changes in receivables from affiliates................... - 144.7 (55.2)
Changes in short-term debt............................... (1.2) 1.8 (1.4)
Changes in debt payable to affiliates within one year.... - (155.7) 30.1
Proceeds from issuances of long-term debt............... 5.4 81.4 6.2
Payments on long-term debt............................... (5.6) (28.7) (6.0)
Cash dividends paid to minority owner.................... (0.9) (7.2) (4.7)
Other.................................................... - - 0.5
------ ------ ------
CASH USED FOR FINANCING......................... (9.5) (38.2) (30.1)
------ ------ ------

INCREASE IN CASH AND CASH EQUIVALENTS......................... 25.0 5.3 0.6
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR................ 5.9 0.6 -
------ ------ ------
CASH AND CASH EQUIVALENTS AT END OF YEAR...................... $ 30.9 $ 5.9 $ 0.6
====== ====== ======
</TABLE>

SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

13
<PAGE> 15

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Schweitzer-Mauduit International, Inc. and Subsidiaries
U.S. $ in millions, except per share amounts

NOTE 1. BACKGROUND

In April 1995, the Board of Directors of Kimberly-Clark Corporation
("Kimberly-Clark") approved a plan providing for a distribution (the
"Distribution") to its stockholders through a tax-free spin-off of its U.S.,
French and Canadian business operations that manufacture and sell
tobacco-related papers and other specialty paper products (the "Businesses").

In order to effectuate the spin-off of the Businesses, on August 21, 1995 and
July 31, 1995, respectively, Schweitzer-Mauduit International, Inc. ("SWM" or
the "Company") and Schweitzer-Mauduit Canada, Inc. ("SM-Canada") were
incorporated and nominally capitalized. Prior to the Distribution,
Kimberly-Clark transferred to SWM ( the "Transfer") (i) the assets and
liabilities of its U.S.-based specialty products business; (ii) all of the
issued and outstanding shares of SM-Canada and of Schweitzer-Mauduit France,
S.A.R.L., (previously named Kimberly-Clark France S.A.R.L., or "S.A.R.L.") a
French corporation ("SMF"); and (iii) 72 percent of the issued and outstanding
shares of LTR Industries, S.A., a French corporation ("LTRI"). After the
Transfer, the Company consisted of the operating assets and liabilities of
Kimberly-Clark's U.S. specialty products business and investments in SM-Canada
(100 percent owned), SMF (100 percent owned) and LTRI (72 percent owned). SMF,
directly or indirectly, owns 100 percent of two principal French subsidiaries:
Papeteries de Mauduit S.A. ("PdM") and Papeteries de Malaucene S.A. ("PdMal").
The Transfer was accounted for at historical cost in a manner similar to that in
pooling of interests accounting as the entities were all under common control.

In July 1995, the stockholders of SMF, then a wholly-owned subsidiary of
Kimberly-Clark, approved the conversion of $65.4 of receivables from an
affiliated company to an equity investment in such company. Such affiliated
company was one of two wholly-owned consumer and service products ("C&S")
subsidiaries (unrelated to the tobacco-related and specialty papers businesses)
which were merged together, and the shares of the merged entity were distributed
to Kimberly-Clark prior to the Distribution. The conversion of receivables to an
equity investment was recorded as a return of capital to Kimberly-Clark,
reducing the par value of common stock of SMF by $37.1, with the $28.3 excess
recorded as a non-cash dividend reducing retained earnings. SMF remained part of
SWM to permit PdM and PdMal to utilize income tax loss carryforwards previously
generated by the French C&S operations.

On November 1, 1995, Kimberly-Clark announced that its Board of Directors had
approved the Distribution of all outstanding shares of common stock of SWM to
Kimberly-Clark stockholders. The Distribution was made on November 30, 1995 to
stockholders of record on November 13, 1995. Effective at the close of business
on November 30, 1995 (the "Distribution Date"), the Company became an
independent, publicly owned company as a result of the Distribution.

Pursuant to a Distribution Agreement, SWM and Kimberly-Clark entered into
various agreements that govern certain relationships between them, as well as
having provided an orderly transition to the status of two separate companies,
including a Tax Sharing Agreement, an Employee Matters Agreement, a Corporate
Services Agreement and a Transfer, Contribution and Assumption Agreement
("Transfer Agreement").

The Distribution Agreement established and provided for the principal corporate
transactions necessary to effect the Distribution, including the transfer of
assets to the Company and assumption by the Company of liabilities associated
with the operation of the Businesses, as well as the cash payments to
Kimberly-Clark. Other ancillary agreements continue to govern the relationship
between Kimberly-Clark and the Company with respect to or in consequence of the
Distribution, including allocation of responsibility for certain pending legal
proceedings, indemnities between the two companies and certain post-Distribution
covenants.

The Tax Sharing Agreement provides for, among other things, the treatment of tax
matters for periods prior to the Distribution Date and responsibility for
adjustments as a result of audits by taxing authorities and is designed to
preserve the status of the Distribution as a tax-free distribution.

Under the Corporate Services Agreement, Kimberly-Clark continues to provide
certain administrative, data processing, technical, and other services for a
limited period of time. Charges for such services have been

14
<PAGE> 16

equal to or based on the cost of rendering such services. In addition, through
January 31, 1996, Kimberly-Clark provided the Company tenancy services
with respect to the office and research space which the Company had occupied in
Kimberly-Clark's Roswell, Georgia facilities.

The Employee Matters Agreement provides for the Company's and Kimberly-Clark's
respective obligations to employees and former employees who are or were
associated with the Businesses and for other employment and employee benefit
matters.

Under the Transfer Agreement, Kimberly-Clark assigned to the Company all
intellectual property rights (such as patent and trademark rights, trade secrets
and know-how) related to the operations of the Businesses, except for certain
rights which were retained by Kimberly-Clark and licensed to the Company on a
perpetual, non-exclusive, royalty-free and, in certain cases, non-transferable
basis. The Transfer Agreement also established time periods during which the
Company has agreed to comply with certain restrictions on its ability to compete
with certain Kimberly-Clark foreign affiliates in the countries such affiliates
currently sell cigarette paper, tipping paper and plug wrap paper used to wrap
various parts of a cigarette ("Cigarette Papers").

NOTE 2. BASIS OF PRESENTATION AND PRO FORMA DATA

Basis of Presentation

These financial statements have been prepared in conformity with generally
accepted accounting principles, which require management to make estimates and
assumptions that affect amounts of assets and liabilities reported, disclosure
of contingent assets and liabilities at the date of the financial statements and
amounts of revenues and expenses reported for the periods. Actual results could
differ from these estimates. These financial statements include the accounts of
SWM and its majority-owned subsidiaries. All material intercompany and
interdivisional transactions are eliminated.

All of the 1996 financial statements, as well as the Balance Sheet as of
December 31, 1995, are presented on a consolidated basis. The Statements of
Income and Cash Flow for the year ended December 31, 1995 include the combined
results of operations and cash flows of the Businesses under Kimberly-Clark for
the eleven months prior to the Distribution Date, as if the Businesses had been
operating as a single entity prior to the Distribution, and the consolidated
results of operations and cash flows of the Company for the one month period
ended December 31, 1995. The financial statements as of December 31, 1994 and
for all periods prior to the Distribution Date are presented on a combined
basis. The combined statements include historical information and reflect the
assets, liabilities, net income and cash flows of the Businesses, of which
Kimberly-Clark's U.S. business had been reported as a division (not a separate
legal entity) of Kimberly-Clark, the Canadian business had been reported as a
division of a Canadian subsidiary of Kimberly-Clark, and the French businesses
had been reported as consolidated subsidiaries of Kimberly-Clark.

The French C&S operations have been excluded from the financial statements of
SWM because the Businesses and the French C&S operations had been independently
operated and managed, had totally separate facilities, no common sales forces or
purchasing functions, no substantive intercompany transactions (except in the
ordinary course of managing Kimberly-Clark's intercompany financing activities),
and no other commonalties, in substance or in form. The accompanying financial
statements accordingly reflect the distribution of the French C&S subsidiaries
to Kimberly-Clark as of the beginning of the earliest period presented.

Pro Forma Data (Unaudited)

Pro forma net income is presented based on data prepared under assumptions as to
the effects on the Company's financial statements of certain intercompany,
equity and operating transactions related to the Distribution as though these
transactions occurred at the beginning of the periods presented. The pro forma
financial data is unaudited, is presented for informational purposes only and
does not reflect the future earnings or results of operations of the Company or
what the earnings or results of operations of the Company would have been had
the Businesses been operated as a separate, independent company for the periods
presented. Pro forma net income per common share has been computed based on the
assumption that pro forma average shares outstanding for all periods prior to
the Distribution Date were the actual number of shares issued and distributed in
the Distribution. The number of shares outstanding from the Distribution date to
December 31, 1995 did not change.

15
<PAGE> 17

The following summarizes the effects of the pro forma adjustments and the pro
forma weighted average common shares outstanding:

1995 1994
---- ----
<S> <C> <C>
Historical net income ............................................... $ 36.8 $ 35.1
Pro forma adjustments:
Incremental operating expense (1)............................... (4.5) (5.3)
Incremental interest expense (2)................................ (4.9) (4.5)
Reversal of interest expense and income to (from)
affiliates, net (3)...................................... (3.3) (5.1)
Reversal of other income related to affiliates (3).............. - 1.5
Net tax benefit of adjustments ................................. 4.9 4.9
----------- -----------
Pro forma net income ................................................ $ 29.0 $ 26.6
=========== ===========

Pro forma net income per common share ............................... $ 1.81 $ 1.66
=========== ===========

Pro forma weighted average common shares outstanding................. 16,051,109 16,051,109
=========== ===========
</TABLE>

(1) Estimated incremental information systems, administration and management
expense associated with being a stand-alone publicly-owned entity.
(2) Estimated incremental interest expense associated with new debt issued and
debt assumed from Kimberly-Clark, and to adjust other interest expense for
the estimated effect of the pro forma adjustments.
(3) Reversal of intercompany interest income, expense and currency effects
related to inter-company receivables and liabilities attributable to
Kimberly-Clark's European cash management program.
- --------------------------------------------------------------------------------

NOTE 3. SIGNIFICANT ACCOUNTING POLICIES

The Company's accounting policies conform to generally accepted accounting
principles. Significant policies followed are described below.

