SCHWEITZER MAUDUIT INTERNATIONAL INC, 10-Q, 1998-11-12

SCHWEITZER MAUDUIT INTERNATIONAL INC
10-Q, 1998-11-12
PAPER MILLS

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<PAGE> 1
FORM 10-Q

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended SEPTEMBER 30, 1998

[ ] 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
ALPHARETTA, GEORGIA
30022-8246
(Address of principal executive offices)
(Zip Code)

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

NO CHANGE (Former name, former address and former fiscal year,
if changed since last report)

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 .
----- -----

As of September 30, 1998, 15,923,033 shares of the Corporation's common stock,
par value $.10 per share, together with preferred stock purchase rights
associated therewith, were outstanding.
<PAGE> 2
PART I - FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

SCHWEITZER-MAUDUIT INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF INCOME
U.S. $ IN MILLIONS, EXCEPT PER SHARE AMOUNTS
(UNAUDITED)

<TABLE>
<CAPTION>
FOR THE THREE MONTHS FOR THE NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
------------------------- -------------------------
1998 1997 1998 1997
------- ------- ------- -------
<S> <C> <C> <C> <C>
Net Sales ........................................ $ 134.4 $ 113.4 $ 412.7 $ 342.7
Cost of products sold ....................... 107.7 83.1 327.2 248.1
------- ------- ------- -------
Gross Profit ..................................... 26.7 30.3 85.5 94.6
Selling expense ............................. 5.1 4.3 15.3 13.0
Research expense ............................ 1.7 1.6 4.7 4.7
General expense ............................. 4.7 3.8 14.1 12.4
------- ------- ------- -------
Operating Profit ................................ 15.2 20.6 51.4 64.5
Interest expense ............................ (1.6) (1.1) (4.8) (3.1)
Other income (expense), net ................. 0.2 0.6 0.9 1.2
------- ------- ------- -------
Income Before Income Taxes and Minority Interest . 13.8 20.1 47.5 62.6
Provision for income taxes .................. 5.6 7.4 14.3 23.2
------- ------- ------- -------
Income Before Minority Interest .................. 8.2 12.7 33.2 39.4
Minority interest in earnings of subsidiaries 1.4 1.5 4.2 4.2
------- ------- ------- -------
Net Income ....................................... $ 6.8 $ 11.2 $ 29.0 $ 35.2
======= ======= ======= =======

Net Income per Common Share
Basic ....................................... $ .43 $ .70 $ 1.81 $ 2.19
======= ======= ======= =======
Diluted ..................................... $ .43 $ .68 $ 1.79 $ 2.15
======= ======= ======= =======

Cash Dividends Declared per Common Share ......... $ .15 $ .15 $ .45 $ .45
======= ======= ======= =======
</TABLE>

See Notes to Unaudited Consolidated Financial Statements

2
<PAGE> 3
SCHWEITZER-MAUDUIT INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS
U.S. $ IN MILLIONS, EXCEPT PER SHARE AMOUNTS
(UNAUDITED)

<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1998 1997
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents ................................................. $ 2.4 $ 37.2
Accounts receivable ....................................................... 77.3 57.0
Inventories ............................................................... 74.7 56.3
Deferred income tax benefits .............................................. 4.0 3.3
Prepaid expenses .......................................................... 3.1 3.8
------ ------
Total Current Assets .................................................. 161.5 157.6
------ ------

Gross Property ................................................................ 468.0 370.0
Less accumulated depreciation ............................................. 189.2 168.9
------ ------
Net Property .......................................................... 278.8 201.1
------ ------

Noncurrent Deferred Income Tax Benefits ........................................ 22.1 18.4
------ ------

Deferred Charges and Other Assets .............................................. 15.1 13.9
------ ------

Total Assets ................................................................... $477.5 $391.0
====== ======

LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Current portion of long-term debt ......................................... $ 4.6 $ 2.5
Other short-term debt ..................................................... 11.3 0.5
Accounts payable .......................................................... 51.4 43.4
Accrued expenses .......................................................... 56.6 43.0
Income taxes payable ...................................................... (0.4) 1.1
------ ------
Total Current Liabilities ............................................. 123.5 90.5
------ ------

Long-Term Debt ................................................................. 108.6 80.8
------ ------
Deferred Income Taxes .......................................................... 14.1 11.2
------ ------
Other Noncurrent Liabilities ................................................... 26.5 21.9
------ ------
Minority Interest .............................................................. 6.5 7.1
------ ------
Contingencies (See Notes 5 and 6)
Stockholders' Equity
Preferred Stock -$.10 par value - 10,000,000 shares authorized, none issued -- --
Common Stock -$.10 par value - 100,000,000 shares authorized,
16,078,733 and 16,065,443 shares issued at September 30, 1998
and December 31, 1997, respectively ..................................... l.6 1.6
Additional paid-in capital ................................................ 60.6 60.3
Common stock in treasury, at cost - 155,700 shares at September 30, 1998 .. (3.8) --
Retained earnings ......................................................... 135.3 113.5
Accumulated other comprehensive income -
Unrealized foreign currency translation adjustments ..................... 4.6 4.1
------ ------
Total Stockholders' Equity ............................................ 198.3 179.5
------ ------

Total Liabilities and Stockholders' Equity ..................................... $477.5 $391.0
====== ======
</TABLE>

See Notes to Unaudited Consolidated Financial Statements

3
<PAGE> 4
SCHWEITZER-MAUDUIT INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOW
U.S. $ IN MILLIONS
(UNAUDITED)

<TABLE>
<CAPTION>
FOR THE NINE MONTHS
ENDED SEPTEMBER 30,
---------------------
1998 1997
----- ------
<S> <C> <C>
Operations
Net income ................................... $ 29.0 $ 35.2
Depreciation and amortization ................ 16.7 10.5
Deferred income tax provision ................ 5.3 9.0
Minority interest in earnings of subsidiaries 4.2 4.2
Other ........................................ 5.0 2.5
Changes in operating working capital ......... (13.8) (23.5)
------ ------
Cash Provided by Operations ......... 46.4 37.9
------ ------
Investing
Capital spending ............................. (23.3) (19.2)
Capitalized software costs ................... (3.0) (4.8)
Acquisitions, net of cash acquired ........... (65.4) --
Other ........................................ (2.2) (3.6)
------ ------
Cash Used for Investing ............. (93.9) (27.6)
------ ------
Financing
Cash dividends paid to SWM stockholders ...... (7.2) (7.2)
Cash dividends paid to minority owner ........ (5.3) (4.5)
Changes in short-term debt ................... 8.4 (0.9)
Proceeds from issuances of long-term debt .... 24.5 5.3
Payments on long-term debt ................... (4.2) (3.6)
Purchases of treasury stock .................. (3.8) --
Proceeds from issuances of common stock ...... 0.3 0.3
------ ------
Cash Provided by (Used for) Financing 12.7 (10.6)
------ ------

Decrease in Cash and Cash Equivalents ............. (34.8) (0.3)

Cash and Cash Equivalents at beginning of period .. 37.2 30.9
------ ------

Cash and Cash Equivalents at end of period ........ $ 2.4 $ 30.6
====== ======
</TABLE>

See Notes to Unaudited Consolidated Financial Statements

4
<PAGE> 5
SCHWEITZER-MAUDUIT INTERNATIONAL, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
U.S.$ IN MILLIONS, EXCEPT PER SHARE AMOUNTS

NOTE 1. NATURE OF THE BUSINESS

Schweitzer-Mauduit International, Inc., including its subsidiaries,
("SWM" or the "Company") is a diversified producer of premium specialty papers
and the world's largest supplier of fine papers to the tobacco industry. The
Company was formed as a spin-off from Kimberly-Clark Corporation
("Kimberly-Clark") at the close of business on November 30, 1995.

NOTE 2. BASIS OF PRESENTATION

The consolidated financial statements include the accounts of SWM and
all its majority-owned subsidiaries, including two newly-acquired companies
since the beginning of February 1998 (see Note 7). All material intercompany and
interdivision amounts and transactions have been eliminated.

The accompanying unaudited consolidated financial statements have been
prepared by the Company pursuant to the rules and regulations of the Securities
and Exchange Commission and on the same basis as the audited financial
statements included in the Company's 1997 Annual Report on Form 10-K. All
adjustments which are, in the opinion of management, necessary for a fair
presentation of the results of operations for the interim periods have been made
and are generally of a normal recurring nature. Operating results for any
quarter are not necessarily indicative of the results for any other quarter or
for the full year. These financial statements should be read in connection with
the financial statements and notes thereto included in the Company's 1997 Annual
Report on Form 10-K.

Basic net income per common share is computed based on net income
divided by the weighted average number of common shares outstanding. The average
numbers of common shares used in the calculations of basic net income per common
share for the three and nine month periods ended September 30, 1998 were
approximately 16,006,600 and 16,050,600, respectively, and for the three and
nine month periods ended September 30, 1997 were 16,062,900 and 16,058,000,
respectively. Diluted net income per common share is computed based on net
income divided by the weighted average number of common and potential common
shares outstanding. The average numbers of common and potential common shares
used in the calculations of diluted net income per common share for the three
and nine month periods ended September 30, 1998 were approximately 16,099,600
and 16,240,700, respectively, and for the three and nine month periods ended
September 30, 1997 were 16,383,800 and 16,326,500, respectively. The only
potential common shares are those related to stock options outstanding during
the respective periods.

NOTE 3. INVENTORIES

The following schedule details inventories by major class as of
September 30, 1998 and December 31, 1997:

<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
------------- ------------
<S> <C> <C>
At the lower of cost on the First-In, First-Out (FIFO)
and weighted average methods or market:
Raw materials ............................................... $ 22.5 $ 20.1
Work in process ............................................. 12.7 11.3
Finished goods .............................................. 32.6 21.4
Supplies and other .......................................... 13.6 9.7
------ ------
81.4 62.5
Excess of FIFO cost over Last-In, First-Out (LIFO) cost .......... (6.7) (6.2)
------ ------

Total ..................................................... $ 74.7 $ 56.3
====== ======
</TABLE>

5
<PAGE> 6
SCHWEITZER-MAUDUIT INTERNATIONAL, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
U.S. $ IN MILLIONS, EXCEPT PER SHARE AMOUNTS

NOTE 4. INCOME TAXES

The effective income tax rates for the three and nine month periods
ended September 30, 1998 were 40.6 percent and 30.1 percent, respectively,
compared with 36.8 percent and 37.1 percent for the respective corresponding
periods of 1997. The nine month period of 1998 reflects the benefit of a
reduction in the valuation allowance recorded against certain French deferred
income tax assets arising from net operating loss carryforwards ("NOLs"). This
adjustment reduced the deferred provision for income taxes by $5.2 in the second
quarter of 1998. The reduction in the valuation allowance was recorded because
of continued strong earnings and projected future earnings at the French
businesses that utilize the NOLs, reducing the uncertainty that these NOLs will
be fully utilized in the future. Excluding the impact of this adjustment, the
effective income tax rate for the nine month period ended September 30, 1998
would have been 41.1 percent. The higher 1998 effective income tax rates
compared with the corresponding periods of 1997 were primarily the result of an
increase in the corporate income tax rate enacted in France in November 1997
from 36.67 percent to 41.67 percent for 1997 and 1998, retroactive to January 1,
1997, and to 40.00 percent for 1999. The increase applicable to the 1997 period
was recorded in the fourth quarter of 1997 when the income tax rate change was
enacted.

NOTE 5. ENVIRONMENTAL MATTERS

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

Prior to the spin-off, Kimberly-Clark was named a potentially
responsible party ("PRP") under the provisions of the U.S. Comprehensive
Environmental Response, Compensation and Liability Act ("CERCLA"), or analogous
state statutes, in connection with two waste disposal sites, one used by the
Company's Spotswood, New Jersey mill and the other site used by the Company's
former Mt. Holly Springs, Pennsylvania mill. Prior to the spin-off, the
Spotswood mill also responded to an information request by the New Jersey
Department of Environmental Protection ("NJDEP") with respect to another
landfill site allegedly used by the Spotswood mill. The Company has assumed
Kimberly-Clark's liabilities at each of these sites but does not believe that
any of these proceedings will result in the imposition of monetary sanctions or
have a material adverse effect on the Company's business or financial condition.

The Company assumed responsibility to administer a consent order
between Kimberly-Clark and the Massachusetts Department of Environmental
Protection ("MDEP") governing the post-closure care of the Willow Hill Landfill
in Lee, Massachusetts. The Company is obligated to maintain the integrity of the
cover and to sample groundwater by means of monitoring wells, in addition to
other long-term maintenance responsibilities for this former non-hazardous waste
disposal facility. Under the terms of a January 24, 1997 Administrative Consent
Order with MDEP, as amended ("Consent Order"), the Company was required to
correct a landfill gas migration problem at the landfill property line. The
Consent Order required the Company to reduce concentrations of landfill gases at
the property line to specified levels by September 15, 1998. The Company met the
specified levels at 22 of 26 gas monitoring wells. Four

6
<PAGE> 7
SCHWEITZER-MAUDUIT INTERNATIONAL, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
U.S. $ IN MILLIONS, EXCEPT PER SHARE AMOUNTS

monitoring wells were not in compliance at 30 feet below ground level, but such
non-compliance does not create a safety risk. Nonetheless, the Company must
continue to monitor gas concentrations at the property line until the specified
gas concentration levels have been attained for four consecutive weeks. Although
the literal terms of the Consent Order would subject the Company to penalties
for failing to meet the September 15, 1998 deadline, no penalties are expected
based on current progress toward full compliance. The estimated cost of the
remaining corrective action and annual operating expenses expected to be
incurred under the Consent Order is $0.3, which amount has been accrued as of
September 30, 1998.

Although the Company had previously entered into an agreement with
NJDEP to monitor chloroform emissions at its Spotswood mill, actual monitoring
results make it unnecessary to install chloroform emissions controls at the
mill.

All of the Company's U.S. facilities may be affected by revised air
emissions and wastewater discharge standards under rules commonly known as the
"Cluster Rules". Although the Environmental Protection Agency ("EPA") originally
indicated that the proposed rules would be finalized in 1996, the first set of
rules was not published until April 1998. The EPA is currently engaged in
further rule-making. Based on a preliminary analysis, the first phase of the
Cluster Rules governing wastewater discharges does not appear to affect the
Company's three U.S. mills. However, the later phases of the Cluster Rules
(and/or Title V of the Clean Air Act Amendments of 1990) and National Pollutant
Discharge Elimination System permit renewals may require the Company to install
air and water pollution controls at its U.S. facilities sometime after the year
2000. Due to uncertainty concerning applicable requirements under the
above-mentioned and other possible regulations, potential capital expenditures
which may become necessary for compliance cannot be estimated until after such
requirements, if any, are known.

The Company incurs spending necessary to meet legal requirements and
otherwise relating to the protection of the environment at the Company's
facilities in the United States, France, Brazil and Canada, including the
aforementioned matters. For these purposes, the Company anticipates that it will
incur capital expenditures of approximately $3 annually in 1998 and 1999. 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. 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 6. LEGAL PROCEEDINGS

Under the terms of the spin-off, the Company assumed liability for and
agreed to indemnify Kimberly-Clark from litigation arising out of the operation
of the Company's predecessor businesses, including the following cases:

- - Three purported class actions, defining several different classes of
plaintiffs who allegedly sustained injuries as a result of smoking or
being exposed to tobacco smoke, and two individual actions were filed
in the Circuit Court of Kanawha County, West Virginia in 1997 and 1998
against several tobacco companies, tobacco industry trade associations,
tobacco wholesalers and others, including Kimberly-Clark and, in four
of the five cases, LTR Industries, S.A. ("LTRI"), a French subsidiary
of the Company. Each class representative in two of the class actions
and each individual plaintiff, respectively, seek compensatory damages
of $2 to $3, punitive damages of $3 and, for class members in each
class action, compensatory and punitive damages in an unspecified
amount. In certain cases, equitable relief is also sought. The five
complaints allege several theories of liability against the

7
<PAGE> 8
SCHWEITZER-MAUDUIT INTERNATIONAL, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
U.S. $ IN MILLIONS, EXCEPT PER SHARE AMOUNTS

defendants including negligence, product liability, misrepresentation,
breach of warranty, conspiracy and other theories of liability.