Revenue Recognition

Sales are generally recognized upon shipment of the product to the customer.

Foreign Currency Translation

Income and expense items attributable to the operations in Canada and France are
translated into U.S. dollars at average exchange rates prevailing during the
periods. The balance sheets of these operations are translated at period-end
exchange rates, and the differences from historical exchange rates are reflected
in stockholders' equity as unrealized currency translation adjustments. Foreign
currency gains and losses arising from settlement of transactions in non-local
currencies and remeasurement of non-local currency denominated monetary assets
and liabilities are included in other income (expense), net.

Earnings Per Share

Net income per common share for 1996 is based on the weighted average of common
and common equivalent shares outstanding during the year. The average number of
common and common equivalent shares used in the calculation of net income per
common share for 1996 was 16,052,100.

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

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 operations
outside the U.S. are valued at the lower of cost, using the First-In,
First-Out (FIFO) and weighted average methods, or market.

Property and Depreciation

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

16
<PAGE> 18

lives for the principal asset categories are as follows:

Asset Category Depreciable Life
- -------------- ----------------
Machinery and Equipment -5 to 20 years
Buildings -20 to 40 years
Building Improvements -Lesser of 20 years or remaining life of the
relevant building or lease

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. The Company adopted
Statement of Financial Accounting Standard No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of"
("SFAS No. 121"), on January 1, 1996. The adoption of SFAS No. 121 had no effect
on the Company's financial position or results of operations.

Income Taxes

Prior to the Distribution, for United States federal and state income tax return
purposes, taxable income of the Businesses' U.S. operations was included in the
consolidated income tax returns of Kimberly-Clark. Prior to the Distribution,
for Canadian federal and provincial income tax purposes, taxable income of the
Businesses' Canadian operations was included in the income tax returns of
Canadian subsidiaries of Kimberly-Clark. In France, prior to the Distribution,
SMF (previously named S.A.R.L.), PdM, PdMal and S.A.R.L.'s other subsidiaries,
the French C&S subsidiaries, were included in the consolidated income tax group
of S.A.R.L., while LTRI separately filed its own income tax returns. Subsequent
to the Distribution, the French C&S subsidiaries are no longer included in the
consolidated income tax group of SMF, and LTRI will continue to separately file
its own income tax returns. Income tax expense and deferred income tax assets
and liabilities attributable to these operations in the consolidated and
separate filings 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.

Employee Benefits

Prior to the Distribution, most U.S. and Canadian employees of the Company
participated in employee benefit plans, including pension, savings, medical and
dental insurance, disability and other plans administered by Kimberly-Clark and
its Canadian subsidiaries. The Company was charged for its portion of the costs
of such plans, but Kimberly-Clark generally recorded the associated assets and
liabilities, with the exception of postretirement benefits other than pensions,
and did not allocate them to the Company. Subsequent to the Distribution, the
Company established substantially all the same employee benefit plans as those
previously provided by Kimberly-Clark. In connection with the Distribution,
Kimberly-Clark retained the employee benefit obligations for the Company's
retired participants as of the Distribution Date, and the Company assumed the
benefit obligations for its active employees. As a result, certain of the
Company's employee benefit liabilities were adjusted as of the Distribution
Date. The net amount of such assets and liabilities transferred in connection
with the Distribution was not significant.

Environmental Spending

Environmental spending related to current operations which qualifies as
property, plant and equipment, substantially increases the economic value or
extends the useful life of an asset is capitalized. All other such spending is
expensed as incurred. Environmental spending relating to an existing condition
caused by past operations is expensed. Liabilities are recorded 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.

Reclassification

Certain prior period amounts in these Notes to Consolidated Financial Statements
are reclassified to conform with current period presentation.

17
<PAGE> 19

NOTE 4. SUPPLEMENTAL DISCLOSURES

SUPPLEMENTAL BALANCE SHEET DATA

AS OF DECEMBER 31
-------------------------------
Summary of Accounts Receivable and Inventories 1996 1995
- ---------------------------------------------- ------ -----

Accounts Receivable:
<S> <C> <C>
Trade......................................................... $ 53.1 $ 53.2
Other......................................................... 12.5 16.8
Less allowances for doubtful accounts and sales discounts..... (0.5) (0.5)
------- -------
Total....................................... $ 65.1 $ 69.5
======= =======

Inventories by Major Class:
At the lower of cost on the First-In, First-Out (FIFO) and weighted average
methods or market:
Raw materials.............................................. $ 19.7 $ 25.9
Work in process............................................ 10.4 7.4
Finished goods............................................. 16.3 22.0
Supplies and other......................................... 10.0 10.2
------- -------
56.4 65.5
Excess of FIFO cost over Last-In, First-Out (LIFO) cost.... (7.2) (9.5)
------- -------
Total....................................... $ 49.2 $ 56.0
======= =======
</TABLE>

Total inventories included $27.9 and $30.8 of inventories subject to the
LIFO method of valuation at December 31, 1996 and 1995, respectively. If
LIFO inventories had been valued at FIFO cost, net income would have been
decreased by $1.4 in 1996, increased by $1.3 in 1995 and increased by $0.2
in 1994.

AS OF DECEMBER 31
------------------------------
Summary of Accrued Expenses 1996 1995
- --------------------------- ---- ----

<S> <C> <C>
Accrued salaries, wages and employee benefits.................... $22.9 $ 17.9
Accrued restructuring charge..................................... - 7.3
Other accrued expenses........................................... 19.6 18.4
----- ------
Total....................................... $42.5 $ 43.6
===== ======
</TABLE>

Analysis of Allowances for Doubtful Accounts and Sales Discounts

<TABLE>
<CAPTION>
BALANCE AT WRITE-OFFS BALANCE
BEGINNING CHARGED TO AND AT END OF
OF PERIOD EXPENSES DISCOUNTS PERIOD
----------- ---------- ---------- ----------
PERIOD
<S> <C> <C> <C> <C>
AS OF DECEMBER 31, 1996
Allowances for doubtful accounts..................... $ 0.5 $ - $ - $ 0.5
Allowances for sales discounts....................... - 0.1 0.1 -
-------- ---------- --------- --------
Total......................................... $ 0.5 $ 0.1 $ 0.1 $ 0.5
======== ========== ========= ========

AS OF DECEMBER 31, 1995
Allowances for doubtful accounts..................... $ 0.3 $ 0.2 $ - $ 0.5
Allowances for sales discounts....................... - 0.1 0.1 -
-------- ---------- --------- ---------
Total......................................... $ 0.3 $ 0.3 $ 0.1 $ 0.5
======== ========== ========= =========

AS OF DECEMBER 31, 1994
Allowances for doubtful accounts..................... $ 0.4 $ - $ 0.1 $ 0.3
Allowances for sales discounts....................... - 0.1 0.1 -
-------- ---------- --------- ---------
Total......................................... $ 0.4 $ 0.1 $ 0.2 $ 0.3
======== ========== ========= =========
</TABLE>

18
<PAGE> 20

SUPPLEMENTAL CASH FLOW INFORMATION
<TABLE>
<CAPTION>

FOR THE YEARS ENDED DECEMBER 31
----------------------------------------
1996 1995 1994
----- ----- -----
<S> <C> <C> <C>
Interest paid to non-affiliated companies.......... $ 4.4 $ 2.9 $ 1.5
Interest capitalized............................... 0.4 0.2 -
Income taxes paid(1)............................... 17.5 7.1 7.4
Increase (Decrease) in cash and cash equivalents
due to exchange rate changes................... $ (0.7) $ 0.1 $ 0.1

(1)Amounts for 1995 and 1994 represent income taxes paid by LTRI.
In 1995 subsequent to the Distribution, SWM and SM-Canada paid
no income taxes. Prior to the Distribution, the Businesses' U.S.
and Canadian operations were divisions of U.S. and Canadian
corporations, respectively. Income tax payments related to these
divisions are not included in the amounts presented, because
such payments are not separately identifiable. Had income tax
payments been made equivalent to the current portions of the
income tax provisions reflected in the accompanying financial
statements for these divisions, such payments would have been
$6.9 and $6.5 in 1995 and 1994, respectively. The SMF
consolidated tax group paid only nominal amounts of minimum
required income taxes in all periods presented due to the net
operating loss carryforwards retained in the Distribution.
</TABLE>

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

NOTE 5. DEBT

On November 27, 1995, the Company, SMF and PdM Industries S.N.C. ("PdM
Industries"), a subsidiary owned 99 percent by PdM and one percent by SMF,
entered into an unsecured credit agreement (the "Credit Agreement") with a group
of banks to provide term and revolving loans totaling 375 million French francs
(or approximately $75) to SMF and PdM Industries (the "French Credit Facility")
and term and revolving loans totaling $40.0 to the Company (the "U.S. Credit
Facility" and, together with the U.S. Credit Facility, the "Credit Facilities").
The French Credit Facility consists of a five-year term loan to SMF in the
amount of 250 million French francs (or approximately $50) (the "French Term
Loan Facility") and a renewable 364-day revolving credit facility available to
both SMF and PdM Industries in an amount of up to 125 million French francs (or
approximately $25) (the "French Revolving Credit Facility"). Borrowings under
the French Credit Facility are guaranteed by the Company. The U.S. Credit
Facility consists of a five-year term loan to the Company in the amount of $25.0
(the "U.S. Term Loan Facility", and, together with the French Term Loan
Facility, the "Term Loan Facilities") and a renewable 364-day revolving credit
facility available to the Company in an amount of up to $15.0 (the "U.S.
Revolving Credit Facility" and, together with the French Revolving Credit
Facility, the "Revolving Credit Facilities"). The Revolving Credit Facilities
were renewed to extend the facilities to November 24, 1997. Loans under each of
the Term Loan Facilities are payable in three equal semi-annual installments
beginning four years following the making of the term loans thereunder.

The interest rates under the Term Loan Facilities are based, at the election of
the Company, on either (a) the sum of (i) either 0.375 percent per annum or
0.300 percent per annum (the "Applicable Margin"), determined by reference to
the Company's Leverage Ratio (as defined in the Credit Agreement) plus (ii) the
London interbank offered rate ("LIBOR"), or (b) an alternate base rate. The
interest rates under the Revolving Credit Facilities are based, at the election
of the Company, on either (a) the sum of (i) 0.200 percent per annum plus (ii)
LIBOR, or (b) an alternate base rate.

The Credit Agreement contains representations and warranties which are customary
for facilities of this type and covenants and provisions that, among other
things, require the Company maintain certain defined financial ratios (a minimum
Tangible Net Worth, a maximum Leverage Ratio and a minimum Fixed Charge Coverage
Ratio, all as defined in the Credit Agreement). Events of default under the
Credit Agreement include, among other things, termination of the Company's
supply agreement with Philip Morris without entry into one or more suitable
replacement agreements.

On the Distribution date, the Company in the U.S. assumed $25.0 of
Kimberly-Clark debt, which it repaid with borrowings of the full amount under
the U.S. Term Loan Facility. In France, SMF retained $10.8 of Kimberly-Clark
debt outstanding which

19
<PAGE> 21

related to the French C&S operations of Kimberly-Clark. In addition and
immediately prior to the Distribution, SMF made a cash payment to Kimberly-Clark
of approximately $56, principally financed by borrowings of the full amount
(approximately $50) by SMF under the French Term Loan Facility.

In January 1996, the Company entered into a six month interest rate hedge
agreement related to its French Term Loan Facility having a total notional
principal amount of 250 million French francs (or approximately $48 at December
31, 1996) to fix the LIBOR rate at 4.4 percent, beginning July 30, 1996 and
ending January 30, 1997. In December 1996, the Company entered into a new
interest rate hedge agreement to fix the LIBOR rate at approximately 3.5 percent
on a notional principal amount of 170 million French francs (or approximately $
32 at December 31, 1996) beginning January 30, 1997 and ending January 30, 1998.

In January 1996, the Company entered into a six month interest rate hedge
agreement related to its U.S. Term Loan Facility having a total notional
principal amount of $25.0 to fix the LIBOR rate at 5.0 percent, beginning July
30, 1996 and ending January 30, 1997. In October 1996, the Company entered into
a new interest rate hedge agreement for the same notional amount to fix the
LIBOR rate at 6.1 percent beginning January 30, 1997 and ending January 30,
1998.

The effective interest rates on the Term Loan Facilities at December 31, 1996
and 1995 for France were 4.8 percent and 5.8 percent, respectively, and for the
U.S. were 5.4 percent and 6.3 percent, respectively.

At both December 31, 1996 and 1995, long-term debt other than the Term Loans
primarily consisted of obligations of the French operations related to
government mandated profit sharing. These amounts bear interest at the five year
treasury note rate in France (5.8 percent and 7.7 percent as of December 31,
1996 and 1995, respectively) and are generally payable in the fifth year
subsequent to the year the profit sharing is accrued.

Following are the balances for these long-term debt obligations as of December
31:
<TABLE>
<CAPTION>

1996 1995
------ -------
<S> <C> <C>
French Term Loan................ $ 47.7 $ 50.8
U.S. Term Loan.................. 25.0 25.0
French Employee Profit Sharing.. 15.5 17.4
Other........................... 1.3 0.8
------ -------
89.5 94.0
Less current portion............ (2.9) (2.4)
------ -------
$ 86.6 $ 91.6
</TABLE>

Following are the scheduled maturities for these long-term debt obligations as
of December 31, 1996:
<TABLE>
<S> <C>
1997.............. $ 2.9
1998.............. 2.8
1999.............. 28.0
2000.............. 51.8
2001.............. 3.5
Thereafter........ 0.5
------
$ 89.5
</TABLE> ======

At December 31, 1996, the French and the U.S. operations of the Company had
approximately $25 and $15.0, respectively of Revolving Credit Facilities. These
facilities, which were unused at December 31, 1996, permit borrowing at
competitive interest rates and are available for general corporate purposes. The
Company pays commitment fees on the unused portion of these facilities at an
annual rate of .10 percent and may cancel the facilities without penalty at any
time prior to their expiration at November 24, 1997.

The Company also had another bank credit facility available in the U.S. of $2.0,
none of which was outstanding at December 31, 1996. Additionally, SMF had
approximately $10 of other bank credit facilities available, of which $1.3 was
outstanding at December 31, 1996. No commitment fees are paid on the unused
portion of these facilities.

At December 31, 1996 and 1995, 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.

<PAGE> 22

NOTE 6. INCOME TAXES

An analysis of the provision (benefit) for income taxes for the years ended
December 31, 1996, 1995, and 1994 follows:

<TABLE>
<CAPTION>
1996 1995 1994
Current income taxes: ----- ----- -----
<S> <C> <C> <C>
U.S. Federal................................................. $ 4.9 $ 5.2 $ 4.2
U.S. State................................................... 0.9 1.2 1.0
Canada and France............................................ 11.6 11.3 7.5
----- ----- -----

17.4 17.7 12.7
----- ----- -----
Deferred income taxes:
U.S. Federal................................................. 1.2 (1.7) 1.4
U.S. State................................................... 0.2 (0.4) 0.4
Canada and France............................................ 7.2 2.0 6.8
----- ----- -----

8.6 (0.1) 8.6
----- ----- -----

Total....................................... $26.0 $17.6 $21.3
===== ===== =====
</TABLE>

Income before income taxes included income of $51.8 in 1996, $43.3 in 1995 and
$42.5 in 1994 from operations outside the U.S.

A reconciliation of income tax computed at the U.S. federal statutory income tax
rate to the provision for income taxes is as follows for the years ended
December 31, 1996, 1995 and 1994:

<TABLE>
<CAPTION>
1996 1995 1994
-------------------------------------------------------------------------
Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ -------
<S> <C> <C> <C> <C> <C> <C>
Tax at U.S. statutory rate............. $24.5 35.0% $20.5 35.0% $21.0 35.0%
State income taxes, net of federal
tax benefit....................... 0.7 1.0 0.8 1.4 0.9 1.5
Statutory rates outside the U.S.
(less than) in excess of U.S. 0.7 1.0 0.5 0.9 (0.9) (1.5)
statutory rate..
French income tax rate increase benefit - - (4.5) (7.7) - -
Other - net............................ 0.1 0.2 0.3 0.5 0.3 0.5
----- ---- ----- ---- ----- ----
Provision for income taxes............. $26.0 37.2% $17.6 30.1% $21.3 35.5%
===== ==== ===== ==== ===== ====
- -----------------------------------------------------------------------------------------------------------------
</TABLE>

The provision for income taxes is higher in 1996 and lower in 1995 primarily
due to an increase in the effective statutory income tax rate enacted in France
in July 1995 from 33.33 percent to 36.67 percent, retroactive to January 1,
1995. The net effect of the tax rate increase was favorable for 1995 because it
increased the value of the tax benefits recognized from the net operating loss
carryforwards retained by SMF. The impact in 1995 attributable to deferred tax
assets, net of liabilities, was a favorable $4.5 on the deferred provision for
income taxes, partially offset by an unfavorable impact on the current provision
for income taxes of $1.3, including a retroactive adjustment for the six-month
period ended June 30, 1995.

<PAGE> 23

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, 1996 and 1995 are
comprised of the following:

1996 1995
---- ----
<S> <C> <C>
Current deferred income tax assets attributable to:

Inventories.............................................. $ (1.0) $ (0.8)
Postretirement and other employee benefits .............. 2.3 1.9
Other accrued liabilities ............................... 1.9 3.9
Other.................................................... 0.1 0.1
------- -------

Net current deferred income tax asset................ $ 3.3 $ 5.1
======= =======

Net noncurrent deferred income tax assets attributable to:
Operating and capital loss carryforwards................. $ 73.6 $ 69.7
Accumulated depreciation................................. (22.0) (22.6)
Other.................................................... (3.3) (2.8)
Valuation allowances..................................... (18.1) (4.2)
------- -------

Net noncurrent deferred income tax asset............. $ 30.2 $ 40.1
======= =======

Net noncurrent deferred income tax liabilities attributable to:
Accumulated depreciation................................. $ (16.0) $ (16.2)
Postretirement and other employee benefits............... 7.2 6.6
Other.................................................... (0.7) (0.5)
------- -------

Net noncurrent deferred income tax liability......... $ (9.5) $ (10.1)
======= =======
</TABLE>

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

In the above presentation, the net noncurrent deferred income tax assets
relate to the French tax jurisdiction, and the net noncurrent deferred income
tax liabilities relate to the U.S. and Canadian tax jurisdictions. Total
deferred income tax assets were $67.0 and $78.0 at December 31, 1996 and 1995,
respectively. Total deferred income tax liabilities were $43.0 and $42.9 at
December 31, 1996 and 1995, respectively.

Under French tax law, the net operating losses incurred through December 31,
1994 by the previously discussed C&S operations in France (see Note 1) were
retained by SMF as of January 1, 1995. For the financial statements presented,
the tax benefits from these net operating losses were recorded as a noncurrent
deferred income tax asset and as a contribution to additional paid-in capital on
the balance sheet in the year such losses arose. The amount of additionally
recorded deferred tax assets and contributed capital was $14.5 in 1994.