- - In June 1998, three union health and welfare funds on behalf of
themselves and "all labor-management multi-employer health and welfare
trust funds operating in the State of Utah" instituted a purported
class action in the U.S. District Court for the District of Utah,
Central Division, against several tobacco companies, tobacco industry
trade associations, law firms and component suppliers including
Kimberly-Clark, seeking to recover compensatory and punitive damages in
an unspecified amount for health care expenditures caused by tobacco
use, treble damages and attorneys' fees, declaratory, injunctive and
other equitable relief. The 21 count complaint sets forth several
theories of liability including violations of federal and Utah
Racketeer Influenced and Corrupt Organizations statutes, the Sherman
Act, fraud and misrepresentation, breach of express and implied
warranties, negligence, strict liability, aiding and abetting and
conspiracy. Among other things, the complaint alleges that the tobacco
companies used the reconstituted process "to triple or even quadruple
the nicotine content of the reconstituted tobacco in their cigarettes"
and, further, that Kimberly-Clark manufactured and sold reconstituted
tobacco knowing that it would be used by cigarette companies to
manipulate the level of nicotine, a substance known to be addictive, in
their cigarettes.

- - In October 1998, Edward J. Sweeney, Stephen R. Micarek and Lisa A.
Figura filed, in the Court of Common Pleas of Allegheny County,
Pennsylvania, on behalf of themselves and certain residents of
Pennsylvania, a purported class action against several tobacco
companies, industry trade associations and consultants, tobacco
wholesalers and retailers and cigarette component manufacturers,
including Kimberly-Clark, seeking equitable relief and punitive damages
for the class in an unspecified amount. The class consists of those
Pennsylvania residents who, "commencing before age 18...purchased,
smoked...and continue to smoke cigarettes manufactured, marketed and
sold by defendants". The five coUNT complaint alleges that defendants
are liable to plaintiffs for product liability, consumer fraud, breach
of special duty, negligence and civil conspiracy. Among other things,
the complaint alleges that nicotine is an addictive substance, that the
tobacco companies, by using reconstituted tobacco and other additives,
are able to control the precise amount and/or the bioavailability of
nicotine in their cigarettes and that LTRI, formerly a subsidiary of
Kimberly-Clark, specializes in the tobacco reconstitution process and
in helping tobacco companies control the nicotine in their cigarettes.

As a component supplier, the Company believes that Kimberly-Clark has
meritorious defenses to each of these cases. LTRI also has meritorious defenses
to each of the cases in which it has been named as a defendant and will seek to
be dismissed from such actions on the grounds that it is not subject to the
personal jurisdiction of the West Virginia courts and also on the grounds that
it did not sell its products in the United States. Due to the uncertainties of
litigation, the Company cannot predict the outcome of these cases and is unable
to make a meaningful estimate of the amount or range of loss which could result
from an unfavorable outcome of these actions. These cases will be vigorously
defended.

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

8
<PAGE> 9
SCHWEITZER-MAUDUIT INTERNATIONAL, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
U.S. $ IN MILLIONS, EXCEPT PER SHARE AMOUNTS

NOTE 7. ACQUISITIONS

On February 2, 1998, the Company's wholly-owned subsidiary,
Schweitzer-Mauduit Spain, S.L. ("SM-Spain"), paid approximately $62.0 in cash
for 99.97 percent ownership interest in Companhia Industrial de Papel Pirahy
("Pirahy"), a specialty paper manufacturer located near Rio de Janeiro, Brazil.
In connection with the acquisition of Pirahy, the Company modified its existing
credit agreement to provide a $20.0 term loan to SM-Spain. SM-Spain borrowed the
remaining funds for the transaction from Schweitzer-Mauduit France, S.A.R.L.
("SM-France"), a French subsidiary of the Company, which in turn utilized its
existing cash balances and borrowings from its revolving credit facilities.

Additionally, on February 11, 1998, the Company's second tier
subsidiary, Schweitzer-Mauduit Enterprises ("SM-Enterprises") paid 37.2 million
French francs (approximately $6.1) in cash and assumed approximately $5.8 in
existing net debt for all of the outstanding shares of Ingefico, S.A. and 97.1
percent of the outstanding shares of its pulp and specialty paper manufacturing
subsidiaries, Groupe SAPAM and Papeteries de la Moulasse, located in St. Girons,
France. Subsequently, SM-Enterprises acquired all the remaining shares of the
minority interest for $0.2 in cash and Papeteries de la Moulasse was renamed
Papeteries de St. Girons. In the third quarter of 1998, SM-Enterprises and
Ingefico, S.A. were merged into Groupe SAPAM.

The above acquisitions have been accounted for under the purchase
method of accounting and, accordingly, the acquired assets and liabilities have
been recorded at their estimated fair values as of the respective dates of the
acquisitions. In conjunction with the acquisitions, liabilities were assumed as
follows:

<TABLE>
<S> <C>
Fair value of assets acquired $ 95.7
Less: Cash paid for the stock (68.3)
Direct costs incurred (2.0)
------
Liabilities assumed $ 25.4
======
</TABLE>

The operating results of the newly-acquired companies are included in
the Consolidated Statements of Income beginning February 1, 1998. The following
summarizes unaudited consolidated pro forma results of operations, assuming the
acquisitions had occurred at the beginning of each of the following periods:

<TABLE>
<CAPTION>
For the three months For the nine months
ended September 30, ended September 30,
-------------------- -------------------- For the full year ended
1998 1997 1998 1997 December 31, 1997
---- ---- ------ ------ -----------------
<S> <C> <C> <C> <C> <C>
Pro Forma Net Sales..................... $134.4 $141.7 $421.9 $425.4 $570.4
Pro Forma Net Income.................... $ 6.8 $ 10.9 $ 29.1 $ 34.4 $ 44.2
Pro Forma Diluted Earnings Per Share.... $ .43 $ .67 $ 1.80 $ 2.11 $ 2.71
</TABLE>

NOTE 8. RESTRUCTURING ACCRUAL

On April 15, 1998, the Company announced that it reached an agreement
with the labor union at its Spotswood mill to modify work rules and eliminate 67
hourly positions. The Company recorded a pre-tax charge of $1.7 in cost of
products sold for the cost of a related voluntary retirement program, reducing
second quarter 1998 earnings. The Company began realizing cost savings in the
third quarter of 1998. On an ongoing basis, this program is expected to provide
annual net pre-tax cost savings of approximately $5.

9
<PAGE> 10
SCHWEITZER-MAUDUIT INTERNATIONAL, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
U.S. $ IN MILLIONS, EXCEPT PER SHARE AMOUNTS

NOTE 9. NEW ACCOUNTING STANDARDS

In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting of
Comprehensive Income" which became effective in the first quarter of 1998.
Currently, the only item of comprehensive income not included in the Company's
determination of net income is the change in unrealized foreign currency
translation adjustments, as shown below for the three and nine month periods
ended September 30, 1998 and 1997:

<TABLE>
<CAPTION>
For the three months For the nine months
ended September 30, ended September 30,
----------------------- ----------------------
1998 1997 1998 1997
------ ------ ------ ------
<S> <C> <C> <C> <C>
Net Income....................................... $ 6.8 $ 11.2 $ 29.0 $ 35.2
Other comprehensive income, net of taxes:
Unrealized foreign currency
translation adjustments........ 4.4 (0.5) 0.5 (11.1)
------ ------ ------ ------
Comprehensive Income............................. $ 11.2 $ 10.7 $ 29.5 $ 24.1
====== ====== ====== ======
</TABLE>

More than 60 percent of the Company's assets and liabilities are
outside the United States, substantially all of which are in France or Brazil.
The balance sheets of the Company's foreign subsidiaries are translated at
period-end currency exchange rates, and the differences from historical exchange
rates are reflected in accumulated other comprehensive income as unrealized
foreign currency translation adjustments. Unrealized foreign currency
translation adjustments for the three and nine month periods ended September 30,
1998 are substantially all due to the strengthening of the French franc against
the U.S. dollar, partially offset by the strengthening of the U.S. dollar
against the Brazilian real from the date of the acquisition of the Brazilian
subsidiary through the end of the third quarter of 1998. Unrealized foreign
currency translation adjustments for the three and nine month periods ended
September 30, 1997 are substantially all due to the strengthening of the U.S.
dollar against the French franc.

In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments
of an Enterprise and Related Information", which will be effective no later than
for the Company's 1998 Annual Report on Form 10-K. This new statement may affect
the Company's financial statement disclosures. The Company is evaluating how to
implement the new disclosure requirements.

Also, in June 1998, the FASB issued SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities", which will require that all
derivative financial instruments be recognized as either assets or liabilities
in the balance sheet. SFAS No. 133 will be effective no later than for the
Company's first quarter of 2000. The Company is evaluating the effects of this
new statement and when to implement the new requirements.

10
<PAGE> 11
ITEM 2. SCHWEITZER-MAUDUIT INTERNATIONAL, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND 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 cigarette paper, tipping paper and plug wrap paper used to wrap
various parts of a cigarette, paper products used in cigarette packaging and
reconstituted tobacco products. The Company's non-tobacco industry products
represented approximately six percent of the Company's net sales in 1997. Due to
the non-tobacco related net sales of the newly-acquired companies, the Company's
non-tobacco industry products increased to approximately ten percent of the
Company's net sales during the first nine months of 1998. The non-tobacco
industry products are a diverse mix of products, certain of which represent
commodity paper grades produced to maximize machine operations.

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 primarily to produce flax fiber used as raw material in the
U.S. operations and have no material effect on such geographic disclosure. The
Company's Brazilian operations were acquired on February 2, 1998. Accordingly,
the results of its operations are included in SWM's consolidated financial
statements since the beginning of February 1998.

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

RESULTS OF OPERATIONS

By Geography for the three months ended September 30, 1998 and 1997
(U.S. $ IN millions)

<TABLE>
<CAPTION>
% of Consolidated
% Change -----------------
Net Sales 1998 1997 vs. 1997 1998 1997
- --------- ---- ---- -------- ---- ----
<S> <C> <C> <C> <C> <C>
United States ...................... $ 47.4 $ 46.1 + 2.8% 35.3% 40.7%
France.............................. 72.4 67.0 + 8.1 53.9 59.1
Brazil.............................. 16.9 N.A. 12.5
Eliminations........................ (2.3) 0.3 (1.7) 0.2
------- ------- ----- -----
Consolidated .................... $ 134.4 $ 113.4 +18.5% 100.0% 100.0%
======= ======= ===== =====
</TABLE>

<TABLE>
<CAPTION>
% of Consolidated % Return on Sales
% Change ----------------- -----------------
Operating Profit 1998 1997 vs. 1997 1998 1997 1998 1997
- ---------------- ---- ---- -------- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
United States.............. $ 1.4 $ 4.2 - 66.7% 9.2 % 20.4% 3.0% 9.1%
France..................... 14.7 17.7 - 16.9 96.7 85.9 20.3 26.4
Brazil..................... 0.4 N.A. 2.6 2.4
Unallocated/Eliminations... (1.3) (1.3) (8.5) (6.3)
------ ------ ----- -----
Consolidated............ $ 15.2 $ 20.6 - 26.2% 100.0 % 100.0% 11.3% 18.2%
====== ====== ===== =====
</TABLE>

N.A. - Not applicable

11
<PAGE> 12
SCHWEITZER-MAUDUIT INTERNATIONAL, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)

By Geography for the nine months ended September 30, 1998 and 1997
(U.S. $ IN millions)

<TABLE>
<CAPTION>
% of Consolidated
% Change -----------------
Net Sales 1998 1997 vs. 1997 1998 1997
- --------- ---- ---- -------- ---- ----
<S> <C> <C> <C> <C> <C>
United States .... $146.2 $146.8 - 0.4% 35.4% 42.8%
France ........... 232.4 197.3 +17.8 56.3 57.6
Brazil ........... 43.4 N.A. 10.5
Eliminations ..... (9.3) (1.4) (2.2) (0.4)
------ ------ ----- -----
Consolidated... $412.7 $342.7 +20.4% 100.0% 100.0%
====== ====== ===== =====
</TABLE>

<TABLE>
<CAPTION>
% of Consolidated % Return on Sales
% Change ----------------- -----------------
Operating Profit 1998 1997 vs. 1997 1998 1997 1998 1997
- ---------------- ---- ---- -------- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
United States.............. $ 7.3 $20.5 - 64.4% 14.2% 31.8% 5.0% 14.0%
France..................... 50.1 48.4 + 3.5 97.5 75.0 21.6 24.5
Brazil..................... (1.7) N.A. (3.3) (3.9)
Unallocated/Eliminations... (4.3) (4.4) (8.4) (6.8)
----- ----- ----- -----
Consolidated............ $51.4 $64.5 - 20.3% 100.0% 100.0% 12.5% 18.8%
===== ===== ===== =====
</TABLE>

N.A. - Not applicable

Primarily as a result of the recent acquisitions, total assets by
geographical area have changed as follows:

<TABLE>
<CAPTION>
% of Consolidated
September 30, December 31, -----------------
Total Assets 1998 1997 1998 1997
------------ ---- ---- ---- ----
<S> <C> <C> <C> <C>
United States.................. $155.4 $155.4 32.5% 39.7%
France......................... 255.3 237.6 53.5 60.8
Brazil......................... 68.3 N.A. 14.3
Intergeographic items.......... (1.5) (2.0) (0.3) (0.5)
------ ------ ----- -----
Consolidated................ $477.5 $391.0 100.0% 100.0%
====== ====== ===== =====
</TABLE>

N.A. - Not applicable

Net Sales

Net sales increased by $21.0 million in the three month period ended
September 30, 1998, compared with the corresponding period of the preceding
year. This increase was attributable to net sales by the two newly-acquired
Brazilian and French companies which totaled $24.2 million in the quarter. Net
sales from the Company's other operations decreased by $3.2 million in the
quarter due to unfavorable sales mix and lower selling prices. Changes in both
currency exchange rates and unit sales volumes, excluding the two acquisitions,
had a nominal impact on net sales in the quarter compared with the same quarter
of the prior year. Excluding the acquisitions, worldwide sales volumes were
essentially at the prior year level. Sales volumes from the French businesses
declined by 2 percent for the three month period compared with the same period
of the prior year, excluding the French acquisition, with lower paper sales
volumes partially offset by higher reconstituted tobacco sales volumes. The
lower sales volumes by the French paper businesses were primarily a result of
decreased shipments to China, Russia and southeast Asia. Sales volumes increased
for the quarter at the U.S. business unit by 4 percent compared with the same
three month period of 1997. In Brazil, unit sales volumes improved somewhat
during the third quarter compared with the second quarter of this year. This
improvement was in part due to a one-time increase in unit sales associated with
the introduction of a new product by a major customer.