<PAGE> 24

The following summarizes the changes in French net operating loss carryforwards
("NOL's") and the related noncurrent deferred income tax asset and valuation
allowance for the years ended December 31, 1996 and 1995:

Total Valuation Net
NOL's Asset Allowance Asset
------ ------ --------- ------
<S> <C> <C> <C> <C>
Amount at December 31, 1994..................... $179.8 $ 59.9 $ - $ 59.9
French income tax rate increase................. - 6.0 - 6.0
Increase related to spin-off.................... 11.4 4.2 (4.2) -
1995 utilization................................ (19.0) (7.0) - (7.0)
Currency translation effect..................... 17.8 6.6 - 6.6
----- ------ ------ ------
Amount at December 31, 1995..................... 190.0 69.7 (4.2) 65.5
Increase related to filing of
1995 French tax returns.................... 40.9 15.0 (15.0) -
1996 utilization................................ (18.6) (6.8) - (6.8)
Currency translation effect..................... (11.6) (4.3) 1.1 (3.2)
------ ------ ------ ------
Amount at December 31, 1996..................... $200.7 $ 73.6 $(18.1) $ 55.5
====== ====== ====== ======
</TABLE>

- -------------------------------------------------------------------------------
The 1995 French income tax rate increase effect of $6.0 on the deferred income
tax asset shown above was partially offset by the effect on the French entities'
net deferred income tax liabilities related to other items in arriving at the
net effect of $4.5 on the deferred provision for income taxes previously
mentioned. The valuation allowance of $4.2 was recorded to offset deferred
income tax assets arising from additional tax loss carryforwards of $11.4
generated in 1995 related to the Distribution transactions. In addition, the
Company's 1995 French income tax returns, filed in April 1996, included tax net
loss carryforward amounts which were $40.9 greater than those which had
previously been reflected on the Company's balance sheet. Thus, the Company
recorded $15.0 of additional deferred tax asset in 1996. There is uncertainty,
however, whether the benefit of these additional amounts will ultimately be
realized by the Company. Accordingly, an additional valuation allowance of $15.0
was recorded to fully offset the additional deferred tax asset, resulting in no
impact on net income for the year ended December 31, 1996.

Of the $200.7 of NOL's still available at December 31, 1996, $22.0, $36.0 and
$30.5 will expire in 1997, 1998 and 1999, respectively, if not utilized against
taxable income. The remaining $112.2 of NOL's have no expiration date. Although
not assured, PdM and PdMal are expected to generate taxable income in the
future, as they have in the past, in amounts sufficient to permit utilization of
most of the NOL's prior to their expiration. After the effect of currency
exchange rate changes during the year, valuation allowances totaled $18.1 as of
December 31, 1996, reducing the net asset to an amount which is estimated can be
realized through utilization of the NOL's by the SMF consolidated income tax
group. 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 period.

The SMF consolidated tax group has not paid income taxes, except nominal amounts
related to minimum required income taxes, in the periods presented in the
financial statements and is not expected to pay income taxes until the NOL's are
utilized.

Along with numerous other companies and banks in France, PdM is subject to a tax
claim with respect to its purchase of certain bonds in 1988 which were
represented by the two selling banks as carrying specific tax benefits. The
French taxing authority is challenging the use by PdM of those benefits. The tax
claim against PdM by the French taxing authority is $1.9 as of December 31,
1996, including late payment penalties. The Company is vigorously defending the
claim based on the merits and has filed claims against each bank on the basis of
their misrepresentation of certain facts. The Company's claim against one of the
banks was rejected by a trial court in May 1996 and

<PAGE> 25

the Company has appealed this decision. The case against the other bank has been
briefed and oral presentations are scheduled for March 1997. No reserve has been
established for this claim. Based on information currently available, there
exists a reasonable possibility of an unfavorable outcome for this claim. Since
the claim relates to a period prior to PdM joining the consolidated tax group,
any unfavorable outcome could not be offset with the NOL's.

NOTE 7 POSTRETIREMENT AND OTHER BENEFITS

North American Pension Benefits

Prior to the Distribution, substantially all of the U.S. and Canadian employees
of the Company were covered by defined benefit pension plans and participated in
pension plans covering employees of Kimberly-Clark and its Canadian subsidiaries
at various locations. The portion of Kimberly-Clark's and its Canadian
subsidiaries' pension costs attributable to the Company's U.S. and Canadian
employees and reflected in the accompanying income statements was $1.5 for the
eleven months ended November 30, 1995, and $1.9 in 1994.

Subsequent to the Distribution, the Company and its subsidiary in Canada
established defined benefit retirement plans covering substantially all
full-time employees. Retirees of the Company prior to the Distribution remained
participants of their respective Kimberly-Clark plans. 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, essentially the same as the
plans in which the employees had participated under Kimberly-Clark. Employees
retained credit for prior service while employees of Kimberly-Clark. The
Company's funding policy is to contribute assets that, at a minimum, fully fund
the accumulated benefit obligation, subject to regulatory and tax deductibility
limits. Under the Distribution, Kimberly-Clark will transfer a proportionate
share of assets of its plans related to the employees who transferred to the
Company in the Distribution. At December 31, 1996, the plan assets for the U.S.
and Canadian plans had not yet been transferred from the Kimberly-Clark plans in
which the employees had participated prior to the Distribution, pending receipt
of favorable determination letters from the Internal Revenue Service and Revenue
Canada, respectively, qualifying the Company's plans.

The components of net pension expense for U.S. employees for the year ended
December 31, 1996 and for the one month ended December 31, 1995 (subsequent to
the Distribution) using estimated amounts related to assets to be transferred to
the Company's plans from Kimberly-Clark's plans as well as estimates related to
return on plan assets for the respective periods were as follows:

1996 1995
------- ------
<S> <C> <C>
Benefits earned........................ $ 2.3 $ 0.2
Interest on projected benefit obligation 3.4 0.3
Amortizations and other................ 0.2 -
------ ------
5.9 0.5
Less expected return on plan assets
(actual return on plan assets was a gain
of $5.2 and $0.3 in 1996 and 1995,
respectively)..................... 3.2 0.3
------- ------
Net pension expense.................... $ 2.7 $ 0.2
======= ======
</TABLE>

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 both 1996
and 1995. Transition adjustments for these plans are being amortized on the
straight-line method over 14 to 18 years.

The Company obtained revised data from Kimberly-Clark during 1996 related to the
employees who transferred to the Company in the Distribution. As a result, more
accurate estimates were determined of the obligations the Company assumed in the
Distribution with respect to these plans. Also, Kimberly-Clark revised the
proportionate share of assets to be transferred to the Company's plans.
Accordingly, the 1995 information presented reflects these more accurate
estimates, although the total net accrued pension cost did not change.

<PAGE> 26

The funded status of the U.S. employee plans as of December 31, 1996 and
the restated amounts as of December 31, 1995 are as follows:

DECEMBER 31, 1996 DECEMBER 31, 1995
--------------------------- -----------------------------
PLANS IN WHICH PLANS IN WHICH
--------------------------- -----------------------------
Assets Accumulated Assets Accumulated
Exceed Benefits Exceed Benefits
Accumulated Exceed Accumulated Exceed
Benefits Assets Benefits Assets
--------------------------- -----------------------------
Actuarial present value of benefit obligations:
<S> <C> <C> <C> <C>
Vested........................................ $ (32.1) $ (1.0) $ (29.7) $ (0.8)
Nonvested.................................... (1.3) - (1.0) -
------- ------ ------- -------
Accumulated benefit obligation........... (33.4) (1.0) (30.7) (0.8)
Effects of projected future compensation
levels (10.8) (0.4) (12.4) (0.5)
------ ------- -------
Projected benefit obligation............. (44.2) (1.4) (43.1) (1.3)
Plan assets at fair value........................... 39.3 - 31.9 -
------- ------ ------- -------
Plan assets less than projected benefit obligation.. (4.9) (1.4) (11.2) (1.3)

Unrecognized net loss (gain)........................ 2.8 (0.4) 9.3 (0.2)
Unamortized transition adjustments.................. 0.1 0.1 0.1 0.1
Unamortized prior service costs..................... - 0.1 - 0.1
-------- ------- ------- -------
Net accrued pension cost............................ $ (2.0) $ (1.6) $ (1.8) $ (1.3)
======= ======= ======= =======
</TABLE>

- --------------------------------------------------------------------------------
The discount rates used to determine the projected benefit obligation and
accumulated benefit obligation for the U.S. employee plans were 7.75 percent and
7.25 percent at December 31, 1996 and 1995, respectively. The assumed long-term
rates of compensation increases used to determine the projected benefit
obligations for these plans were 4.0 percent and 4.25 percent at December 31,
1996 and 1995, respectively.

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 $1.0, $0.9
and $0.7 for the years ended December 31, 1996, 1995 and 1994, respectively. The
assumed long-term rates of return on pension assets for purposes of pension
expense recognition for the French plans were 8.0 percent for both 1996 and
1995, and 7.0 percent for 1994. Transition adjustments for these plans are being
amortized on the straight-line method over 19 to 20 years.

The Company's prepaid pension cost for the French plans whose assets exceeded
accumulated benefits was $0.6 at both December 31, 1996 and 1995. The Company's
accrued pension cost for the French plans whose accumulated benefits exceeded
assets was $1.2 and $1.0 at December 31, 1996 and 1995, respectively. The
discount rate used to determine the projected benefit obligation and accumulated
benefit obligation for the French plans was 8.0 percent at both December 31,
1996 and 1995. The assumed long-term rates of compensation increases used to
determine the projected benefit obligation for these plans were approximately
4.0 percent at both December 31, 1996 and 1995.

Postretirement Health Care and Life Insurance Benefits

Prior to the Distribution, substantially all U.S. and Canadian retired employees
of the Company were covered by unfunded health care and life insurance benefit
plans of Kimberly-Clark or its Canadian subsidiaries. Eligibility for such
benefits was based on years of service and age at retirement. The plans

<PAGE> 27

were principally noncontributory for current retirees, and were contributory for
most future retirees. The portion of Kimberly-Clark's and its Canadian
subsidiaries' postretirement health care and life insurance benefits costs
attributable to the Company's employees and reflected in the accompanying income
statements was $1.5 for the eleven months ended November 30, 1995, and $1.9 in
1994.

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

The components of U.S. employee postretirement health care and life insurance
benefit costs were as follows for the year ended December 31, 1996 and for the
one month period ended December 31, 1995 (subsequent to the Distribution):

1996 1995
----- ------
<S> <C> <C>
Benefits earned....................... $ 0.3 $ -
Interest on accumulated postretirement
benefit obligation ............... 0.7 0.1
Amortizations and other............... (0.1) -
----- ------
Net periodic postretirement benefit cost $ 0.9 $ 0.1
===== ======
</TABLE>

The Company obtained revised data from Kimberly-Clark during 1996 related to the
employees who transferred to the Company in the Distribution. As a result, more
accurate estimates were determined of the obligations the Company assumed in the
Distribution with respect to these plans. Accordingly, the presented 1995
information reflects these more accurate estimates, although the total accrued
postretirement benefit liability did not change. The components of the U.S.
employee postretirement health care and life insurance benefit obligation
included in other noncurrent liabilities as of December 31, 1996 and the
restated amounts as of December 31, 1995 are as follows:

1996 1995
---- ----
Accumulated postretirement benefit obligation:
<S> <C> <C>
Retirees................................ $ - $ -
Fully eligible active plan participants. 10.1 9.8
Other active plan participants.......... - -
----- -----
Total................................. 10.1 9.8
Favorable actuarial experience............. 4.2 3.7
----- -----
Total accrued postretirement benefit
liability ................................. 14.4 13.5
Less current portion....................... - -
----- -----
Noncurrent portion......................... $14.4 $13.5
===== =====
</TABLE>

The December 31, 1996 accumulated postretirement benefit obligation for the
these plans was determined using an assumed health care cost trend rate of 10.5
percent in 1997, declining to 6.0 percent in 2000 and thereafter. The December
31, 1995 accumulated postretirement benefit obligation was determined using an
assumed health care cost trend rate of 10.0 percent in 1996, declining to 5.25
percent in 2000 and thereafter. Discount rates of 7.75 percent and 7.25 percent
were used to determine the accumulated postretirement benefit obligations at
December 31, 1996 and 1995, respectively.

A one-percentage point increase in the healthcare cost trend rate would increase
accumulated postretirement benefit obligations by $0.1 at December 31, 1996.

Other Benefits

Prior to the Distribution, voluntary contributory investment plans were provided
to substantially all U.S. employees. Under the plans, Kimberly-Clark matched a
portion of employee contributions. The portion of Kimberly-Clark's costs under
the plans attributable to the Company and reflected in the accompanying income
statements was $0.6 for the eleven months ended November 30, 1995, and $0.8 in
1994.

Subsequent to the Distribution, substantially all U.S. employees have been given
the opportunity to participate in voluntary investment plans. Under the plans,
the Company matches a portion of employee contributions. The Company's costs
under the plan reflected in the accompanying consolidated income statements for
the year ended December 31, 1996 and for the one month ended December 31, 1995
(subsequent to the Distribution) were $1.0 and less than $0.1, respectively. At
December 31, 1996, 500,000 shares of the Company's Common Stock were reserved
for issuance under these plans, none of which had been issued as of December 31,
1996. The

<PAGE> 28

shares may, at the Company's option, be used by the Company to satisfy the
Company's liability for its matching contributions.

NOTE 8.......STOCKHOLDERS' EQUITY

As explained in Note 1, SWM was not capitalized with the net assets of the
Businesses until immediately before the Distribution. Stockholders' equity,
prior to the Distribution, therefore, consisted of the separately presented
Predecessors' Capital Stock (the historical Common Stock amounts of SMF and
LTRI), the historical combined amounts of paid-in capital and retained earnings
for these corporations (as adjusted to exclude operations unrelated to the
Businesses and to include the benefit of certain French tax net operating loss
carryforwards generated by such businesses) and the combined division equity
amounts of the U.S. and Canadian tobacco-related and other specialty paper
businesses. The latter businesses were part of the operations of Kimberly-Clark
and one of its Canadian subsidiaries, and all aspects of cash management for
such divisions with respect to intercompany sales, receivables, accounts
payable, pensions, taxes, and similar corporate activities were controlled by
Kimberly-Clark and one of its Canadian subsidiaries.

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

The net interdivisional advances and transfers for all periods prior to the
Distribution are presented in the "Advances to affiliates" caption in the
following summary of changes in stockholders' equity of the Company and its
predecessors for the years ended December 31, 1996, 1995 and 1994:

COMMON STOCK PREDECESSORS' ADDITIONAL UNREALIZED
------------------- CAPITAL PAID-IN RETAINED DIVISION CURRENCY
SHARES AMOUNT STOCK (1) CAPITAL EARNINGS EQUITY TRANSLATION TOTAL
------ ------ --------- ------- -------- -------- ----------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1993............... $ 24.8 $51.2 $ 58.3 $ 65.3 $(2.7) $196.9
Net income for the year
ended December 31, 1994 ........... 22.9 12.2 35.1
Advances to affiliates................. (9.5) (9.5)
Dividends declared .................... (12.0) (12.0)
Common stock issued (2)................ 49.5 49.5
Return of capital (2).................. (37.1) (37.1)
Contributed tax benefit................ 14.5 14.5
Adjustments due to translation......... - - - - 7.7 7.7
------ ----- ------ ------ ----- ------
BALANCE, DECEMBER 31, 1994............... 37.2 65.7 69.2 68.0 5.0 245.1
Net income for the eleven months
ended November 30, 1995 ........... 26.5 12.9 39.4
Advances to affiliates................. (2.5) (2.5)
Dividends declared (3)................. (46.8) (46.8)
Return of capital (2) (3).............. (37.1) (56.0) (93.1)
Adjustments due to translation......... 15.1 15.1
Debt assumed from Kimberly-Clark (3)... (25.0) (25.0)
Stock distribution to holders of
Kimberly-Clark stock ............ 16,051,109 $ 1.6 (0.1) 50.3 - (53.4) 1.6
---------- ----- ----- ----- ------ ------ ----- ------

BALANCE, DECEMBER 1, 1995................ 16,051,109 1.6 - 60.0 48.9 - 21.7 132.2
Net loss for the month
ended December 31, 1995 .......... (2.6) (2.6)
Adjustments due to translation......... - - - - - 0.3 0.3
---------- ----- ----- ----- ------ ------ ----- ------

BALANCE, DECEMBER 31, 1995.............. 16,051,109 1.6 - 60.0 46.3 - 22.0 129.9
Net income for the year
ended December 31, 1996 .......... 38.7 38.7
Dividends declared ($0.45 per share)... (7.2) (7.2)
Stock issued to directors as compensation 1,512 - - -
Adjustments due to translation......... - - - - - - (5.4) (5.4)
---------- ----- ----- ----- ------ ------ ----- ------

BALANCE, DECEMBER 31, 1996.............. 16,052,621 $ 1.6 $ - $60.0 $ 77.8 $ - $ 16.6 $156.0
========== ===== ===== ===== ====== ====== ====== ======
</TABLE>

(1) Changes relate to SMF. The issuances of SWM and SM-Canada stock to
Kimberly-Clark and Kimberly-Clark, Inc. (an indirect wholly-owned Canadian
subsidiary of Kimberly-Clark), respectively, on August 21, 1995 and August
17, 1995, respectively, solely for the purpose of effecting the
Distribution (see Note 1) were nominal amounts and thus are not reflected
in the above summary. $0.1 was attributable to LTRI and was unchanged
during all the periods presented through November 30, 1995.
(2) Represents contributions to SMF equity by Kimberly-Clark which were, in
turn invested in whole or in part in the French C&S subsidiaries of SMF.
The investments in these subsidiaries have been retroactively reflected in
the accompanying Consolidated Financial Statements as having been
distributed to Kimberly-Clark. Accordingly, these additional C&S
investments have been shown as return of capital distributions to
Kimberly-Clark (or as dividends to the extent the investment exceeded SMF's
available common stock amount). See Note 1.
(3) In connection with the Distribution, the Company paid $56.0 to
Kimberly-Clark as a return of capital, in addition to the debt of
Kimberly-Clark which the Company assumed in the US. ($25.0) and retained in
France ($10.8), as well as a cash dividend from LTRI to Kimberly-Clark on
the Distribution Date of $8.2. The total of these items represents a
distribution of $100.0 to Kimberly-Clark in connection with the spin-off.

27
<PAGE> 29

The Company's Certificate of Incorporation authorizes the issuance of up to
100,000,000 shares of Common Stock, par value $.10 per share, and 10,000,000
shares of Preferred Stock, par value $.10 per share. Each share of presently
outstanding Common Stock and each share of Common Stock issued after the date of
this report will have attached to it, one right to purchase from the Company one
one-hundredth (1/100) of a share of a series of Preferred Stock designated as
the Series A Junior Participating Preferred Stock (the "Series A Preferred
Stock") (a "Right"). Each Right entitles a shareholder to purchase from the
Company one one-hundredth (1/100) of a share of the Series A Preferred Stock at
a price of $65 per one one-hundredth (1/100) of a share, subject to certain
anti-dilution adjustments. The Rights, however, become exercisable only at such
time as a person or group acquires, or commences a public tender or exchange
offer for, 15 percent or more of the Company's Common Stock. The Rights have
certain anti-takeover effects since they may cause substantial dilution to a
person or group that attempts to acquire the Company on terms not approved by
the Company's Board of Directors. The Rights should not interfere with any
merger or other business combination approved by the Board of Directors since
they may be redeemed by the Company at $.01 per Right at any time until a person
or group has obtained beneficial ownership of 15 percent or more of the voting
stock. The Rights will expire at the close of business on October 1, 2005,
unless redeemed earlier by the Company.

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

The Company's Equity Participation Plan (the "Plan"), adopted on October 23,
1995 provides that eligible employees may be granted stock options which, when
exercised, give the recipient the right to purchase the Company's Common Stock
at a price no less than the "fair market value" (as defined in the Plan) of such
stock at grant date. Options awarded under the Plan only become exercisable
after specified periods of employment after the grant thereof (30 percent after
the first year, 30 percent after the second and the remaining 40 percent after
the third year). Generally, such options expire ten years subsequent to the date
of grant.

In October 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 123, "Accounting for Stock-Based
Compensation", which became effective for the Company beginning in 1996. SFAS
No. 123 requires expanded disclosures of stock-based compensation arrangements
with employees and encourages (but does not require) compensation costs to be
measured based on the fair value of the equity instrument awarded. Companies are
permitted, however, to continue to apply Accounting Principles Board (APB)
Opinion No. 25 and related Interpretations, which recognizes compensation cost
based on the intrinsic value of the equity instrument awarded. The Company has
elected to continue to apply APB Opinion No. 25 and related Interpretations in
accounting for its stock-based compensation awards to employees. Accordingly, no
charge is made against earnings in the Company's financial statements for
stock-based compensation awards under its current Plan. Proceeds from the
exercise of stock options will be credited to the appropriate capital accounts.
Had compensation cost for the Plan been determined based on the fair value at
the grant date consistent with the

<PAGE> 30
method of SFAS No. 123, the Company's net income and earnings per share would
not have been materially different from what has been reported in these
consolidated financial statements. 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 of 32 percent over the ten year
option term, a risk-free rate of return based upon the zero coupon government
bond yield, and an assumed quarterly dividend of $0.15 per share. Certain grants
awarded after the spin-off in 1995 were considered modifications of
Kimberly-Clark stock options previously held by employees of the Company. At
both December 31, 1996 and 1995, 1,500,000 shares of the Company's Common Stock
were reserved under the Plan. At December 31, 1996 and 1995, there were 800,600
and 901,200 shares available for future awards.