12
<PAGE> 13

SCHWEITZER-MAUDUIT INTERNATIONAL, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)

Net sales increased by $70.0 million in the nine month period ended
September 30, 1998, compared with the corresponding period of the preceding
year. This increase was primarily attributable to sales at the two
newly-acquired companies, whose results are included in the Company's
consolidated results beginning in February 1998, and stronger sales volumes in
France. Net sales of the newly-acquired companies totaled $67.7 million in the
period. Excluding the acquisitions, worldwide sales volumes increased by 6
percent, favorably affecting net sales by $16.8 million. Sales volumes from the
French businesses grew by 13 percent for the nine month period, excluding the
French acquisition, with gains in the plug wrap, tipping paper and reconstituted
tobacco leaf product lines. Sales volumes declined at the U.S. business unit by
4 percent for the nine month period, due to reduced domestic cigarette
production by the Company's customers. Sales volumes in the U.S. declined in all
major product lines. Compared with the same nine month period of the preceding
year, changes in average selling prices and sales mix had an unfavorable effect
of $5.6 million. The net sales comparison was unfavorably affected $8.9 million
by changes in currency exchange rates, primarily related to a strengthened U.S.
dollar versus the French franc.

Operating Profit

Operating profit decreased by $5.4 million in the three month period
ended September 30, 1998, compared with the corresponding period of the
preceding year. Operating profit from the French business unit was $3.0 million
lower than in the same quarter a year ago due to the lower sales volumes of the
French paper businesses, lower average selling prices, and the impact of a
planned mill-wide maintenance down at the newly-acquired St. Girons mill.
Operating profit in the U.S. declined by $2.8 million compared with the same
prior year quarter. The favorable affects of higher volumes in the U.S. business
were more than offset by poor start-up operations associated with a planned
mill-wide maintenance down at the Spotswood mill, new computer systems expenses,
unfavorable sales mix and lower average selling prices. Amortization of
capitalized software costs related to the new integrated computer systems in the
U.S. and associated incremental operating expenses began in January 1998 and
negatively impacted the current three month period by $0.9 million. In Brazil,
improved mill operations compared with the second quarter of this year and a
one-time increase in volume related to the introduction of a new product by a
major customer resulted in operating profit for the three-month period of $0.4
million. Changes in currency exchange rates had a nominal impact in the quarter.
Non-manufacturing expenses increased by $1.8 million during the quarter. This
increase was solely caused by expenses at the two newly-acquired companies.
Excluding expenses of the newly-acquired companies, non-manufacturing expenses
were at the same level as the corresponding period of the prior year. Changes in
per ton wood pulp costs compared with the prior year favorably affected
operating profit by $0.9 million in the three month period, although this
benefit was offset by changes in selling prices.

Operating profit decreased by $13.1 million in the nine month period
ended September 30, 1998, compared with the corresponding period of the
preceding year, as lower operating profit in the U.S. and an operating loss in
Brazil were partially offset by improved operating profit in France. The U.S.
business unit's operating profit declined by $13.2 million primarily as a result
of lower sales and production volumes, increased computer systems expenses,
unfavorable sales mix, lower selling prices and a one-time second quarter
pre-tax restructuring charge of $1.7 million related to the Spotswood mill (see
Note 8 of the Notes to Unaudited Consolidated Financial Statements).
Amortization of capitalized software costs related to the new integrated
computer systems in the U.S. and associated incremental operating expenses began
in January 1998 and totaled $2.7 million for the first nine months.
Additionally, start-up costs of $1.2 million were incurred in the first quarter
related to the new U.S. computer systems. The Brazilian operations had an
operating loss of $1.7 million in the year-to-date period primarily because of
unfavorable second quarter

13
<PAGE> 14
SCHWEITZER-MAUDUIT INTERNATIONAL, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)

results. In France, operating profit improved by $1.7 million as a result of
higher French sales and production volumes, partially offset by unfavorable
changes in average selling prices and sales mix, and changes in currency
exchange rates. Changes in currency exchange rates had an unfavorable impact of
approximately $1.6 million. Non-manufacturing expenses increased by $4.0 million
during the nine month period. This increase was solely caused by expenses at the
two newly-acquired companies. Excluding expenses of the newly-acquired
companies, non-manufacturing expenses were 3 percent lower than in the
corresponding period of the prior year. Per ton wood pulp cost decreases
compared with the prior year favorably impacted operating profit by $1.5 million
in the nine month period, although this benefit was offset by changes in selling
prices.

NON-OPERATING EXPENSES

Interest expense increased by $0.5 million and $1.7 million in the
three and nine month periods ended September 30, 1998, respectively, compared
with the corresponding periods of the preceding year. The increases were
primarily a result of increased debt related to acquisitions in Brazil and
France, partially offset by changes in currency exchange rates for the nine
month period. Other income (expense) consists primarily of interest income and
foreign currency transaction gains and losses in the 1998 and 1997 periods and a
one-time favorable litigation recovery in France in the first quarter of 1998.

INCOME TAXES

The effective income tax rates for the three and nine month periods
ended September 30, 1998 were 40.6 percent and 30.1 percent, respectively,
compared with 36.8 percent and 37.1 percent for the respective corresponding
periods of 1997. The nine month period of 1998 reflects the benefit of a
reduction in the valuation allowance recorded against certain French deferred
income tax assets arising from net operating loss carryforwards ("NOLs"). This
adjustment reduced the deferred provision for income taxes by $5.2 million in
the second quarter of 1998. The reduction in the valuation allowance was
recorded because of continued strong earnings and projected future earnings at
the French businesses that utilize the NOLs, reducing the uncertainty that these
NOLs will be fully utilized in the future. Excluding the impact of this
adjustment, the effective income tax rate for the nine month period ended
September 30, 1998 would have been 41.1 percent. The higher 1998 effective
income tax rates compared with the corresponding periods of 1997 were primarily
the result of an increase in the corporate income tax rate enacted in France in
November 1997 from 36.67 percent to 41.67 percent for 1997 and 1998, retroactive
to January 1, 1997, and to 40.00 percent for 1999. This higher French income tax
rate increased the provision for income taxes by approximately $0.7 million and
$2.4 million, and reduced net income by approximately $0.6 million and $2.0
million, for the three and nine month periods ended September 30, 1998,
respectively. The increase applicable to the 1997 period was recorded in the
fourth quarter of 1997 when the income tax rate change was enacted.

LIQUIDITY AND CAPITAL RESOURCES

<TABLE>
<CAPTION>
Nine Months Ended September 30,
-------------------------------
(U.S. $ IN millions)
Cash Provided by (Used for): 1998 1997
- ---------------------------- ---- ----
<S> <C> <C>
Changes in operating working capital.................. $(13.8) $(23.5)
Operations............................................ 46.4 37.9
Capital spending...................................... (23.3) (19.2)
Capitalized software costs............................ (3.0) (4.8)
</TABLE>

14
<PAGE> 15
SCHWEITZER-MAUDUIT INTERNATIONAL, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)

The Company's primary source of liquidity is cash flow from operations,
which is principally obtained through operating earnings. The Company's net cash
provided by operations increased from $37.9 million for the nine months ended
September 30, 1997 to $46.4 million for the nine months ended September 30,
1998, primarily as a result of changes in operating working capital, excluding
the added working capital obtained with the two recent acquisitions. Changes in
operating working capital contributed unfavorably to cash flow in both periods,
by $13.8 million and $23.5 million in the nine month periods ended September 30,
1998 and 1997, respectively. Excluding working capital of the two acquisitions,
the 1998 increase in working capital was primarily due to an increase in
accounts receivable and an increase in finished goods inventories in the French
businesses in the third quarter of 1998, primarily for the Chinese market. The
1997 increase in working capital was primarily due to a decrease in accounts
payable, mainly associated with 1997 payments for capital expenditures and
capitalized software costs included in accounts payable at December 31, 1996,
and an increase in finished goods inventories in the U.S. business unit in the
second and third quarters of 1997.

Cash provided by operations exceeded the level of capital spending
during the first nine months of 1998. Capital spending for the nine months ended
September 30, 1998 included $2.5 million toward the expansion of the Malaucene,
France mill, $1.4 million to modify a paper machine at the newly-acquired St.
Girons mill, $1.2 million toward upgrades to a paper machine at the Spotswood
mill, and $1.1 million toward speed-ups of two machines in the French mills.
During the first quarter of 1998, the Ancram, New York mill successfully
completed a rebuild of the wet end of a long fiber paper machine. The Quimperle,
France mill successfully started up a new long fiber paper machine in March
1997. During the first quarter of 1998, the Quimperle mill initiated a speed-up
program for this machine. By late 1998, this speed-up program and the completed
Ancram project will, together, increase the Company's annual long fiber
production capacity by 10 to 12 percent.

In addition to capital spending, the Company incurred, and deferred on
the balance sheet, additional software development costs of $3.0 million in the
nine month period ended September 30, 1998, toward new company-wide integrated
computer systems. These computer systems are replacing the previously used
Kimberly-Clark systems and are expected to provide Year 2000 compliance for the
Company's computer systems.

In February 1998, two acquisitions were completed. On February 2, 1998,
SM-Spain paid approximately $62.0 million in cash for 99.97 percent ownership
interest in Pirahy. In connection with the acquisition of Pirahy, the Company
modified its existing credit agreement to provide a $20.0 million term loan to
SM-Spain. SM-Spain borrowed the remaining funds for the transaction from
SM-France, which in turn utilized its existing cash balances and borrowings from
its revolving credit facilities. Additionally, on February 11, 1998,
SM-Enterprises paid 37.2 million French francs (approximately $6.1 million) in
cash and assumed approximately $5.8 million in existing net debt for all of the
outstanding shares of Ingefico, S.A. and 97.1 percent of the outstanding shares
of its pulp and specialty paper manufacturing subsidiaries, Groupe SAPAM and
Papeteries de la Moulasse. Subsequently, SM-Enterprises acquired all the
remaining shares of the minority interest for $0.2 million in cash.

On April 24, 1997, the Board of Directors authorized a program to
permit the repurchase of the Company's common stock through December 31, 1998 in
an aggregate amount not to exceed $20 million. Through September 30, 1998, the
Company has repurchased a total of 155,700 shares of its common stock for $3.8
million under this program. All of these repurchases took place in the third
quarter of 1998.

15
<PAGE> 16
SCHWEITZER-MAUDUIT INTERNATIONAL, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)

On October 29, 1998, the Company announced that the Board of Directors
had declared a quarterly cash dividend of fifteen cents per share of common
stock. The dividend will be payable on December 14, 1998 to stockholders of
record on November 9, 1998.

The Company's ongoing requirements for cash are expected to consist
principally of amounts required for capital expenditures, the new company-wide
integrated computer systems, stockholder dividends and working capital. Other
than expenditures associated with environmental matters (see Note 5 of the Notes
to Unaudited Consolidated Financial Statements) and other capital projects
mentioned in the Outlook section below, the Company had no material outstanding
commitments as of September 30, 1998. The principal sources of cash are expected
to be cash flow from operations and borrowings from commercial banks.

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.

YEAR 2000 COMPLIANCE

Historically, many computer systems and other equipment with embedded
chips or processors utilize computer programs written using two digits to
represent the year rather than four digits. These programs may not properly
recognize a year "20XX". As a result, these programs may be unable to accurately
process certain data before, during or after the year 2000 and could result in
major governmental and business systems failures or miscalculations causing
disruptions in operations after December 31, 1999. This problem is commonly
referred to as the "Year 2000" issue.

Because of the numerous information systems, mill process controls and
operating systems, and vendors and service providers that the Company uses, as
well as the Company's many customers and customer locations around the world,
the Company anticipates that there may be some disruption in its business due to
the Year 2000 issue. Due to the interdependent nature of the Company and its
systems with those of so many customers, vendors and service providers, as well
as domestic and foreign governmental agencies, the Company and its operating
subsidiaries are exposed to many possible systems failures or processing errors.
As a result, the Company and its operating subsidiaries could be materially
adversely affected if utilities, private businesses and governmental agencies
with which they do business or that provide essential materials or services are
not Year 2000 compliant. The Company believes that the most reasonably likely
worst case scenarios would be temporary mill closings, delays in the receipt of
supplies, delays in the delivery of its products, delays in collection of
amounts due the Company, delays in payment of amounts owed by the Company to
others, and delays in receipt of needed services. As a consequence of one or
more of these scenarios, the Company's results of operations could be materially
adversely impacted by a temporary inability to conduct its business in the
ordinary course for some period of time. However, the Company believes that its
plans, including its contingency planning discussed below should minimize the
adverse effect of any such business disruptions if they occur.

Each of the Company's business units has inventoried its business
operations, assessed its susceptibility to system failures or processing errors
as a result of Year 2000 issues and developed a plan to address those issues,
focusing on three elements: information systems software and hardware, mill
process controls and operating systems, and vendors and service providers. Each
element is being subdivided according to risk potential of high, medium and low.
High risk is defined as being critical to uninterrupted operation of the
business. Medium risk is defined as being necessary to support the business but
temporary work-arounds can be accomplished. Low risk is defined as being minor
inconveniences that should not impact the Company's business. Those issues which
are considered most critical to continuing operations are being given the
highest priority.

16
<PAGE> 17
SCHWEITZER-MAUDUIT INTERNATIONAL, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)

On January 1, 1998, the Company's U.S. operations, including the
research and headquarters areas, began utilizing new integrated information
systems to replace the Kimberly-Clark systems formerly used in the U.S. A
benefit of the new systems is that they are expected to provide Year 2000
compliance in the area of information systems. In the U.S., mill process
controls and operating systems have been reviewed for nearly 3,000 pieces of
equipment and systems. Only six high risk equipment or systems issues have been
identified. For these issues, modification requirements and a schedule for
compliance are being developed with the applicable equipment and systems
vendors.

The Company's French businesses have inventoried and evaluated all
their information systems. Approximately one-fourth of these information systems
are believed to be Year 2000 compliant. Upon implementation in mid-1999 of
certain new integrated computer systems in France, substantially all of the
French businesses' information systems are expected to be Year 2000 compliant.
Less than three percent of the approximately 2,000 pieces of mill process
control equipment and operating systems will require modification or
replacement. Such corrective action is expected to be completed by the end of
the first quarter of 1999.

The Company's Brazilian business has inventoried and evaluated all of
its information systems. Nine of its systems will require modifications to
become Year 2000 compliant. Of these, upgrades have already been developed for
eight systems. Upgrades for all nine systems are expected to be developed and
implemented by the end of the second quarter of 1999. Of its mill process
control equipment and operating systems, ten will require modification. The
required modifications have already been developed for nine of the systems and
all ten are expected to be developed and implemented by the end of the second
quarter of 1999.

Inquiries have been mailed to all vendors and service providers for the
Company's U.S., French and Brazilian operations as to the status of their Year
2000 compliance. Thus far, approximately one-third have responded. Second
requests have been sent to those vendors and service providers that had not yet
responded to the first inquiry and to those whose responses were incomplete or
inadequate. Critical vendors and suppliers are being contacted either by phone
or in person to review the status of their Year 2000 compliance plans.

Coincident with the actions described above, the Company and its
operating subsidiaries are developing and evaluating contingency plans to
further mitigate the effects of possible disruptions that may occur and are
developing and evaluating related cost estimates for such plans. All of the
Company's operations are assessing the need for alternative supply arrangements
and increased inventory levels of raw materials, supplies and finished goods, as
well as other possible measures based on the responses from vendors and service
providers. Contingency plans will be developed to try to reasonably ensure that
operations are not interrupted and unexpected costs are minimized. However,
there can be no assurances that all possible negative consequences can be
identified and avoided. The Company presently plans to address each of its
systems which are critical to its operations by the end of the second quarter of
1999.

The Company currently estimates that the total cost of implementing its
Year 2000 compliance plans will be in the range of $1 million to $2 million,
substantially all to be incurred in 1999, excluding the costs of the new
integrated computer systems. Approximately two-thirds of this amount is expected
to be expensed and one-third included in capital projects. These preliminary
estimates are subject to change, since they are based on presently available
information, and will be updated as the Company continues its assessments,
proceeds with implementation of modifications and replacements necessary to
become compliant, receives further feedback from vendors and service providers
and formulates reasonable and necessary contingency plans.