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

The following stock options were outstanding as of December 31, 1996 and 1995:

1996 1995
--------------------------------- ------------------------------
WEIGHTED AVERAGE WEIGHTED AVERAGE
PER SHARE PER SHARE
SHARES EXERCISE PRICE SHARES EXERCISE PRICE
------- ---------------- ------ ----------------
<S> <C> <C> <C> <C>
Outstanding at beginning of year............ 598,800 $21.0625 -
Granted.............................. 100,600 28.1875 598,800 $21.0625
Exercised............................ - -
Forfeited............................ - -
------- -------
Outstanding at end of year.................. 699,400 22.0873 598,800 21.0625
======= =======

Options exercisable at year-end............. 179,640 21.0625 None
======= =======
Weighted-average per share fair value of
options granted during the year........ $ 9.13 $ 6.82
======= =======
</TABLE>

At December 31, 1996, the range of exercise prices was from $21.0625 to
$28.1875 per share with a weighted average contractual life of approximately
9 years.
- --------------------------------------------------------------------------------

NOTE 9. RESTRUCTURING CHARGE

In December 1995, the Company announced its decision to exit the U.S.
reconstituted tobacco leaf ("RTL") product line and to restructure operations in
France, which resulted in a one-time restructuring charge against operating
profit in the amount of $7.3 ($5.9 in the U.S. and $1.4 in France).
Approximately $4.7 of the reserve was utilized during 1996 for a non-cash
write-down of assets. The cash charges were primarily for severance related
costs in France and costs of mothballing the equipment of the U.S. RTL
operations. The plan was completed on schedule and the associated restructuring
reserve was closed out at the end of the third quarter, 1996. The Company's
decision to exit the U.S. RTL product line had no impact on the Company's U.S.
wrapper and binder business, its RTL business in France, or the Company's
commitment to reconstituted tobacco worldwide.

NOTE 10. RELATED PARTY TRANSACTIONS

For the periods prior to the Distribution, Kimberly-Clark was a related party
and subsidiaries of Kimberly-Clark were affiliates. For all periods presented,
Kimberly-Clark and affiliated companies have provided services to and incurred
costs on behalf of the Company. The costs of certain services, including, but
not limited to, property and casualty insurance coverage under the
Kimberly-Clark insurance program, administrative services, management
information services, employee benefits administration, environmental
consultation and administration, central purchasing, transportation services,
tax services, treasury services, accounting and reporting, and the
Kimberly-Clark Equity Participation Plan were allocated to the Businesses for
the periods prior to the Distribution and billed to the Company after the
Distribution. The allocations and

29
<PAGE> 31

billings of costs and expenses for these services were based on methods that
management believes are reasonable including use of time estimates, headcount
and transaction statistics, and similar activity-based data. The actual costs to
be incurred by the Company in the future to replace the services still provided
by Kimberly-Clark and affiliated companies may increase from currently billed
amounts due to differences in scale, organizational structure, management
structure and other factors.

The costs allocated and other intercompany and interdivisional transactions
between Kimberly- Clark and affiliated companies and the Company were as follows
for the eleven months ended November 30, 1995 and for the year ended December
31, 1994 (the periods prior to the Distribution):

1995 1994
---- ----
Operating expenses (costs for
<S> <C> <C>
services described above). $15.0 $15.1
Interest expense .............. 10.4 6.8
Interest income................ 13.7 11.9
Purchases of wood pulp......... 13.9 7.5
</TABLE>

Prior to the Distribution, the Company participated in Kimberly-Clark's and
certain affiliated companies' cash management programs, under which the
Company's cash needs were funded by Kimberly-Clark and certain affiliates
thereof, and the Company's excess cash was transferred to Kimberly-Clark and
such affiliates. In the U.S. and Canada, such advances and transfers prior to
the Distribution are shown as interdivisional transactions and were noninterest
bearing. In France, prior to the Distribution, SMF functioned as a cash
management and financing entity for other Kimberly-Clark affiliates, primarily
in France. The financial statements accordingly reflected affiliate loans, notes
payable, interest income and expense and stockholder's equity transactions to
accomplish Kimberly-Clark financing objectives for the periods prior to the
Distribution.

The Company had sales to the minority shareholder of LTRI of $18.4, $15.0 and
$19.2 in 1996, 1995 and 1994, respectively.

NOTE 11. FOREIGN CURRENCY

Foreign currency losses have arisen from settlement of transactions in non-local
currencies and the remeasurement of non-local currency denominated monetary
assets and liabilities into the currency of the country in which the operation
is domiciled. Such losses were primarily related to receivables from and
payables to affiliated companies unrelated to the Businesses prior to the
Distribution. Such losses included in other expense, net were nominal in 1996
and 1995 and were $2.1 in 1994.

Foreign currency risks arise from transactions and commitments denominated in
non-local currencies. In addition to affiliated company debt, 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 economical to do so. The instruments are purchased from
well-known money center banks, insurance companies or government agencies
(counterparties). Usually the contracts extend for no more than 12 months,
although their contractual term has been as long as 18 months. Credit risks with
respect to the counterparties, and the foreign currency risks that would not be
hedged if the counterparties fail to fulfill their obligations under the
contracts, are minimal in view of the financial strength of the counterparties.

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

At December 31, 1996, there were outstanding forward contracts, which were held
for purposes other than trading, maturing at various dates in 1997, to purchase
$25.9 of various foreign currencies. These contracts have not given rise to any
significant net deferred gains or losses as of December 31, 1996.

NOTE 12. 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, 1996 are less
than $1 annually over the next five years. Rental expense under operating leases
was $3.9, $3.9 and $3.5 for the years ended December 31, 1996, 1995 and 1994,
respectively.

<PAGE> 32

Other Commitments

The Company has entered into long-term contracts for the purchase of certain raw
materials. Minimum purchase commitments, at current prices, are approximately
$4.1 in 1997. These purchase commitments are not expected to result in losses.

The Company has also entered into certain contracts for the purchase of
equipment and related costs in connection with its ongoing capital projects.
These commitments at December 31, 1996 totaled approximately $7.6.

NOTE 13. LEGAL PROCEEDINGS

On January 31, 1997, James E. McCune on behalf of himself and other "nicotine
dependent" West Virginia cigarette smokers filed, in the Circuit Court of
Kanawha County, West Virginia, a purported class action against several tobacco
companies, industry trade associations and consultants, tobacco wholesalers and
cigarette component manufacturers, including Kimberly-Clark, seeking equitable
relief and compensatory and punitive damages in an unspecified amount for mental
suffering and physical injuries allegedly sustained as a result of having smoked
cigarettes. Under the terms of the Distribution, the Company assumed liability
for and agreed to indemnify Kimberly-Clark in litigation arising out of the
operations of the Businesses, including this case. The nine-count complaint sets
forth several theories of liability, including intentional and negligent
misrepresentation, negligence, product liability and breach of warranty. Among
other things, the complaint alleges that nicotine is an addictive substance,
that the tobacco companies, by using reconstituted tobacco, are able to control
the precise amount of nicotine in their cigarettes and that LTR Industries, a
French subsidiary of the Company, specializes in the reconstitution process to
help the tobacco companies control nicotine levels. As a component supplier, the
Company believes that it has meritorious defenses to this case, but due to the
uncertainties of litigation, the Company cannot predict its outcome and is
unable to make a meaningful estimate of the amount or range of loss which could
result from an unfavorable outcome of this action.

NOTE 14. ENVIRONMENTAL MATTERS

Kimberly-Clark was named a potentially responsible party ("PRP") under the
provisions of the U.S. Comprehensive Environmental Response, Compensation and
Liability Act ("CERCLA"), or analogous state statutes, at two waste disposal
sites utilized by the Company's Spotswood, New Jersey mill and one site used by
the Company's former Mt. Holly Springs, Pennsylvania mill. Under the terms of
the Transfer Agreement , the Company assumed all liabilities associated with
each of the following:

- In August 1992, the Spotswood mill received an information request from
the New Jersey Department of Environmental Protection and Energy
("NJDEPE"), now known as the New Jersey Department of Environmental
Protection ("NJDEP"), with respect to the Jones Industrial Service
Landfill. Neither Kimberly-Clark nor the Company have any internal records
indicating that the mill used the site. However, the Spotswood mill
received routing sheets completed by a nonhazardous waste disposal
transporter used by the mill which indicate that the transporter may have
sent three loads of Spotswood mill waste to the site in September 1980. The
NJDEP issued a draft Record of Decision ("ROD") in June 1995 which
evaluated remedial alternatives. The draft ROD included a NJDEP list of
PRPs, but Kimberly-Clark was not named on the list. Although the amount of
the Company's liability, if any, cannot yet be determined, the Company does
not believe that it will be material.

31
<PAGE> 33

PRPs pursuant to which Kimberly-Clark agreed to pay $0.6 for its share of
Phase I cleanup costs. This amount has been reflected in the Company's
financial statements. In December 1996, NJDEP issued a proposed remedial
action plan for Phase II cleanup costs. Although the Spotswood mill's
share of Phase II cleanup costs cannot yet be determined, the Company does
not believe its liability will be material.

- In April 1995, Kimberly-Clark received a letter from the Industrial
Solvents and Chemical Company ("ISCC") Site PRP Steering Committee stating
it had been identified by the Pennsylvania Department of Environmental
Protection as a generator of waste at a nine acre site in Newberry
Township, York County, Pennsylvania. The PRP group believes the Company's
former Mt. Holly Springs, Pennsylvania facility sent 825 gallons of waste
to the ISCC site. The PRP group has determined the waste allegedly sent by
the Company represents 0.0185 percent of the total amount of waste sent to
the ISCC site and, therefore, has assigned the Company a 0.0185 percent
share of the response costs. The PRP Steering Committee has committed to
incur up to $13.5 in interim response costs and expects future remedial
costs to range from an additional $20 to $30. The Company does not believe
its liability will be material.

The Company also assumed responsibility to administer a consent order between
Kimberly-Clark and the Massachusetts Department of Environmental Protection
("MDEP") governing the post-closure care of the Willow Hill Landfill in Lee,
Massachusetts. The Company is obligated to maintain the integrity of the cover
and sample groundwater monitoring wells, in addition to other long-term
maintenance responsibilities for this former non-hazardous waste disposal
facility. Under the terms of a consent order signed on January 24, 1997 with
MDEP resulting from a Comprehensive Site Assessment and a Corrective Action
Alternative Assessment ("CAAA") submitted by the Company to MDEP, the Company
has until September 10, 1997 to correct a gas migration problem by means of a
passive gas venting system, as the Company recommended in its CAAA at a cost of
$0.1. If the passive venting system does not bring the site into compliance by
September 10, 1997, the Company must submit to MDEP, no later than December 1,
1997, a revised compliance plan which employs technologies other than passive
gas venting. If the site is not in full compliance by February 10, 1998, the
Company must then implement, subject to MDEP's possible modification, the
compliance plan which it would have submitted. The cost of such a plan could
range from $0.3 to $1.5 in addition to an estimated $0.1 for annual operating
expenses.

The Company, under the Transfer Agreement, became owner of and assumed
responsibility for the Valley Mill Landfill site in Lee, Massachusetts. The
landfill was operated by the Company from 1968 to 1969 and was capped in 1970.
On December 23, 1996 the Company received a Notice of Responsibility ("Notice")
from MDEP under Section 21E of the Massachusetts Oil and Material Release
Prevention and Response Act stating that an electro-magnetic survey ("Survey")
performed by a contractor of EPA at the site indicated that buried metallic
objects may be present in the subsurface. The Survey was conducted following an
anonymous call to MDEP alleging the site contains buried metal drums. The
Company will respond to the Notice and will investigate the information reported
in the Survey. Based on information currently available, the Company believes
the Survey only indicates the presence of crushed drums disposed of at the site
in 1968 and 1969 and previously reported to MDEP. Although the Company can give
no assurances as to the ultimate cost of addressing this matter, the Company
does not believe such costs will be material.

Some or all of the Company's U.S. facilities may be subject to revised air
emissions and wastewater discharge standards under rules commonly known as the
"Cluster Rules". The first phase of the Cluster Rules, proposed by the EPA in
1993, would affect only wastewater discharges from the Ancram, New York mill and
the Lee mills and would require compliance by late 1999. The Spotswood mill
discharges its effluent to a publicly-owned treatment works. Although the EPA
originally indicated that the proposed rules would be finalized in 1996, final
rules have not yet been issued. The estimated capital expenditures for
compliance at the Ancram mill and the Lee mills is between $6 and $9 in the
aggregate. However, due to uncertainty concerning applicable requirements under
the final Cluster Rules, the

<PAGE> 34

Company can give no assurance that this estimate will accurately reflect the
actual cost of compliance.

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 and France. For these purposes, the Company incurred total capital
expenditures of $2.5 in 1996, and anticipates that it will incur approximately
$2 in capital expenditures in 1997 and $5 to $10 in 1998. The major projects
included in these estimates are upgrading wastewater treatment facilities at
various locations and installation of equipment to treat volatile organic
compound emissions in France. Approximately $3 of the total environmental
capital spending estimates for 1997 and 1998 relate to projects anticipated as
necessary to comply with the wastewater discharge requirements of the proposed
Cluster Rules. The balance of expenditures required for compliance with the
initial phase of the Cluster Rules is expected to occur in 1999. The foregoing
capital expenditures are not expected to reduce the Company's ability to invest
in capacity expansion, quality improvements, capital replacements, productivity
improvements, or cost containment projects, and are not expected to have a
material adverse effect on the Company's financial condition or results of
operations.

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

NOTE 15. BUSINESS SEGMENTS AND GEOGRAPHY

Business Segment Reporting

The Company essentially operates in one business segment, "Tobacco Industry
Products", which consists of tobacco-related papers and reconstituted tobacco
products. The Company's non-tobacco industry products are less than ten percent
of total consolidated net sales.

Consolidated Operations by Geographic Area

NET SALES OPERATING PROFIT ASSETS
------------------------------- -------------------------------- --------------------

1996 1995 1994 1996 1995 1994 1996 1995
---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
United States................ $212.3 $219.9 $201.2 $23.7 $16.1 $20.6 $143.7 $139.3
Outside United States........ 263.5 251.7 207.9 55.5 44.3 38.7 237.8 213.6
------ ------ ------- ------ ------ ------ ------ ------
Subtotal................ 475.8 471.6 409.1 79.2 60.4 59.3 381.5 352.9
Intergeographic items........ (4.5) (8.7) (4.9) - - - (0.9) (5.2)
Unallocated items and
eliminations - net...... - - - (5.2) (1.7) (0.6) - -
------ ------ ------ ----- ----- ----- ------ ------
Consolidated................. $471.3 $462.9 $404.2 $74.0 $58.7 $58.7 $380.6 $347.0
====== ====== ====== ===== ===== ===== ====== ======
</TABLE>

Intercompany sales of products between geographic areas are made at market
prices and are referred to as intergeograhic items. Expense amounts not
associated with geographic areas are referred to as unallocated items. Assets
reported by geographic area represent assets which are directly used and an
allocated portion of jointly used assets. These assets include receivables from
other geographic areas and are referred to as intergeographic items.

<PAGE> 35

NOTE 16. MAJOR CUSTOMER

Net sales to Philip Morris Companies, Inc., together with its affiliates and
designated converters, accounted for $165.6, $165.6 and $142.5, or 35.1 percent,
35.8 percent and 35.3 percent, of total consolidated net sales for the years
ended December 31, 1996, 1995 and 1994, respectively. Accounts receivable
includes balances due from Philip Morris Companies, Inc., together with its
affiliates and designated converters, of $11.5 and $12.4 at December 31, 1996
and 1995, respectively. The Company performs ongoing credit evaluations on all
of its customers' financial conditions and generally does not require collateral
or other security to support customer receivables.

NOTE 17. UNAUDITED QUARTERLY FINANCIAL DATA AND COMMON STOCK INFORMATION

The Company's Common Stock trades on the New York Stock Exchange under the
ticker symbol "SWM". As of December 31, 1996, there were 10,761 stockholders of
record of the Company's Common Stock. This number does not include shares held
in "nominee" or "street" name.

<TABLE>
<CAPTION>
1996
------------------------------------------------------
FIRST SECOND THIRD FOURTH YEAR
--------- -------- -------- -------- -------
<S> <C> <C> <C> <C> <C>
Net Sales.................................. $ 119.8 $ 117.5 $ 118.5 $ 115.5 $ 471.3
Gross Profit............................... 28.8 29.8 28.6 27.0 114.2
Operating Profit........................... 18.0 19.8 18.8 17.4 74.0
Net Income................................. 9.4 10.5 9.8 9.0 38.7
Net Income Per Share....................... .59 .65 .61 .56 2.41
Cash Dividends Declared and Paid Per Share. $ - $ .15 $ .15 $ .15 $ .45

Market Price:
High....................................... $ 28 7/8 $ 28 3/4 $ 33 1/2 $ 33 5/8 $ 33 5/8
Low........................................ 22 3/4 25 5/8 27 1/2 28 7/8 22 3/4
Close...................................... $ 27 1/2 $ 28 1/8 $ 33 1/2 $ 31 5/8 $ 31 5/8
</TABLE>

<TABLE>
<CAPTION>
1995
------------------------------------------------------
FIRST SECOND THIRD (2) FOURTH (3) YEAR
------ -------- ---------- ---------- -------
<S> <C> <C> <C> <C> <C>
Net Sales.................................. $109.5 $ 113.4 $ 121.5 $ 118.5 $ 462.9
Gross Profit............................... 24.5 24.8 26.8 25.1 101.2
Operating Profit........................... 16.8 16.5 18.1 7.3 58.7
Net Income................................. 9.9 10.3 13.9 2.7 36.8
Pro Forma Net Income (1)................... 7.9 7.3 12.0 1.8 29.0
Pro Forma Net Income Per Share (1)......... $ .49 $ .46 $ .75 $ .11 $ 1.81

Market Price (from December 1 to December 31, 1995):
High....................................... $ 23 5/8 $ 23 5/8
Low........................................ 20 3/8 20 3/8
Close...................................... $ 23 1/8 $ 23 1/8
</TABLE>

1) On a pro forma basis for all periods presented prior to December 1, 1995.
Average shares used to compute earnings per share prior to December 1, 1995
are the actual number of shares issued and distributed in the Distribution.

2) Results for the third quarter 1995 include a $4.5 one-time deferred income
tax benefit as a result of the increase in the effective statutory income
tax rate enacted in France in July 1995 from 33.33 percent to 36.67
percent. The impact of this item was $.28 per share, which was partially
offset by the $0.6 additional income tax expense recorded in the third
quarter 1995 for the retroactive effect of the enactment back to January 1,
1995. The net impact of this item on net income for third quarter 1995 was
$3.9, or $.24 per share (see Note 6).

3) Results for the fourth quarter 1995 include the $7.3 pre-tax
restructuring charge, the net income impact of which is $4.4, or $.27 per
share (see Note 9).

<PAGE> 36

REPORT OF INDEPENDENT AUDITORS
Schweitzer-Mauduit International, Inc. and Subsidiaries

INDEPENDENT AUDITORS' REPORT

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, 1996
and 1995, and the related consolidated statements of income and cash flow for
the years ended December 31, 1996, 1995 and 1994. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.

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

In our opinion, such consolidated financial statements present fairly, in all
material respects, the consolidated financial position of Schweitzer-Mauduit
International, Inc. and subsidiaries as of December 31, 1996 and 1995, and the
consolidated results of their operations and their cash flows for the years
ended December 31, 1996, 1995 and 1994 in conformity with generally accepted
accounting principles.