17
<PAGE> 18
SCHWEITZER-MAUDUIT INTERNATIONAL, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)

EURO CURRENCY CONVERSION

On January 1, 1999, eleven of the fifteen member countries of the
European Union are scheduled to establish fixed conversion rates between their
existing currencies ("legal currencies") and one common currency - the euro. The
euro will then trade on currency exchanges and may be used in business
transactions. Beginning in January 2002, new euro-denominated bills and coins
will be issued, and legal currencies will be withdrawn from circulation. The
Company established a committee to identify and implement changes necessary to
address the systems and business issues raised by the euro currency conversion.
These issues include, among others, the need to adapt computer and other
business systems and equipment to accommodate euro-denominated transactions,
competitive implications of increased price transparency within European Union
countries, changes in currency exchange costs and rate exposures, continuity of
contracts that require payment in a legal currency, and tax implications of the
conversion. The Company's French subsidiaries currently utilize multi-currency
software that will be capable of euro-denominated sales and purchase
transactions on January 1, 1999. Consideration has also been given to other
potential issues in connection with the conversion, including those mentioned
above. The Company does not anticipate any significant negative consequences of
these issues and does not anticipate that the euro conversion will have a
material adverse impact on its financial condition or results of operations.

NEW ACCOUNTING STANDARDS

OUTLOOK

The difficult market conditions experienced in the third quarter of
1998 are continuing. U.S. cigarette consumption is being impacted by adverse
publicity and by increases in the retail selling price of cigarettes. U.S.
cigarette consumption in 1998 is approximately 4 percent under the 1997 level.
Year-to-date, the export of cigarettes from the United States is approximately
at the prior year level. Although the Company's shipments to China have improved
during the beginning of the fourth quarter, these shipments have not returned to
the levels experienced during the first six months of 1998. Continued lower
sales to Russia and southeast Asia are also expected for the foreseeable future.
The weakness in shipments to China, Russia and southeast Asia are related to
import controls, currency convertibility and decreased demand. With weakness in
demand, pricing has come under pressure in some markets. The uncertain pricing
environment for the Company's paper products is expected to continue into 1999
due to market conditions and the results of global pricing negotiations with
multi-national cigarette manufacturers.

With weakening demand for the Company's paper products, some production
downtime is likely to be taken during the fourth quarter in France, the United
States and Brazil to manage inventory levels. The Company's customers in the
U.S. traditionally reduce their operating schedules around holidays during the

18
<PAGE> 19
SCHWEITZER-MAUDUIT INTERNATIONAL, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)

fourth quarter, which could further soften the demand for the Company's products
and allow for additional maintenance and capital work.

Compared with the prior year, the Company's net sales will benefit in
the fourth quarter from sales by companies acquired in Brazil and France during
the first quarter of 1998. The Company continues to integrate these
acquisitions. Earnings of the Company's Brazilian operations improved during the
third quarter. However, operating results in Brazil in the fourth quarter may
not be as strong as in the third quarter, due to the absence of a one-time third
quarter increase in volume related to the introduction of a new product by a
major customer and possible production downtime during the fourth quarter. On
October 28, 1998, the Brazilian government announced its plans to reduce its
spending deficit. The proposed plan includes measures that, if implemented,
would increase both the social security tax on companies and the tax on
financial transactions. If implemented as proposed, these two tax changes would
reduce the full year 1999 pre-tax operating profit of the Brazilian operations
by an estimated $0.9 million.

The amortization of capitalized software costs related to the new
integrated computer systems in the U.S. began in January and is expected to
reduce full-year 1998 earnings by approximately $.05 per share compared with
1997. Additionally, operating expenses for the new computer network in the U.S.
over and above the amount previously paid to Kimberly-Clark for utilization of
its systems are expected to have an unfavorable full year effect of
approximately $.08 per share in 1998 compared with 1997. These increased
computer-related pre-tax expenses will total approximately $0.9 million during
the fourth quarter. The Company expects to incur approximately $4 to $5 million
of capitalized software costs in 1998, primarily in France, and an additional $3
to $4 million of capitalized software costs in 1999. Start-up of the new systems
in France will occur in phases, commencing in mid-1999.

Cost savings are expected to continue from recently implemented capital
projects and from the Spotswood mill restructuring program that was announced in
the second quarter of 1998. The per ton cost of wood pulp declined during the
third quarter of 1998, with an additional decrease expected in the fourth
quarter of the year. The expected lower per ton wood pulp cost should offset
some of the possible pricing weakness.

The higher corporate income tax rate in France is expected to
negatively impact full year 1998 earnings by $.15 to $.20 per share compared
with 1997. The French corporate income tax rate is scheduled to decline from 41
2/3 percent in 1998 to 40 percent in 1999. Such a reduction would improve 1999
earnings compared with 1998 by approximately $.05 per share.

The company expects capital spending for 1998 to be approximately $35
to $40 million in total, focused primarily on internal capacity expansion,
product quality improvements and cost reduction opportunities. As a result of
recent changes in market conditions, the Company is in the process of
reassessing its capital spending plans for 1999. In the second quarter of 1998,
the Company initiated an expansion of the Malaucene mill, which is expected to
increase the mill's capacity for finished tipping paper by approximately 45
percent. This project includes spending for increased printing and slitting
capabilities and should be completed in the second half of 1999. Capital
spending in 1999 will also include spending for a $9.9 million project
authorized to increase reconstituted tobacco leaf ("RTL") production capacity at
the Spay, France mill by approximately 10 percent. With the authorization of
this project, current inventory levels and customer order patterns, the decision
was made to cease production of RTL products at the Spotswood mill in the fourth
quarter of 1998. The Spotswood RTL production line had been temporarily
restarted during the fourth quarter of 1997 to support the French RTL operation
until a plan for adding permanent RTL capacity was developed.

19
<PAGE> 20
SCHWEITZER-MAUDUIT INTERNATIONAL, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)

Certain comments contained herein concerning the business outlook and
anticipated financial results of the Company constitute forward-looking
statements and are 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 Company's results will be as estimated. Many factors
outside the control of the Company also could impact the realization of such
estimates. Certain such factors that could cause the Company's future results to
differ materially from those expressed in any such forward-looking statements
are discussed in the Company's 1997 Annual Report on Form 10-K, Part I, Item 7,
under the heading "Factors That May Affect Future Results".

PART II - OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

- - In September 1998, Sinette Newkirk, personal representative of the
estate of Delbert Newkirk, filed a complaint in the Circuit Court of
Kanawha County, West Virginia, against several tobacco companies,
industry trade associations and consultants, Kimberly-Clark and LTRI
seeking $2 million in compensatory and $3 million in punitive damages
allegedly sustained as a result of the death of her husband, which
plaintiff contends was caused by smoking Kool cigarettes during the
period 1966 to 1993. The fourteen count complaint alleges several
theories of liability including intentional and negligent
misrepresentation, breach of warranty, intentional infliction of
emotional distress, product liability, sale of an unreasonably
dangerous product and conspiracy.

The Company believes that Kimberly-Clark, as a component supplier, has
meritorious defenses to each of these cases. LTRI also has meritorious defenses
to the Newkirk case in which it has been named as a defendant and will seek to
be dismissed from such action on the grounds that it is not subject to the
personal jurisdiction of the West Virginia courts and also on the grounds that
it did not sell its products in the United States. Due to the uncertainties of
litigation, the Company cannot predict the outcome of these cases and is unable
to make a meaningful estimate of the amount or range of loss which could result
from an unfavorable outcome of these actions. These cases will be vigorously
defended.

20
<PAGE> 21
ITEM 5. OTHER INFORMATION

During the third quarter of 1998, a new three-year labor agreement was
ratified at the Ancram mill. This mill employs approximately 100 employees. The
settlement included a lump sum payment of four percent of affected
employees'1997 earnings in the first year of the agreement and a general wage
rate increase of three percent per year in years two and three.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a) Exhibits:

10.1 Amended and Restated Agreement between Philip Morris
Incorporated and Schweitzer-Mauduit International, Inc. for
Fine Paper Supply, effective April 1, 1998.*

10.2 Technology Ownership, Technical Assistance and Technology
License Agreement among Philip Morris Incorporated, Philip
Morris Products, Inc. and Schweitzer-Mauduit International,
Inc., effective April 1, 1998.*

15. Independent Accountants' Report, dated October 21, 1998 from
Deloitte & Touche LLP to Schweitzer-Mauduit International,
Inc.

23. Independent Accountants' Consent.

27. Financial Data Schedule (for SEC use only).

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

(b) Reports on Form 8-K:

(1) On July 7, 1998, the Company filed a Current Report on Form
8-K dated July 7, 1998, which reported the Company's expected
second quarter earnings.

(2) On July 14, 1998, the Company filed a Current Report on Form
8-K dated July 14, 1998, which reported that the Company had
signed a new Supply Agreement with Philip Morris Incorporated.

SIGNATURES

Pursuant to the requirements 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.
(Registrant)

By: /s/ PAUL C. ROBERTS By: /s/ WAYNE L. GRUNEWALD
-------------------------------- ---------------------------
Paul C. Roberts Wayne L. Grunewald
Chief Financial Officer and Controller
Treasurer (principal accounting officer)
(duly authorized officer and
principal financial officer)

November 10, 1998 November 10, 1998

21
<PAGE> 22
SCHWEITZER-MAUDUIT INTERNATIONAL, INC.
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1998

INDEX TO EXHIBITS

<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION PAGE
- ------- ------------------- ------------
<S> <C> <C> <C>
10.1 --- Amended and Restated Agreement between Philip Morris
Incorporated and Schweitzer-Mauduit International, Inc. for
Fine Paper Supply, effective April 1, 1998.*

10.2 --- Technology Ownership, Technical Assistance and Technology
License Agreement among Philip Morris Incorporated, Philip
Morris Products, Inc. and Schweitzer-Mauduit International,
Inc., effective April 1, 1998.*

15. --- Independent Accountants' Report, dated October 21, 1998 from
Deloitte & Touche LLP to Schweitzer-Mauduit International,
Inc.

23. --- Independent Accountants' Consent.

27. --- Financial Data Schedule (for SEC use only).
</TABLE>

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

<PAGE> 1

EXHIBIT 10.1

AMENDED AND RESTATED

AGREEMENT

BETWEEN

PHILIP MORRIS INCORPORATED

AND

SCHWEITZER-MAUDUIT INTERNATIONAL, INC.

FOR

FINE PAPER SUPPLY

EFFECTIVE APRIL 1, 1998

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

<TABLE>
<S> <C> <C> <C>
I. Definitions........................................................................................ 3
A. Affiliate................................................................................. 3
B. Annual Forecast........................................................................... 3
C. Auditor................................................................................... 3
D. Base Sheet Attributes..................................................................... 3
E. Bobbin.................................................................................... 3
F. Buyer..................................................................................... 3
G. Buyer's Direct Purchase Requirements...................................................... 3
H. Buyer's Indirect Purchase Requirements.................................................... 4
I. Category.................................................................................. 4
J. Cigarette ................................................................................ 4
K. Cigarette Paper........................................................................... 4
L. Composition List.......................................................................... 4
M. Contractor................................................................................ 4
N. Delivering Carrier........................................................................ 4
O. Direct Purchases.......................................................................... 5
P. Dispute................................................................................... 5
Q. Effective Date............................................................................ 5
R. Event of Default.......................................................................... 5
S. Existing Products......................................................................... 5
T. Excluded Quantities....................................................................... 5
U. Fast Flow Orders.......................................................................... 5
V. Fine Papers............................................................................... 6
W. Firm Orders............................................................................... 6
X. Force Majeure............................................................................. 6
Y. Grade..................................................................................... 6
Z. Group..................................................................................... 6
AA. Guaranteed Sales Period................................................................... 6
AB. Implementation Agreement.................................................................. 7
AC. Index..................................................................................... 7
AD. Indirect Purchases........................................................................ 7
AE. Initial Term.............................................................................. 7
AF. Invoice Price............................................................................. 7
AG. Term...................................................................................... 7
AH. Law....................................................................................... 7
AI. New Product............................................................................... 8
AJ. Order..................................................................................... 8
AK. Original Fine Papers Supply Agreement..................................................... 8
AL. Phaseout Period........................................................................... 8
AM. Plants.................................................................................... 8
</TABLE>

(i)
<PAGE> 3
<TABLE>
<S> <C> <C>
AN. Plug Wrap................................................................................. 8
AO. Prior Year................................................................................ 8
AP. Prior Year's Purchases.................................................................... 9
AQ. Product or Manufacturing Advance.......................................................... 10
AR. Records................................................................................... 10
AS. Renewal Term.............................................................................. 10
AT. Seller.................................................................................... 10
AU. Seller's Manufacturing Facility........................................................... 11
AV. Seller's Projected U.S. Production Capacity............................................... 11
AW. Shipment.................................................................................. 11
AX. Specifications............................................................................ 11
AY. Specification Change...................................................................... 11
AZ. Term...................................................................................... 11
BA. Tipping Paper............................................................................. 12
BB. Year...................................................................................... 12

II. Restated Agreement................................................................................. 12

III. Term; Early Termination............................................................................ 12
A. Term...................................................................................... 12
B. Early Termination......................................................................... 13
C. Effect of Early Termination............................................................... 14
D. Phaseout Period........................................................................... 14

IV. Quantity of Supply; Seller's Maximum Sales Obligation.............................................. 15
A. General................................................................................... 15
B. Direct Purchase Requirements.............................................................. 15
C. Buyer's Indirect Purchase Requirements.................................................... 16
D. Excluded Quantities....................................................................... 17
E. Seller's Maximum Sales Obligation......................................................... 18
F. Purchase of Fine Papers from Other Suppliers in the Event of Seller's Inability
or Refusal to Deliver Buyer's Requirements................................................ 20
G. Direct Purchases and Indirect Purchases During Phaseout Period............................ 21
H. Purchases of Fine Papers by Buyer for Use by Buyer's Affiliates........................... 21
I. Fine Papers Manufactured by Seller's Affiliates........................................... 22

V. Forecasts of Requirements and Monthly Orders....................................................... 23
A. Forecasts................................................................................. 23
B. Direct Purchases.......................................................................... 23
1. Orders............................................................................ 23
2. Firm Orders....................................................................... 24
3. Schedule of Deliveries............................................................ 24
C. Indirect Purchases........................................................................ 25
</TABLE>

(ii)
<PAGE> 4
<TABLE>
<S> <C> <C>
VI. Delivery and Transportation........................................................................ 26
A. Delivery.................................................................................. 26
B. Duty Drawbacks............................................................................ 26
C. Transportation/Risk of Loss............................................................... 27
D. Production Sources........................................................................ 27

VII. Receipt Inspection and Acceptance.................................................................. 28

VIII. Compensation....................................................................................... 29
A. General................................................................................... 29
B. Definitions............................................................................... 30
1. "Adjusted Base Price"............................................................. 30
2. "Current Cost".................................................................... 30
3. "Base Price"...................................................................... 30
4. "Extraordinary Cost".............................................................. 30
5. "Index"........................................................................... 30
6. "[******]Price"................................................................... 30
7. "Standard Bobbin"................................................................. 31
8. "Unit"............................................................................ 31
9. "Unit Grade Cost"................................................................. 31
C. Determination of Invoice Price............................................................ 31
D. Adjustments to Base Price................................................................. 31
1. Calculation of Pulp Price Adjustment.............................................. 31
2. Calculation of [******]Adjustment During Phase-Out................................ 32
3. Calculation of Adjustment for Extraordinary Costs................................. 33
E. [******].................................................................................. 33
F. Determination of Base Price for New Products/New Grades................................... 33
G. [******].................................................................................. 34
H. Verification of Calculations/Prices; Audits............................................... 34
I. Changes in Seller's Accounting Methods.................................................... 34
J. Alternate Index........................................................................... 34
K. Price Reopeners........................................................................... 34
L. Changes in Specifications................................................................. 34
M. Precision of Calculations................................................................. 35

IX. Invoices and Payment............................................................................... 35

X. Warranty........................................................................................... 36
A. Title..................................................................................... 36
1. Warranty of Title................................................................. 36
2. Remedy............................................................................ 36
B. Quality................................................................................... 37
</TABLE>

(iii)
<PAGE> 5

1. Warranty of Quality............................................................... 37
2. Remedy............................................................................ 38
C. Exclusivity of Warranties................................................................. 39

XI. Patents, Trademarks, Trade Secrets and Copyrights.................................................. 39

XII. Limitation of Liability/Exceptions................................................................. 40
A. General................................................................................... 40
B. Exception to Limitation of Seller's Liability............................................. 41
C. Exception to Limitation of Buyer's Liabilities............................................ 41

XIII. Strategic Planning and Cooperation................................................................. 41
A. Objectives................................................................................ 41
B. Committees................................................................................ 42
1. Operating Steering Committee...................................................... 42
2. [******].......................................................................... 44
3. Review Team....................................................................... 44
C. Alternate Sources of Supply of Fine Papers................................................ 45
D. Sales to Buyer's Affiliates............................................................... 45
E. Performance Evaluations................................................................... 46
F. Specification Changes or Product or Manufacturing Advances................................ 46
1. Specification Changes............................................................. 46
2. Product or Manufacturing Advance.................................................. 47

XIV. Force Majeure...................................................................................... 48
A. Definition of Force Majeure............................................................... 48
B. Force Majeure Procedure................................................................... 49
C. Effect of Force Majeure................................................................... 49
D. Allocation of Seller's Production Capacity................................................ 50
E. Termination for Extended Force Majeure.................................................... 50
F. Contingency Plans......................................................................... 50

XV. Compliance with Laws; Nondiscrimination; Fines..................................................... 52
A. General................................................................................... 52
B. Nondiscrimination......................................................................... 52
C. No Collusion.............................................................................. 53
D. Fines..................................................................................... 54

XVI. Quality Assurance.................................................................................. 55

XVII. Inspection......................................................................................... 55

XVIII. Confidentiality and Confidential Information....................................................... 55
</TABLE>

(iv)
<PAGE> 6

<TABLE>
<S> <C> <C> <C>
A. Confidential Information of the Parties................................................... 56
B. Non-Disclosure............................................................................ 57
C. Exception to Non-Disclosure............................................................... 57

XIX. Ownership Of Documents; Development Programs....................................................... 58

XX. Records............................................................................................ 58

XXI. Dispute Resolution................................................................................. 59
A. Intent.................................................................................... 59
B. Procedure................................................................................. 59

XXII. Insurance.......................................................................................... 60

XXIII. Cancellation for Default........................................................................... 61
A. Default by Seller......................................................................... 61
B. Default by Buyer.......................................................................... 63

XXIV. Indemnity.......................................................................................... 65
A. Indemnity by Buyer........................................................................ 65
B. Indemnity by Seller....................................................................... 66

XXV. Notices............................................................................................ 67

XXVI. Governing Law...................................................................................... 68

XXVII. Nonwaiver.......................................................................................... 68

XXVIII. Severability....................................................................................... 69

XXIX. Assignment......................................................................................... 69

XXX. Survival........................................................................................... 69

XXXI. Amendments......................................................................................... 69

XXXII. Independent Contractor............................................................................. 70

XXXIII. Headings........................................................................................... 70

XXXIV. Publicity.......................................................................................... 70

XXXV. Entire Agreement................................................................................... 70
</TABLE>

(v)
<PAGE> 7

AGREEMENT

This Agreement, effective as of April 1, 1998, is by and between
Philip Morris Incorporated, a Virginia corporation, doing business as Philip
Morris U.S.A., with offices at 3601 Commerce Road, Richmond, Virginia 23234
("Buyer"), and Schweitzer-Mauduit International, Inc., a Delaware corporation,
with a place of business at 100 North Point Center East, Alpharetta, Georgia
30022 ("Seller").

RECITALS

1. Buyer is engaged in the business of manufacturing Cigarettes.

2. In the conduct of its Cigarette manufacturing activities, Buyer
requires Fine Papers, including Cigarette Paper, Plug Wrap and Tipping Paper,
that are incorporated into certain of its finished products and components
thereof.

3. Seller owns and operates manufacturing facilities that are capable
of producing Fine Papers in accordance with the Specifications.

4. Buyer and Seller are currently parties to an agreement, effective
January 1, 1993, through which Buyer purchases, accepts and pays for, and
Seller manufactures, sells and delivers, Fine Papers used by Buyer in its
Cigarette manufacturing activities in the United States (the "Original Fine
Papers Supply Agreement").

5. Buyer and Seller are desirous of amending and restating the Original
Fine Papers Supply Agreement with the effect, among other things, of extending
the term of such Fine Papers Supply Agreement for a period of approximately 24
months beyond the end of its

<PAGE> 8

current Initial Term (presently set to expire July 15, 2000) and possible
24-month renewal terms thereafter.

6. It is the intention of both Buyer and Seller that the contractual
relationship between them be one that, consistent with their respective
interests and corporate objectives, will foster an ongoing strategic and
cooperative long-term business relationship, based on mutual trust, that will
inure to their common benefit. The parties intend that this relationship shall
enable them to strive jointly for managed continuous improvement in quality,
technological development, superior service, secure source of supply, and the
lowest total cost throughout both Seller's and Buyer's entire supply chain. To
that end, the parties are committed to sharing certain strategic information,
to engaging in joint planning efforts and to forming joint cross-functional
improvement teams such that the contractual relationship will enhance their
competitive positions in the respective markets in which each does business,
all as detailed herein. The parties further intend that their strategic
alliance will lead to Seller's investigation and, if appropriate,
implementation of all proven new or improved methods relating to acquisition of
pulps, materials, processes and technology, so that the parties may benefit
mutually from any cost reductions associated with the manufacture of Fine
Papers.

<PAGE> 9
NOW THEREFORE, the parties agree as follows:

I. DEFINITIONS

A. AFFILIATE -- any business entity which by means of voting interest
is controlled by or under common control with a party to this Agreement. For
purposes of this definition, an Affiliate includes entities in existence as of
the Effective Date hereof as well as entities that may come into being in the
future so long as such entities are controlled by or under common control with
an entity that is an Affiliate as of the Effective Date hereof.

B. ANNUAL FORECAST -- as defined in Article V.A.

C. AUDITOR -- the independent public accounting firm to be selected by
Buyer and approved by Seller to verify that the compensation payable hereunder
to Seller has been computed in accordance with the terms of Article VIII
hereof.

D. BASE SHEET ATTRIBUTES -- the basis weight, porosity, filler,
appearance or other physical or chemical properties for each Grade.

E. BOBBIN -- an inventory measure of a cylindrical spool of Fine
Papers of varying lengths, widths and properties, all of which are described in
the Specifications for each Grade.

F. BUYER -- Philip Morris Incorporated, a Virginia corporation, doing
business as Philip Morris U.S.A.

G. BUYER'S DIRECT PURCHASE REQUIREMENTS -- the aggregate quantity of
each Category of Fine Papers (measured in Standard Bobbins or, in the case of
Tipping Paper, by

3
<PAGE> 10
weight) Buyer shall purchase directly for delivery to the Plants during any
Year for use in the manufacture of Cigarettes or Cigarette components for Buyer
at the Plants.

H. BUYER'S INDIRECT PURCHASE REQUIREMENTS -- the aggregate quantity of
each Category of Fine Papers (measured in Standard Bobbins or in the case of
Tipping Paper, by weight) Buyer's Contractors shall purchase for delivery to
the Plants during any Year for use in the manufacture of Cigarettes or
Cigarette components for Buyer at the Plants.

I. CATEGORY -- the several Groups comprising Cigarette Paper, Plug
Wrap and Tipping Paper, respectively.

J. CIGARETTE -- a quantity of tobacco, rolled in paper for smoking,
with or without a filtering medium.

K. CIGARETTE PAPER -- the Category of Fine Papers that is used to
enclose the tobacco, forming the rod of a Cigarette.

L. COMPOSITION LIST -- Seller's confidential list of components used to
produce each Grade of Fine Papers, as communicated by Seller to Buyer pursuant
to the terms of a Confidentiality Agreement between Buyer and Kimberly-Clark
Corporation, dated April 22, 1993, as amended from time to time.

M. CONTRACTOR -- one of Buyer's contract manufacturers (including
convertors) of Cigarettes or Cigarette components at the Plants.

N. DELIVERING CARRIER -- the shipping company or companies specified by
Buyer or Seller, in accordance with Article VI, to take receipt and transport
Shipments of Fine Papers

4
<PAGE> 11

from Seller's Manufacturing Facility(ies) to such destination(s) as Buyer may
specify for further processing or inclusion in Cigarettes.

O. DIRECT PURCHASES -- purchases of Fine Papers by Buyer directly for
use in manufacturing Cigarettes or Cigarette components at the Plants.

P. DISPUTE -- any dispute, controversy or claim as defined in Article
XXI.A hereof.

Q. EFFECTIVE DATE -- the date set forth in Article III.A hereof.

R. EVENT OF DEFAULT -- any of the events set forth in Article XXIII
hereof.

S. EXISTING PRODUCTS -- the Fine Papers identified in Exhibit A.

T. EXCLUDED QUANTITIES -- (a) Grades of Fine Papers the Specification
for which has not been agreed upon by Buyer and Seller pursuant to Article
XIII.F.1, (b) New Products available for purchase by Buyer from suppliers other
than Seller pursuant to XIII.F.2, (c) Grades of Fine Papers for which Seller
has no qualified manufacturing facility in accordance with Article XVI or (d)
New Products developed jointly by Buyer and another supplier as the result of
the implementation of a Product or Manufacturing Advance concerning which
either Seller failed to commit to develop and/or implement or which the parties
were unable to negotiate the agreement(s) necessary to develop and/or implement
such Product or Manufacturing Advance within the period allowed, all as
provided in Article XIII.F.2.

U. FAST FLOW ORDERS -- An Order communicated electronically or
telephonically requesting delivery of Fine Papers within [******] of Seller's
receipt of such Order or within such earlier period agreed to by the parties.

5
<PAGE> 12

V. FINE PAPERS -- Cigarette Paper, Plug Wrap and Tipping Paper to be
used in the manufacture of Cigarettes or Cigarette components.

W. FIRM ORDERS -- as defined in Article V.B.2.

X. FORCE MAJEURE -- the events of force majeure set forth in Article
XIV.A hereof.

Y. GRADE -- a Fine Paper with a unique set of Base Sheet Attributes as
defined in the Specifications and which is identified by Seller's separate
identification number for each such base sheet.

Z. GROUP -- several Grades with the same general Base Sheet Attributes
grouped as follows, unless otherwise agreed:

flax cigarette papers

[******] (sometimes hereinafter referred to as "[******]")

wood cigarette papers

non-porous plug wrap

porous plug wrap

heat sealable plug wrap

regular white tipping paper

regular cork tipping paper

economy white tipping paper

AA. GUARANTEED SALES PERIOD -- the minimum period specified in the
applicable Implementation Agreement, if any, following the initial commercial
production of a New

6
<PAGE> 13

Product manufactured by Seller during which Buyer shall make Direct Purchases
and Indirect Purchases of such New Product pursuant to this Agreement.

AB. IMPLEMENTATION AGREEMENT -- an agreement, or an amendment or
supplement hereto, between Seller and Buyer setting forth the terms and
conditions of Seller's undertaking to manufacture a New Product, including
amendments thereto.

AC. INDEX -- as defined in Article VIII hereof.

AD. INDIRECT PURCHASES -- purchases of Fine Papers by Buyer's
Contractors for use in manufacturing Cigarettes or Cigarette components for
Buyer at the Plants.

AE. INITIAL TERM -- as defined in Article III.A hereof.

AF. INVOICE PRICE -- the price per bobbin or pound, as determined in
accordance with Article VIII.C hereof or such other method as shall be provided
in an Implementation Agreement between Buyer and Seller, which shall be the
amount Buyer shall pay Seller for each Grade of Fine Papers sold by Seller to
Buyer through Direct Purchases hereunder.

AG. TERM -- as defined in Article III.A.

AH. LAW -- (a) any statute, regulation, rule, order or other
requirement of any competent governmental authority first enacted or
promulgated after the Effective Date hereof or (b) the enforceable decision of
any court interpreting any statute, regulation, rule, order or other
requirement of any competent governmental authority, the effect of which is to
modify Seller's obligations with respect to any statute, regulation, rule,
order or other requirement as reasonably understood by Seller on the later of
the Effective Date hereof or the date of enactment or promulgation of such
statute, regulation, rule, order or other requirement.

7
<PAGE> 14

AI. NEW PRODUCT -- a Grade, Group or Category of Fine Papers first
produced and sold to Buyer by Seller or another supplier after the Effective
Date of this Agreement for use by Buyer or Buyer's Contractors to manufacture
Cigarettes or Cigarette components at the Plants.

AJ. ORDER -- as defined in Article V.B.1 (including Fast Flow Orders).

AK. ORIGINAL FINE PAPERS SUPPLY AGREEMENT -- that certain agreement,
effective January 1, 1993, by and between Philip Morris Incorporated and
Kimberly-Clark Corporation and assigned by Kimberly-Clark Corporation to
Schweitzer-Mauduit International Inc., including all amendments thereto.

AL. PHASEOUT PERIOD -- the period described in Article III.D.

AM. PLANTS -- all the Cigarette manufacturing facilities owned and
operated by Buyer that are located in the continental United States, whether
presently existing or built or acquired during the Term hereof. In addition,
the Plants shall include those Cigarette or Cigarette component manufacturing
facilities located in the continental United States and operated by Contractors
that Buyer shall designate in writing as being subject to this Agreement. The
term also shall include Cigarette or Cigarette component manufacturing
facilities, other than those identified above, performing Cigarette
manufacturing services for Buyer that the parties shall jointly designate in
writing as being subject to this Agreement.

AN. PLUG WRAP -- the Category of Fine Papers enclosing cellulose
acetate, or such other filtering medium as Buyer may employ, forming the filter
portion of a Cigarette.

AO. PRIOR YEAR -- the Year before the current Year.