DELOITTE & TOUCHE LLP

Atlanta, Georgia
January 31, 1997

<PAGE> 37

MANAGEMENT'S RESPONSIBILITY FOR FINANCIAL REPORTING
Schweitzer-Mauduit International, Inc. and Subsidiaries

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

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

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

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

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

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

/s/ WAYNE H. 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 31, 1997

<PAGE> 1

EXHIBIT 21.1

SUBSIDIARIES OF SCHWEITZER-MAUDUIT INTERNATIONAL, INC.

The subsidiaries of the Company at December 31, 1996 were as follows:

<TABLE>
<CAPTION>
JURISDICTION OF
INCORPORATION OR
NAME ORGANIZATION
- ---- -----------------------
<S> <C>
LTR Industries S.A................................................ France
Schweitzer-Mauduit Canada, Inc.................................... Manitoba Province (Canada)
Schweitzer-Mauduit France S.A.R.L................................. France
- Schweitzer-Mauduit Enterprise S.A.................. France
- Papeteries de Mauduit S.A.......................... France
-- PDM Industries S.N.C......................... France
-- Papeteries de Malaucene S.A.................. France
-- Malaucene Industries S.N.C............ France
</TABLE>

<PAGE> 1

EXHIBIT 23.1

INDEPENDENT AUDITORS' CONSENT

We consent to the incorporation by reference in Registration Statements No.
33-99812, No. 33-99814, No. 33-99816, and No. 33-99848 of Schweitzer-Mauduit
International, Inc. and subsidiaries on Form S-8 of our report dated January 31,
1997, incorporated by reference in the Annual Report on Form 10-K of
Schweitzer-Mauduit International, Inc. and subsidiaries for the year ended
December 31, 1996.

DELOITTE & TOUCHE LLP

Atlanta, Georgia
March 19, 1997

<PAGE> 1

EXHIBIT 24.1

POWERS OF ATTORNEY

<PAGE> 2

POWER OF ATTORNEY

The undersigned, Claire L. Arnold, hereby constitutes and appoints
William J. Sharkey and Paul C. Roberts, or either of them, his true and lawful
attorneys-in-fact and agents, with full powers of substitution and
resubstitution, for him and in his name, place and stead, in any and all
capacities, to sign the Annual Report on Form 10-K of Schweitzer-Mauduit
International, Inc. for the fiscal year ended December 31, 1996, and any and all
amendments thereto, and to file the same, with all exhibits thereto, and other
documents in connection therewith, with the Securities and Exchange Commission,
granting unto said attorneys-in-fact and agents, each acting alone, full power
and authority to do and perform each and every act and thing requisite and
necessary to be done in and about the premises, as fully to all intents and
purposes as he might or could do in person, hereby ratifying and confirming all
that said attorneys-in-fact and agents, each acting alone, or his substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.

Dated this 10th day of March, 1997 /s/ CLAIRE L. ARNOLD
--------------------
Claire L. Arnold

<PAGE> 3

POWER OF ATTORNEY

The undersigned, K.C. Caldabaugh, hereby constitutes and appoints
William J. Sharkey and Paul C. Roberts, or either of them, his true and lawful
attorneys-in-fact and agents, with full powers of substitution and
resubstitution, for him and in his name, place and stead, in any and all
capacities, to sign the Annual Report on Form 10-K of Schweitzer-Mauduit
International, Inc. for the fiscal year ended December 31, 1996, and any and all
amendments thereto, and to file the same, with all exhibits thereto, and other
documents in connection therewith, with the Securities and Exchange Commission,
granting unto said attorneys-in-fact and agents, each acting alone, full power
and authority to do and perform each and every act and thing requisite and
necessary to be done in and about the premises, as fully to all intents and
purposes as he might or could do in person, hereby ratifying and confirming all
that said attorneys-in-fact and agents, each acting alone, or his substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.

Dated this 10th day of March, 1997 /s/ K.C. CALDABAUGH
-------------------
K.C. Caldabaugh

<PAGE> 4

POWER OF ATTORNEY

The undersigned, Laurent G. Chambaz, hereby constitutes and
appoints William J. Sharkey and Paul C. Roberts, or either of them, his true and
lawful attorneys-in-fact and agents, with full powers of substitution and
resubstitution, for him and in his name, place and stead, in any and all
capacities, to sign the Annual Report on Form 10-K of Schweitzer-Mauduit
International, Inc. for the fiscal year ended December 31, 1996, and any and all
amendments thereto, and to file the same, with all exhibits thereto, and other
documents in connection therewith, with the Securities and Exchange Commission,
granting unto said attorneys-in-fact and agents, each acting alone, full power
and authority to do and perform each and every act and thing requisite and
necessary to be done in and about the premises, as fully to all intents and
purposes as he might or could do in person, hereby ratifying and confirming all
that said attorneys-in-fact and agents, each acting alone, or his substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.

Dated this 10th day of March, 1997 /s/ LAURENT G. CHAMBAZ
----------------------
Laurent G. Chambaz

<PAGE> 5

POWER OF ATTORNEY

The undersigned, Richard D. Jackson, hereby constitutes and
appoints William J. Sharkey and Paul C. Roberts, or either of them, his true and
lawful attorneys-in-fact and agents, with full powers of substitution and
resubstitution, for him and in his name, place and stead, in any and all
capacities, to sign the Annual Report on Form 10-K of Schweitzer-Mauduit
International, Inc. for the fiscal year ended December 31, 1996, and any and all
amendments thereto, and to file the same, with all exhibits thereto, and other
documents in connection therewith, with the Securities and Exchange Commission,
granting unto said attorneys-in-fact and agents, each acting alone, full power
and authority to do and perform each and every act and thing requisite and
necessary to be done in and about the premises, as fully to all intents and
purposes as he might or could do in person, hereby ratifying and confirming all
that said attorneys-in-fact and agents, each acting alone, or his substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.

Dated this 10th day of March, 1997 /s/ RICHARD D. JACKSON
----------------------
Richard D. Jackson

<PAGE> 6

POWER OF ATTORNEY

The undersigned, Leonard J. Kujawa, hereby constitutes and appoints
William J. Sharkey and Paul C. Roberts, or either of them, his true and lawful
attorneys-in-fact and agents, with full powers of substitution and
resubstitution, for him and in his name, place and stead, in any and all
capacities, to sign the Annual Report on Form 10-K of Schweitzer-Mauduit
International, Inc. for the fiscal year ended December 31, 1996, and any and all
amendments thereto, and to file the same, with all exhibits thereto, and other
documents in connection therewith, with the Securities and Exchange Commission,
granting unto said attorneys-in-fact and agents, each acting alone, full power
and authority to do and perform each and every act and thing requisite and
necessary to be done in and about the premises, as fully to all intents and
purposes as he might or could do in person, hereby ratifying and confirming all
that said attorneys-in-fact and agents, each acting alone, or his substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.

Dated this 10th day of March, 1997 /s/ LEONARD J. KUJAWA
---------------------
Leonard J. Kujawa

<PAGE> 7

POWER OF ATTORNEY

The undersigned, Jean-Pierre Le Hetet, hereby constitutes and
appoints William J. Sharkey and Paul C. Roberts, or either of them, his true and
lawful attorneys-in-fact and agents, with full powers of substitution and
resubstitution, for him and in his name, place and stead, in any and all
capacities, to sign the Annual Report on Form 10-K of Schweitzer-Mauduit
International, Inc. for the fiscal year ended December 31, 1996, and any and all
amendments thereto, and to file the same, with all exhibits thereto, and other
documents in connection therewith, with the Securities and Exchange Commission,
granting unto said attorneys-in-fact and agents, each acting alone, full power
and authority to do and perform each and every act and thing requisite and
necessary to be done in and about the premises, as fully to all intents and
purposes as he might or could do in person, hereby ratifying and confirming all
that said attorneys-in-fact and agents, each acting alone, or his substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.

Dated this 10th day of March, 1997 /s/ JEAN-PIERRE LE HETET
------------------------
Jean-Pierre Le Hetet

<PAGE> 8

POWER OF ATTORNEY

The undersigned, Larry B. Stillman, hereby constitutes and appoints
William J. Sharkey and Paul C. Roberts, or either of them, his true and lawful
attorneys-in-fact and agents, with full powers of substitution and
resubstitution, for him and in his name, place and stead, in any and all
capacities, to sign the Annual Report on Form 10-K of Schweitzer-Mauduit
International, Inc. for the fiscal year ended December 31, 1996, and any and all
amendments thereto, and to file the same, with all exhibits thereto, and other
documents in connection therewith, with the Securities and Exchange Commission,
granting unto said attorneys-in-fact and agents, each acting alone, full power
and authority to do and perform each and every act and thing requisite and
necessary to be done in and about the premises, as fully to all intents and
purposes as he might or could do in person, hereby ratifying and confirming all
that said attorneys-in-fact and agents, each acting alone, or his substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.

Dated this 10th day of March, 1997 /s/ LARRY B. STILLMAN
---------------------
Larry B. Stillman

<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCAL INFORMATION EXTRACTED FROM THE FINANCIAL
STATEMENTS OF SCHWEITZER-MAUDIT FOR THE YEAR ENDED DECEMBER 31, 1996, AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000

<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 30,900
<SECURITIES> 0
<RECEIVABLES> 65,100
<ALLOWANCES> 400
<INVENTORY> 49,200
<CURRENT-ASSETS> 150,600
<PP&E> 361,000
<DEPRECIATION> 166,800
<TOTAL-ASSETS> 380,600
<CURRENT-LIABILITIES> 101,800
<BONDS> 86,600
0
0
<COMMON> 1,600
<OTHER-SE> 154,400
<TOTAL-LIABILITY-AND-EQUITY> 380,600
<SALES> 471,300
<TOTAL-REVENUES> 471,300
<CGS> 357,100
<TOTAL-COSTS> 357,100
<OTHER-EXPENSES> 40,200
<LOSS-PROVISION> 100
<INTEREST-EXPENSE> 5,300
<INCOME-PRETAX> 69,900
<INCOME-TAX> 26,000
<INCOME-CONTINUING> 38,700
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 38,700
<EPS-PRIMARY> 2.41
<EPS-DILUTED> 2.41

</TABLE>