8
<PAGE> 15

AP. PRIOR YEAR'S PURCHASES -- the aggregate quantities of Fine Papers
purchased in the Prior Year (a) by Buyer through Direct Purchases hereunder
(excluding any purchases by Buyer pursuant to Article IV.H for use by Buyer's
Affiliates and any purchases of New Product which Buyer is obligated by an
Implementation Agreement to purchase exclusively from Seller), (b) by Buyer's
Contractors through Indirect Purchases hereunder (excluding any purchases by
Buyer's Contractors of any New Product which Buyer is obligated by an
Implementation Agreement to purchase exclusively from Seller) and (c) by Buyer
from other suppliers for use in manufacturing Cigarettes or Cigarette components
for Buyer at the Plants (excluding any Grade of Fine Papers for which Seller has
no manufacturing facility qualified pursuant to Article XVI for the manufacture
of such Grade and such Grade is commercially available from another supplier).
The term includes Buyer's Direct Purchases and Indirect Purchases hereunder of a
New Product following the expiration, termination, or cancellation of Buyer's
obligation to purchase such New Product exclusively from Seller under an
Implementation Agreement. The quantities of Fine Papers purchased by Buyer in
any Year through Direct Purchases hereunder shall be the quantities so stated as
delivered as Direct Purchases hereunder in such Year on Seller's several
invoices to Buyer and accepted as such by Buyer, including any quantities
delivered to and credited to Buyer for the replacement of nonconforming Fine
Papers pursuant to Article X.B.2.a during such Year, less any returns, plus any
quantities identified for delivery in such Year in Buyer's Firm Orders for
Direct Purchases hereunder but not delivered. The quantities of Fine Papers
purchased through Indirect Purchases in any Year shall be determined by
quarterly reports submitted by Buyer to Seller pursuant to Article VIII.E. The
quantities of Fine Paper purchased by Buyer from other suppliers for use in the
manufacture of Cigarettes or Cigarette components for Buyer at the Plants shall
be determined by an annual report to be submitted by Buyer to

9
<PAGE> 16

Seller following the end of each Year. Such report shall identify actual
quantities of Fine Papers (measured in Standard Bobbins, or in the case of
Tipping Paper, by weight) that were purchased by Buyer from other suppliers
(less returns, plus replacements) and delivered to the Plants for incorporation
into Cigarettes or Cigarette components manufactured for Buyer as well as
Buyer's Cigarette production at the Plants during that period.

AQ. PRODUCT OR MANUFACTURING ADVANCE -- any process, product
composition, manufacturing technique, processing technique, idea or the like
applicable to Fine Papers that Buyer desires to investigate or implement
through (a) a material change to the Base Sheet Attributes that define an
existing Grade, (b) a New Product the Base Sheet Attributes of which vary so
materially from the Base Sheet Attributes that define the Grades of an existing
Group that such New Product constitutes a new Group or Category, (c) a change
in the manufacturing or processing technique applicable to Fine Papers that is
currently used by Seller or (d) the implementation of a new manufacturing or
processing technique applicable to Fine Papers.

AR. RECORDS -- as defined in Article XX hereof.

AS. RENEWAL TERM -- as defined in Article III.A hereof.

AT. SELLER -- Schweitzer-Mauduit International, Inc., a Delaware
corporation.

10
<PAGE> 17
AU. SELLER'S MANUFACTURING FACILITY -- each of the facilities
specified in Article VI.D (or as otherwise agreed in writing by Buyer and
Seller) at which Fine Papers are produced by Seller for incorporation into
Cigarettes and Cigarette components to be manufactured at the Plants.

AV. SELLER'S PROJECTED U.S. PRODUCTION CAPACITY -- Seller's good faith
projection of the production capability of each of Seller's U.S. manufacturing
facilities that are qualified as provided in Article XVI.

AW. SHIPMENT -- the quantity of Fine Papers loaded on a single vehicle
for delivery hereunder.

AX. SPECIFICATIONS -- the physical, chemical, visible and other
properties and attributes of the individual Fine Papers to be purchased and
sold hereunder, all as specified by Buyer in Buyer's General Direct Material
Specification, Class Material Specification and in the individual material code
specification and Buyer's individual Plant requirements applicable to each Fine
Papers product, or such supplements or additions as Buyer may require in writing
from time to time.

AY. SPECIFICATION CHANGE -- a non-material change to the Base Sheet
Attributes that define an existing Grade utilized in the manufacture of
Cigarettes or Cigarette components at the Plants, including reductions in the
tolerance range for variations in Base Sheet Attributes.

AZ. TERM -- the Initial Term and any Renewal Terms.

11
<PAGE> 18

BA. TIPPING PAPER -- the Category of Fine Papers (before printing)
used to enclose the filter portion of a Cigarette and to attach the filter to
the rod of the Cigarette.

BB. YEAR -- the 12-month period beginning January 1 and ending
December 31.

II. RESTATED AGREEMENT

This Agreement amends and restates the Original Fine Papers Supply
Agreement. The terms set forth herein shall apply to Direct Purchases and
Indirect Purchases within the scope hereof after the Effective Date and during
the remaining Term hereof.

III. TERM; EARLY TERMINATION

A. TERM

This Agreement shall be effective April 1, 1998, (the "Effective
Date") and shall continue in effect through June 30, 2002 (such period being
hereinafter referred to as the "Initial Term"). Thereafter, the Agreement
automatically shall renew for three successive terms of two years each
("Renewal Terms"); provided, however, either party may cause the Agreement to
terminate effective at the end of the Initial Term or any Renewal Term (whether
or not such Renewal Term has then commenced) by providing written notice of
termination to the other party (a) in the case of a termination to be effective
at the end of the Initial Term, not later than [******], or (b) in the case of
a termination to be effective at the end of a Renewal Term, not later than
[******].

12
<PAGE> 19

Notwithstanding the foregoing, this Agreement shall not expire with
respect to any New Product purchased and sold through Direct Purchases and
Indirect Purchases hereunder prior to the expiration of the Guaranteed Sales
Period, if any, specified in any applicable Implementation Agreement between
the parties respecting such New Product.

B. EARLY TERMINATION

In addition to the termination provision provided in Article III.A.,
this Agreement may be terminated effective prior to the expiration of the
Initial Term or any Renewal Term:

1. by mutual written agreement of the parties, such termination to
be effective as provided in such agreement;

2. by either party as provided in Article XIV.E in the event of an
extended Force Majeure;

3. by either Party, at its election, after invoking Article
[******] to [******] the provisions of Article [******] and having failed to
agree on a revised Article [******] within the [******] negotiation period
provided by Article [******], upon written notice to the other in accordance
with Article [******], such notice to specify the effective date of termination,
which date shall be no sooner than (a) [******] to the date when Seller must
[******] referred to in Article [******] or (b) the end of the Phaseout Period
defined in Article III.D hereof, whichever first occurs; or

4. by Seller, at its election, upon [******] prior written notice
to Buyer, if Buyer purchases, or otherwise accepts delivery from its Contractors
of Fine Papers or products that incorporate Fine Papers produced by suppliers
other than Seller for incorporation

13
<PAGE> 20

into Cigarettes to be manufactured by the Plants, except (a) as expressly
permitted by this Agreement or (b) as the result of Seller's failure or refusal
to perform in accordance with its contracts with Buyer's Contractors.

C. EFFECT OF EARLY TERMINATION

Subject to Article XXX, neither party shall have any further duty,
obligation or liability to the other hereunder as of the effectiveness of the
termination of this Agreement in accordance with Article III.A or Article
III.B; provided, however, with respect to Firm Orders for Direct Purchases
hereunder of Fine Papers that are not delivered as of the effectiveness of such
termination, nothing herein shall be deemed to excuse Seller from its
obligation to manufacture, sell and deliver Fine Papers covered by such Firm
Orders or to excuse Buyer from its obligation to purchase, accept and pay for
Fine Papers delivered pursuant to such Firm Orders provided such deliveries are
timely made.

D. PHASEOUT PERIOD

The final 24 months that this Agreement shall remain in effect prior
to expiration of the last Renewal Term or termination pursuant to Article III.A
or Article III.B above are hereinafter referred to as the Phaseout Period.
Except as otherwise may be agreed in writing, during the Phaseout Period the
quantities of Fine Papers to be purchased and sold as Direct Purchases and
Indirect Purchases hereunder shall be as set forth in Article IV hereof, and
the Invoice Prices during the Phaseout Period shall be determined as set forth
in Article VIII hereof or the applicable Implementation Agreement for a New
Product.

14
<PAGE> 21

IV. QUANTITY OF SUPPLY; SELLER'S MAXIMUM SALES OBLIGATION

A. GENERAL

Buyer currently purchases all of the Cigarette Papers and most of the
Plug Wrap used in the manufacture of Cigarettes or Cigarette components for
Buyer at the Plants through Direct Purchases. Buyer currently obtains all of
the Tipping Paper used in the manufacture of Cigarettes or Cigarette components
for Buyer at the Plants through Indirect Purchases. In the future Buyer may
cause some or all of the Cigarette Papers and more of the Plug Wrap used to
manufacture Cigarettes or Cigarette components for Buyer at the Plants to be
purchased through Indirect Purchases made by Buyer's Contractors. Similarly,
Buyer may purchase some or all of the Tipping Paper used to manufacture
Cigarettes or Cigarette components for Buyer at the Plants through Direct
Purchases.

B. DIRECT PURCHASE REQUIREMENTS

During the Term hereof and subject to Article IV.D, Article IV.E,
Article IV.F and Article IV.G, Buyer agrees to purchase, accept and pay for,
and Seller agrees to manufacture, sell and deliver, Buyer's Direct Purchase
Requirements for each Category of Fine Papers; provided, however, at Buyer's
sole discretion and without limiting Buyer's rights during a Phaseout Period as
provided in Article IV.G, Buyer shall have the right during any Year to reduce
its purchase obligation hereunder with respect to Direct Purchases and to
purchase Fine Papers from suppliers other than Seller for use in the
manufacture of Cigarettes or Cigarette components for Buyer at the Plants but
only to the extent (a) that the aggregate of Buyer's Direct Purchases and
Indirect Purchases of any Category of Fine Papers from other suppliers

15
<PAGE> 22

do not exceed (i) in 1998, five percent of the Prior Year's Purchases and (ii)
in 1999 and Years thereafter, 10 percent of the Prior Year's Purchases and (b)
that the Fine Papers so purchased from other suppliers do not include any New
Products that Buyer is obligated by an Implementation Agreement to purchase
exclusively from Seller.

Buyer's Direct Purchase Requirements that are to be purchased and sold
hereunder shall be communicated to Seller in accordance with Article V. Nothing
in this Agreement shall be deemed to limit or preclude Buyer from changing its
Cigarette products lines, reducing or eliminating its manufacture of Cigarettes
or Cigarette components within the United States, or altering the physical
constituents of Cigarettes or Cigarette components such that Buyer's Direct
Purchase Requirements for any Category, Group or Grade of Fine Papers are
reduced or eliminated during the Term of this Agreement.

C. BUYER'S INDIRECT PURCHASE REQUIREMENTS

During the Term hereof and subject to Article IV.D, Article IV.E,
Article IV.F and Article IV.G, Buyer shall direct its Contractors purchasing
Fine Papers used to manufacture Cigarettes or Cigarette components for Buyer at
the Plants through Indirect Purchases to obtain Buyer's Indirect Purchase
Requirements of Fine Papers from Seller, and Seller shall manufacture, sell and
deliver Buyer's Indirect Purchase Requirements of Fine Papers ordered by such
Contractors; provided, however, at Buyer's sole discretion and without limiting
Buyer's rights during a Phaseout Period as provided in Article IV.G, Buyer
shall have the right during any Year to reduce its obligation hereunder with
respect to Indirect Purchases and to cause its Contractors to purchase Fine
Papers from suppliers other than Seller for use in the

16
<PAGE> 23

manufacture of Cigarettes or Cigarette components for Buyer at the Plants but
only to the extent (a) that the aggregate of Buyer's Direct Purchases and
Indirect Purchases of any Category of Fine Papers from other suppliers do not
exceed (i) in 1998, five percent of the Prior Year's Purchases and (ii) in 1999
and Years thereafter, 10 percent of the Prior Year's Purchases and (b) that the
Fine Papers so purchased from other suppliers do not include any New Products
that Buyer is obligated by an Implementation Agreement to purchase exclusively
from Seller.

Nothing in this Agreement shall be deemed to preclude Buyer from
changing its Cigarette products lines, reducing or eliminating its manufacture
of Cigarettes or Cigarette components within the United States, or altering the
physical constituents of Cigarettes or components thereof such that Buyer's
Indirect Purchase Requirements for any Category, Group or Grade of Fine Papers
is reduced or eliminated during the Term of this Agreement.

D. EXCLUDED QUANTITIES

Notwithstanding Article IV.B and Article IV.C above, Buyer shall have
no obligation hereunder to purchase from Seller, directly or indirectly, any
Excluded Quantities except: with respect to (a) a New Product available for
purchase by Buyer from suppliers other than Seller pursuant to Article
XIII.F.2, or (b) a New Product developed jointly by Buyer and a supplier other
than Seller as the result of the implementation of a Product or Manufacturing
Advance as provided in Article XIII.F.2, Buyer shall purchase Buyer's Direct
Purchase Requirements of such New Product, and cause its Contractors to
purchase Buyer's Indirect Purchase Requirements of such New Product, from
Seller if (a) Seller demonstrates to

17
<PAGE> 24

Buyer's reasonable satisfaction that Seller has qualified manufacturing
facilities with sufficient uncommitted capacity to manufacture such New Product
in quantities sufficient to satisfy the aggregate of Buyer's Direct Purchase
Requirements and Buyer's Indirect Purchase Requirements with respect to such New
Product and (b) Seller commits to sell such New Product to Buyer and Buyer's
Contractors at [******] provided, however, such obligation to purchase from
Seller shall be reduced to the extent and for such period (not including future
discretionary renewal terms) as Buyer is contractually obligated or otherwise
committed to purchase such quantities of the New Product from a supplier other
than Seller. Notwithstanding Seller's inability to satisfy the foregoing
conditions, Buyer will consider purchasing such New Products from Seller where
it is reasonable to do so. Buyer will take into consideration Seller's
development efforts respecting any New Product, and Buyer will minimize its
purchase commitments with other suppliers for such New Products if Buyer, in
Buyer's sole discretion, determines it is reasonable to do so.

E. SELLER'S MAXIMUM SALES OBLIGATION

Each Year, not later than [******], Seller shall prepare and deliver
to Buyer a report that shall identify Seller's Projected U.S. Production
Capacity for each Category of Fine Papers during each of the following [******]
Years. Seller's [******] projections were as follows:

<TABLE>
<CAPTION>
Year Seller's Projected U.S. Production Capacity
- ---- ------------------------------------------------------------
Cigarette Paper Plug Wrap Tipping Paper
(Standard Bobbins) (Standard Bobbins) (Metric Tons)
<S> <C> <C> <C>

[******]
[******]
[******]
</TABLE>

18
<PAGE> 25

Notwithstanding Article IV.B and Article IV.C, for each Year that this
Agreement is in effect, Seller's maximum sales and delivery obligation for each
Category of Fine Papers hereunder through both Direct Purchases and Indirect
Purchases ("Seller's Maximum Sales Obligation") shall not exceed [******] of
the highest of Seller's Projected U.S. Production Capacities for that Category
and for that Year as reflected in the three most recent annual reports Seller
shall have submitted to Buyer in accordance with this Article IV.E (including
any updates to such reports submitted to Buyer that increase the Seller's
Projected U.S. Production Capacity for any Category for any such Year);
provided, however, for [******], Seller's Maximum Sales Obligation for any
Category shall be [******] of the applicable projection set forth above in this
Article IV.E, and for [******], Seller's Maximum Sales Obligation shall be
[******] of the higher of the projection set forth above in this Article IV.E
and the applicable projection set forth in the [******], and for [******],
Seller's Maximum Sales Obligation for any Category shall be [******] of the
highest of the applicable projection set forth above in this Article IV.E and
the projections set forth in the [******]. (The aggregate limitation imposed by
this Article is inclusive of Fine Papers purchased by Buyer pursuant to Article
IV.H for transfer (or resale) to Buyer's Affiliates.) For each Year that the
Agreement remains in effect, Seller's Maximum Sales Obligation for each
Category shall be reduced by the forecasted amount that Seller's Projected U.S.
Production Capacity for that category will be reduced below Seller's Maximum
Sales Obligation for that Category and for

19
<PAGE> 26

that Year (as previously established as provided above) as a result of Seller's
implementation at Buyer's request of a Specification Change or Product or
Manufacturing Advance; provided, however, that Seller shall provide Buyer notice
of the annual forecasted reduction in writing no later than [******] of the Year
preceding the Year that the forecasted reduction shall be applicable and shall
provide forecasts of such reductions no less than [******] days prior to the
implementation of a Specification Change or a Product or Manufacturing Advance
that occurs during the then-current Year.

If the aggregate of Buyer's Direct Purchase Requirements for Fine
Papers and Buyer's Indirect Purchase Requirements for Fine Papers in any Year
exceeds Seller's Maximum Sales Obligation for that Year, then Seller shall use
reasonable efforts to supply such quantities of Fine Papers in excess of
Seller's Maximum Sales Obligation as may be Ordered by Buyer as Direct
Purchases hereunder or by Buyer's Contractors as Indirect Purchases.

F. PURCHASE OF FINE PAPERS FROM OTHER SUPPLIERS IN THE EVENT OF
SELLER'S INABILITY OR REFUSAL TO DELIVER BUYER'S REQUIREMENTS

Notwithstanding Article IV.B or Article IV.C, if Buyer projects at any
time before or during a Year that the aggregate of Buyer's Direct Purchase
Requirements and Buyer's Indirect Purchase Requirements for any Group of Fine
Papers in such Year will exceed Seller's Maximum Sales Obligation for that
Year, Buyer shall so notify Seller and, with such Notice or thereafter, may
request that Seller commit to sell such excess to Buyer and its Contractors, if
ordered. In the event that Seller does not commit to sell and deliver hereunder
Buyer's estimate of the aggregate of Buyer's Direct Purchase Requirements and
Indirect Purchase

20
<PAGE> 27

Requirements in excess of such Maximum Sales Obligation within [******] after
receiving such request, Buyer may purchase Fine Papers from other Suppliers or
cause its Contractors to purchase Fine Papers from other Suppliers in quantities
aggregating up to the total quantity of Buyer's projected requirements that
Seller has not committed to supply for that Year; provided, however, insofar as
is reasonable but with due consideration of Buyer's need for secure supplies of
Fine Papers at least equal to Buyer's actual projected requirements, Buyer and
its Contractors [******] in the purchases of Fine Papers from Seller otherwise
required by Article IV.B and Article IV.C.

G. DIRECT PURCHASES AND INDIRECT PURCHASES DURING PHASEOUT PERIOD

During the Phaseout Period, (1) up to [******] of Buyer's Prior Year's
Purchases may be purchased (whether as Direct Purchase or Indirect Purchase, or
both) from suppliers other than Seller during the first [******] of the final
[******] months of the Term, and (2) up to [******] of Buyer's Prior Year's
Purchases may be purchased (whether as Direct Purchase or Indirect Purchase, or
both) from suppliers other than Seller during the [******] of the Term.

H. PURCHASES OF FINE PAPERS BY BUYER FOR USE BY BUYER'S AFFILIATES

In addition to quantities of Fine Papers purchased through Direct
Purchases and Indirect Purchases, Buyer, from time to time, desires to supply
its Affiliates with Fine Papers manufactured in the United States to support
specific, world-wide projects. Buyer shall have the right, but not the
obligation, to place Orders in accordance with the procedures in Article V.B.1
for additional quantities of Fine Papers not to exceed the equivalent of
[******]

21
<PAGE> 28

Standard Bobbins per Year for Cigarette Paper, [******] Standard
Bobbins per Year for Plug Wrap and [******]pounds per Year for Tipping Paper
for transfer (or resale) to Buyer's Affiliates for use in the manufacture of
Cigarettes. Such Orders shall be treated as Orders for Direct Purchases for all
purposes hereunder except the calculation of Prior Year's Purchases.

I. FINE PAPERS MANUFACTURED BY SELLER'S AFFILIATES

If due to an event of Force Majeure under Article XIV hereof, Seller is
unable to manufacture, sell and deliver Fine Papers Ordered by Buyer, Seller
shall supplement deliveries of Fine Papers in satisfaction of Buyer's Direct
Purchase Requirements and Buyer's Indirect Purchase Requirements with Fine
Papers manufactured from qualified manufacturing facilities of Seller's
Affiliates, except that for any Category of Fine Papers, Seller shall not be
obligated to supply [******] more than [******] of the [******] of Buyer's
aggregate Direct Purchases and Indirect Purchases of that Category for the
[******] period preceding the event of Force Majeure or sell Buyer and its
Contractors more than the Seller's Maximum Sales Obligation for such Year.

22
<PAGE> 29

V. FORECASTS OF REQUIREMENTS AND MONTHLY ORDERS

A. FORECASTS

In the fourth calendar quarter of each Year, Buyer shall provide Seller
with Buyer's forecast of Buyer's Direct Purchases hereunder, Buyer's Indirect
Purchases hereunder and Buyer's Direct Purchases for use by Buyer's Affiliates
for the coming Year (the "Annual Forecast"). Buyer's Annual Forecast shall
include the forecasted quantity of Fine Papers to be purchased through Fast Flow
Orders in that Year. Each month Buyer will issue to Seller a short term forecast
consisting of anticipated Direct Purchases and Indirect Purchases of Fine Papers
for the next four calendar months. The detail of the short term forecasts shall
be as agreed between Buyer and Seller for each Grade, and shall be provided to
Seller by such means as the parties mutually agree (e.g., electronic data
interchange or telecopy notice). The Annual Forecast and short term forecasts
shall be for information purposes only and shall not constitute firm orders for
any quantity of Fine Papers.

B. DIRECT PURCHASES

1. ORDERS

From time to time, Buyer shall place orders for quantities of Fine
Papers to be purchased and sold hereunder through Direct Purchases (an
"Order"). An Order shall be communicated to Seller via Buyer's written forms,
electronic data interchange, telecopy, telephone (confirmed by telecopy) or by
such other means as the parties mutually agree. Each Order shall be governed by
the terms and conditions of this Agreement and shall specify (a) the
quantities, Grades and dimensions (i.e., material codes) of Bobbins of Fine
Papers to be

23
<PAGE> 30

delivered by Seller pursuant to the Order, (b) the Delivering Carrier(s), (c)
Seller's Manufacturing Facility(ies), and (d) the delivery schedule. Buyer may
amend or supplement an Order at any time.

Buyer's use of written forms for the placing of Orders (or amendments
or supplements thereto) shall be for administrative convenience only. Any
preprinted commercial terms and conditions contained on Buyer's written forms
shall not be applicable to an Order.

2. FIRM ORDERS

Except for Fast Flow Orders, the Orders issued pursuant to Article
V.B.1 shall be deemed firm (i.e., Buyer shall be required to accept delivery
and pay for such Fine Papers) for the quantities specified to be delivered in
the current week (Sunday through Saturday) and in the next week after the
current week with respect to all quantities Seller shall have manufactured for
delivery in accordance with such Order. Unless otherwise agreed in writing, and
except for Fast Flow Orders, an Order shall not be deemed firm for any
quantities scheduled for delivery following the week next after the current
week or if the Order is for quantities scheduled to be delivered during the
current week, for any quantities not manufactured before such quantities are
reduced, eliminated, or deferred by an amendment or supplement to an Order or
by a subsequent Order. All Fast Flow Orders shall be deemed firm. All orders
that are "firm" in accordance with this Article V.B.2 are hereafter to be
referred to as "Firm Orders."

3. SCHEDULE OF DELIVERIES

All deliveries of Direct Purchases shall be made in accordance with
the delivery

24
<PAGE> 31

schedule set forth in the applicable Order or any amendment thereto. Except for
Fast Flow Orders, Seller shall be under no obligation to effect a delivery of an
Order for Fine Papers originating from one of Seller's domestic Manufacturing
Facilities in fewer than [******] (exclusive of Buyer's non-production days) or
to effect a delivery of an Order for Fine Papers originating from the
Manufacturing Facilities of Seller's overseas Affiliates in fewer than [******]
(exclusive of Seller's non-production days). For Fast Flow Orders, Seller shall
effect delivery of the quantity so ordered within [******] of receiving such
Order.

Seller's obligation to effect a "delivery" of Fine Papers under
Article V.B.3 only, shall occur when the applicable Shipment is received at
Buyer's Plant. Time is of the essence with respect to all deliveries. To the
extent Buyer's delivery schedule in an Order or an amendment thereto specifies
delivery of any quantities of Fine Papers in a period shorter than the minimum
period specified in the immediately preceding paragraph above for such an
Order, Seller shall use best efforts to effect delivery of such Fine Papers in
accordance with the delivery schedule.

C. INDIRECT PURCHASES

Indirect Purchases shall be ordered, delivered and shipped in
accordance with procedures to be developed and agreed upon by Seller and Buyer's
Contractors. Unless the parties otherwise agree in writing, Buyer in no way
guarantees the performance of such Contractors and any contracts that may govern
the relationship between such Contractors and Seller with respect to Indirect
Purchases.

25
<PAGE> 32

VI. DELIVERY AND TRANSPORTATION

A. DELIVERY

All Fine Papers purchased and sold hereunder shall be delivered F.O.B.
Seller's manufacturing facility except those Fine Papers manufactured by
Seller's Affiliate Papeteries de Mauduit ("PDM") which shall be delivered
F.O.B. Buyer's Plant. To the extent Buyer and Seller agree that Seller may
supply any Fine Papers that are manufactured by Seller's Affiliate PDM, Seller
shall ensure that such Fine Papers are cleared through customs and shall pay
all applicable import and export taxes and duties (without reimbursement from
Buyer) and provide Buyer evidence that such taxes and duties have been paid.

If Buyer and Seller agree that Seller shall specify the Delivering
Carrier for goods manufactured at any of Seller's domestic manufacturing
facilities, the Fine Papers purchased, sold and so delivered shall be delivered
F.O.B. Buyer's Plant, freight collect.

B. DUTY DRAWBACKS

Buyer shall be entitled to 100% of any duty drawback that may be
applicable upon the export of Cigarettes incorporating or deemed to incorporate
Fine Papers originally supplied from the facilities of any of Seller's
non-domestic Affiliates. In no event does Seller guarantee the quantity of Fine
Papers eligible for any duty drawback. For each delivery hereunder for which
the source of Fine Papers is a non-domestic manufacturing facility of Seller's
Affiliate, Seller shall execute and provide to Buyer, not more than 30 days
after such delivery, Customs Form 331 or such other documentation as may be
required to authorize the payment directly to Buyer of duty drawbacks that may
be applicable for such deliveries ("Certificate of Delivery").

26
<PAGE> 33

In addition to the federally mandated information required on the Certificate of
Delivery, Seller shall specify on the Certificate of Delivery (a) the duty rate
paid for such Fine Papers upon their entry into the United States and (b) the
actual unit of measure (e.g., kilograms or pounds) utilized as the basis of such
duty payment. Whenever Seller is notified of any adjustment upon liquidation by
U.S. Customs of the duties paid for any delivery of Fine Papers, such that the
actual duties paid are either greater or less than the amount reflected on the
Certificate of Delivery for such Fine Papers, Seller shall immediately notify
Buyer of such adjustment. In the event that Seller fails to provide such notice
of adjustment, Seller shall indemnify Buyer for any fines, penalties and costs
incurred by Buyer and any duty drawback Buyer does not recover as the result of
filing a drawback claim based on the duty reflected on the original Certificate
of Delivery.

C. TRANSPORTATION/RISK OF LOSS

If Buyer selects the Delivering Carrier, Transportation of Fine
Papers from Seller's Manufacturing Facility to Buyer's Plant shall be Buyer's
responsibility unless the Fine Papers are transported from Seller's Affiliate
PDM (from which all Shipments are to be delivered F.O.B. Buyer's Plant). Seller
shall be responsible to make arrangements with the Delivering Carrier to have
trucks available to receive and transport Fine Papers ordered by Buyer.
Seller's personnel shall load the Fine Papers on the Delivery Carrier's trucks.
Buyer shall pay all transportation costs directly to the Delivering Carrier;
provided, however, Seller shall reimburse Buyer for any demurrage or other
charges (e.g., less than truckload rates, air freight) that Buyer may be
required to pay the Delivering Carrier due to Seller's failure to

27
<PAGE> 34

schedule or load any Shipment of Fine Papers in accordance with applicable terms
and conditions of the transportation agreement between Buyer and the Delivering
Carrier, but only if Buyer has communicated such terms and conditions to Seller
in writing. Notwithstanding the foregoing, in the event that Buyer and Seller
agree that Seller shall specify the Delivering Carrier pursuant to Article VI.A
hereof, Seller shall be responsible for arranging the transportation of any Fine
Papers (including insurance) to be delivered F.O.B. Buyer's Plant, freight
collect.

D. PRODUCTION SOURCES

Unless Buyer agrees differently in writing, the manufacturing
facilities identified below shall be the exclusive production sources for the
Fine Papers to be delivered to Buyer pursuant to both Direct Purchases and
Indirect Purchases hereunder, but such facilities may only be used to the
extent that they continue to be qualified by Buyer in accordance with Article
XVI:

<TABLE>
<CAPTION>
CATEGORY PRODUCTION SOURCE
<S> <C>
Cigarette Paper Spotswood, NJ (#5, 6, 7, 12, 14, 17);
Papeteries de Mauduit (PDM), Quimperle, France

Plug Wrap
4500 Ancram, NY (#21); Lee, MA (#8, Niagara); Lee, MA
(#9, Eagle) Papeteries de Mauduit (PDM),
Quimperle, France

26000 Lee, MA (#9, Eagle); Lee, MA (#8, Niagara)

Non Porous Lee, MA (#18, Greylock) (#5, Eagle); Spotswood, NJ (#14)

Heat Seal Lee, MA (#8, Niagara)

Tipping Paper
White Lee, MA (#18, Greylock)

Cork Lee, MA (#5, Eagle); Lee, MA (#18, Greylock)
</TABLE>

28
<PAGE> 35

VII. RECEIPT INSPECTION AND ACCEPTANCE

Upon receipt at Buyer's Plant or storage facility, Buyer may, but
shall not be required to, perform receipt inspections to confirm that the Fine
Papers in each Shipment conform to the Specifications applicable to the
material codes (i.e., Grades and dimensions) to be delivered pursuant to the
subject Order. Buyer may reject any portion of a Shipment delivered hereunder
that does not conform to applicable Specifications. Receipt inspections shall
be cursory in nature, and acceptance of a Shipment by Buyer shall not be deemed
evidence that the Fine Papers in such Shipment conform to applicable
Specifications. Notwithstanding any receipt inspection, Buyer shall be entitled
to revoke its acceptance, in whole or in part, of any Shipment of Fine Papers
that is subsequently found to fail to conform in any respect to applicable
Specifications. Buyer's sole and exclusive remedy for such revocation of
acceptance shall be the remedy provided in Article X.B.2.

VIII. COMPENSATION

A. GENERAL

This Article states the methods by which the Invoice Price for each
Grade of Fine Papers shall be determined for the period [******]. Prior to
[******], Buyer and Seller shall negotiate in good faith in an attempt to agree
upon the methodology to be used to determine the

29
<PAGE> 36

Invoice Price for each Grade that is to be applicable beginning [******] if the
Agreement is not terminated in accordance with Article III.A. If the parties so
agree, this Agreement shall be amended accordingly.

B. DEFINITIONS

For purposes of this Article VIII, each of the following terms shall
have the meaning hereinafter set forth:

1. "ADJUSTED BASE PRICE" - for each Grade, the Base
Price adjusted as provided in Article VIII.D hereof for changes in wood pulp
prices, [******] and Extraordinary Costs, as applicable.

2. "CURRENT COST" - the unit manufacturing cost under
normal operating conditions for each Grade based on Seller's actual costs for
labor, materials and utilities at the Seller manufacturing facility where such
Grade is produced, or if produced at more than one facility, by the [******]
where such Grade is produced (provided that in no event shall such costs be
measured at non-domestic facilities), as generated by GEMMS at any given time
based on Seller's actual current and historic costs of manufacturing.

3. "BASE PRICE" - the unadjusted selling price per
Standard Bobbin or per hundredweight, as applicable, for each Grade as set
forth in Exhibit A hereto.

4. "EXTRAORDINARY COST" - increases to Seller's Unit
Grade Cost of producing Fine Papers caused by a [******].

5. "INDEX" - the [******].

6. [******]

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7. "STANDARD BOBBIN" - a Bobbin whose dimensions are
[******].

8. "UNIT" - a Standard Bobbin of Cigarette Paper or Plug
Wrap or a pound of Tipping Paper, as the context requires.

9. "UNIT GRADE COST" - Seller's Current Cost of
manufacturing a Unit of each Grade of Cigarette Paper, Plug Wrap or Tipping
Paper.

C. DETERMINATION OF INVOICE PRICE

The Invoice Price for each Grade for each Year during the period
[******]through [******] shall be determined as follows:

1. for Cigarette Paper and Plug Wrap, the Adjusted Base
Price per Standard Bobbin shall be multiplied by a fraction, the numerator of
which is the number of square meters in the actual Bobbin sold and delivered to
Buyer and the denominator of which is the number of square meters in a Standard
Bobbin;

2. for Tipping Paper, the Adjusted Base Price per
hundredweight.

D. ADJUSTMENTS TO BASE PRICE

1. CALCULATION OF PULP PRICE ADJUSTMENT

Effective [******], the Base Price for each Grade, except Cigarette
Papers containing flax, shall be subject to adjustment, up or down, to reflect
changes in the price paid by Seller for wood pulp used in the production of
Fine Papers purchased through Buyer's Direct Purchases and Indirect Purchases
hereunder, the first such adjustment to be made as of [******].

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a. An adjustment to the Base Price for each
Grade shall be made as of an Adjustment Date if there is a [******] or more
between the [******], less any discounts or rebates due to Seller, [******]
prior to an Adjustment Date and, initially, the [******] in effect as of
[******] less any discounts or rebates due to Seller [******] and, thereafter,
the [******], less any discounts or rebates due to Seller, [******] to the
effective date of the last change in the pulp price adjustment to the Base
Price pursuant to this Article VIII.D.1. This percentage difference shall be
calculated as follows:

[******]

2. CALCULATION OF [******]ADJUSTMENT DURING PHASE-OUT

In the event either party provides notice of termination prior to
[******] pursuant to Article III.A or III.B hereof, then effective [******] for
each of [******] and [******], the applicable Base Price for each Grade of Fine
Papers shall be adjusted, up or down, based on the percentage change in the
Index first published for [******] and [******] of the current Year. The
[******] adjustment to the Base Price for each Grade shall be calculated as
follows:

[******]

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3. CALCULATION OF ADJUSTMENT FOR EXTRAORDINARY COSTS

Effective each Adjustment Date, the Base Price for each Grade shall be
subject to adjustment, up or down, in an amount which shall permit Seller to
recover, [******], Extraordinary Costs that are then being incurred by Seller,
as measured by the amount of such Extraordinary Cost [******]. Upon determining
the amount of such adjustment for any [******], Seller shall advise Buyer of
the [******] that caused such Extraordinary Cost (for the first adjustment
period only), the amount such Extraordinary Costs allocated to Direct Purchases
and Indirect Purchases hereunder, and the amount of the adjustment to each Base
Price attributable to such Extraordinary Cost. Seller shall provide information
in appropriate detail for Buyer to understand the basis for any adjustment for
Extraordinary Costs.

[******] Seller shall [******]

F. DETERMINATION OF BASE PRICE FOR NEW PRODUCTS/NEW GRADES

The Base Price for each New Product shall be determined as follows:

1. A New Product shall be assigned by mutual agreement
of Buyer and Seller to an existing Group that has essentially similar Base
Sheet Attributes as other Grades within a Category. If the New Product does not
fit within an existing Group due to the absence of similar Base Sheet
Attributes, or, if after good faith discussions the parties cannot agree on the
assignment of a New Product to an existing Group, such New Product shall be
assigned to a new Group within the applicable Category, if any. In the absence
of an applicable Category, such New Product shall not be subject to the terms
of this Agreement.

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2. Seller shall establish the Base Price for a New
Product as follows:

[******]

[******] in accordance with Article VIII.D hereof.

G. [******]

H. VERIFICATION OF CALCULATIONS/PRICES; AUDITS [******]

I. CHANGES IN SELLER'S ACCOUNTING METHODS

Seller shall disclose promptly to Buyer and the Auditor any change in
its method of accounting, the type of costs recorded in or allocated to
specific cost accounts or the recording of other information required by this
Article VIII if such change would materially affect the calculation of any
price, price adjustment, rebate or other item called for by this Article VIII.

J. ALTERNATE INDEX

In the event that (a) the Index is discontinued, (b) the nature of the
Fine Papers purchased by Buyer or Buyer's Contractors is changed such that the
Index [******], or (c) the government materially alters the data included in
the Index or the basis of computation of the Index, either party may request
renegotiation of the Index by giving written notice of such request. The
parties shall negotiate in good faith with the goal of agreeing upon a suitable
alternate index. [******]

K. PRICE REOPENERS
[******]:

L. CHANGES IN SPECIFICATIONS

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<PAGE> 41

If there is a change in the Specification for a Grade which affects,
directly or indirectly, the Unit Grade Cost for such Grade, such Grade shall
become a New Product and its Base Price shall be determined in accordance with
Article VIII.G hereof.

M. PRECISION OF CALCULATIONS

The number of digits to the right of a decimal in any number which
must be calculated pursuant to this Article VIII shall be as specified in
Exhibit C, attached hereto and made a part hereof, unless the parties otherwise
agree in writing.

IX. INVOICES AND PAYMENT

Prior to or upon delivery of each Shipment of Fine Papers ordered by
Buyer in accordance with Article V.B, Seller shall submit an invoice for such
Shipment in the form of an "Advance Shipment Notice" ("ASN"), except for trials
and special orders that are to be invoiced separately. Such invoice shall
specify the number of Bobbins or total pounds of Fine Papers in the Shipment by
material code, Buyer's Delivery Schedule and purchase order or authorization
number, and the place of delivery. Buyer shall then calculate the total
compensation due Seller for such Shipment based on the applicable Invoice
Prices for the Grades specified in Buyer's Order and the number of Bobbins or
pounds of Fine Papers of each such Grade received at the specified place of
delivery. Provided that Seller has delivered the Certificate of Delivery for
such Shipment as required by Article VI.B, Buyer shall pay all proper invoices
[******] from Buyer's receipt of the Shipment at Buyer's Plant.

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<PAGE> 42

Payments made to Seller hereunder shall not be considered evidence of
acceptance by Buyer of any non-conforming delivery of Fine Papers, in whole or
in part, or that any such delivery conforms, in whole or in part, to the
requirements of this Agreement. Nor shall payment hereunder be deemed to
relieve Seller of its obligation that any future deliveries of Fine Papers
hereunder conform in all respects with the requirements of this Agreement.

X. WARRANTY

A. TITLE

1. WARRANTY OF TITLE

Seller warrants that title to all Fine Papers received as the
result of Direct Purchases and Indirect Purchases hereunder shall be good, and
its transfer rightful, and that such Fine Papers shall be free from all
security interests, liens and other encumbrances.

2. REMEDY

If any Fine Papers fail to conform to the above warranty, Seller
shall defend the title thereto and, if requested by Buyer and at no cost to
Buyer, shall promptly cause any security interest, lien or other encumbrance to
be removed by discharging such security interest, lien or other encumbrance or
posting a bond therefor. If Seller fails to cause any such security interest,
lien or other encumbrance to be removed by discharge or posting a bond within
five days after Buyer's written request for such removal, then Buyer, at
Buyer's option, either (a) may cause the removal of such security interest,
lien or other encumbrance by bonding, in which case Seller shall be liable to
Buyer for the expenses thereby incurred, or (b) (but only in

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<PAGE> 43

the case of Direct Purchases) may revoke its acceptance of such Fine Papers, in
which case Seller shall promptly refund any compensation Seller shall have
received from Buyer in connection with such Fine Papers.

B. QUALITY

1. WARRANTY OF QUALITY

a. Seller warrants that all Fine Papers
received as the result of Direct Purchases and Indirect Purchases hereunder
shall strictly conform to the applicable Specifications.

b. Seller further warrants that the continuous
quality of each Category of Fine Papers received as the result of Direct
Purchases and Indirect Purchases hereunder shall not result in a rejection rate
greater than the maximum rejection rate provided below:

MAXIMUM REJECTION RATE

[******]

Recalls by Seller and rejects under preliminary specifications shall be
excluded in calculating the maximum rejection rate. Such rate shall be adjusted
equitably to account for changes in Buyer's floor inspection practices or
mutually agreed changes to the Specifications that could affect the rejection
rate. (The parties agree to negotiate in good faith to reach an agreement upon
objective criteria upon which the quality of each Category of Fine Papers
received as the result of Direct Purchases and Indirect Purchases hereunder
shall be evaluated in the future, and upon reaching such agreement, this
Article X.B.1 and Articles X.B.2 and XXIII.A.1 shall be amended to incorporate
such criteria in lieu of the "rejection rates" set forth herein.)

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<PAGE> 44

2. REMEDY

a. If any Fine Papers received as the result
of Direct Purchases and Indirect Purchases hereunder fail to conform to the
warranty set out in Article X.B.1.a, Seller shall promptly replace such Fine
Papers with Fine Papers conforming to the above warranty. Buyer shall give
Seller notice of the nonconforming Fine Papers and a reasonable opportunity to
inspect them after Buyer discovers the nonconforming Fine Papers. Seller shall
take possession of nonconforming Fine Papers within a reasonable time after
Seller has inspected them or has been given a reasonable opportunity to do so.
Seller shall bear all costs, including transportation costs, in fulfilling the
foregoing remedial obligations.

If Seller is unable to replace promptly any nonconforming Fine Papers
with Fine Papers that conform to the warranty set out in Article X.B.1.a, then
Buyer shall have the right to purchase substitute Fine Papers from a supplier
other than Seller but Buyer shall not be entitled to recover damages based on
such substitute purchases.

b. If the rejection rate of any Category of
Fine Papers received hereunder during any calendar quarter exceeds the maximum
rejection rate set forth in Article X.B.1.b, Seller shall promptly take all
necessary action to identify and correct the cause or causes of the
nonconformances that led to the high rejection rate. Seller shall provide Buyer
with a written report evaluating the nonconformances and their causes and
describing Seller's plans for preventing reoccurrence of such nonconformances
in the future. Seller shall bear all costs in fulfilling the foregoing remedial
obligations. [******]

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<PAGE> 45

d. The remedies in this Article X.B.2, shall constitute Buyer's
sole and exclusive remedies for any breach of the Seller's warranties of
quality set forth in Article X.B.1. Seller shall not be liable in damages to
Buyer for breach of Article X.B, except as set forth in Articles X.B.2 and
XII.B.2 or XII.B.3 hereof, as applicable; provided, however, that the parties
expressly agree that if Seller shall contest [******].

C. EXCLUSIVITY OF WARRANTIES

SELLER MAKES NO WARRANTIES OF TITLE AND QUALITY OTHER THAN THE
WARRANTIES SET FORTH IN THIS ARTICLE, AND SELLER HEREBY DISCLAIMS ALL OTHER
WARRANTIES OF QUALITY, WHETHER EXPRESS OR IMPLIED, ORAL OR WRITTEN, AND WHETHER
CREATED BY CONTRACT OR BY OPERATION OF LAW, INCLUDING BUT NOT LIMITED TO
WARRANTIES OF MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE.

XI. PATENTS, TRADEMARKS, TRADE SECRETS AND COPYRIGHTS

Seller shall, at its expense, defend any suit or proceeding brought
against Buyer to the extent based on any allegation that purchase or use of any
Fine Papers received pursuant to Direct Purchases or Indirect Purchases
hereunder or any process employed by Seller to manufacture any such Fine Papers
constitutes an infringement of any patent, trademark, trade secret or copyright
except to the extent that such suit or proceeding is based in whole or in part
on any Specifications for Fine Papers furnished by Buyer or any process
employed by Seller at Buyer's request; provided, however, that Buyer shall
promptly notify Seller in writing and

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<PAGE> 46

give Seller authority, information and assistance for the defense of the suit or
proceeding. Seller shall pay all damages and costs (including reasonable
attorneys' fees) awarded in any suit or proceeding so defended. Neither party
shall settle any such suit or proceeding without the other party's prior written
consent, which consent shall not be unreasonably withheld. Seller's obligation
to indemnify Buyer pursuant to this Article XI shall cease if settlement of any
such suit or proceeding is made without its prior written consent.

If any Fine Papers or the use thereof by Buyer infringes any patent,
trademark, trade secret or copyright and its use by Buyer is enjoined, Seller
shall, at Seller's option and at no cost to Buyer, either (a) procure for Buyer
the right to use the Fine Papers or (b) replace such Fine Papers with
substantially equivalent non-infringing Fine Papers. The provisions of this
Article XI shall not apply to the extent that any claim of infringement is
based on the manner in which the Fine Papers are utilized by Buyer in its
Cigarette or Cigarette component manufacturing processes and a suit or
proceeding is brought against Buyer by reason of such manner of utilization.

XII. LIMITATION OF LIABILITY/EXCEPTIONS

A. GENERAL

Neither Buyer nor Seller shall be liable to the other for any
[******] whether at law or in equity, except as provided in Article XII.B and
XII.C hereof.

B. EXCEPTION TO LIMITATION OF SELLER'S LIABILITY Article XII.
A hereof shall not limit Seller's liability to Buyer for:

[******]

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<PAGE> 47

C. EXCEPTION TO LIMITATION OF BUYER'S LIABILITIES Article XII.
A hereof shall not limit Buyer's liability to Seller for:
[******]

4. Buyer's obligations to Seller as set forth in
Article XXIV. A hereof; and

5. Buyer's obligation to Seller with respect to fines
for noncompliance with laws pursuant to Article XV hereof.

XIII. STRATEGIC PLANNING AND COOPERATION

A. OBJECTIVES

This Agreement is intended to foster a long-term business relationship
between Buyer and Seller regarding Buyer's Direct Purchase Requirements and
Buyer's Indirect Purchase Requirements. It is intended to facilitate both
parties' efforts to improve the quality of Fine Papers subject to this Agreement
and to reduce costs in the entire supply chain of each party. The parties
acknowledge that Buyer's selection of Seller as a strategic supplier of direct
materials and Seller's agreement to so act are significant departures from the
usual practices of each party, and that this approach is based on the
anticipated mutual benefits that the parties expect to achieve through a
long-term business relationship. The parties will pursue their objectives
through (a) mutual efforts to increase productivity and efficiency in the
ordering, manufacture, shipping, delivery, receipt, inspection, processing and
use of Fine Papers, (b) jointly developing and implementing, as appropriate,
technological advances in Fine Papers

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<PAGE> 48

production and handling machinery and Cigarette manufacturing machinery as
provided herein, (c) reevaluation of the Specifications for Fine Papers;
integrated quality assurance programs, (d) enhanced inventory management;
electronic data interchange and (e) such other joint efforts as the parties
shall deem appropriate.

B. COMMITTEES

In order to achieve the objectives set forth above, the parties
hereto acknowledge the need to cooperate. To that end, the parties have formed
the following three committees:

1. the Operating Steering Committee;

2. the [******]; and

3. the Review Team.

The roles and responsibilities of each of these committees are described in more
detail below.

1. OPERATING STEERING COMMITTEE

Buyer and Seller shall establish an Operating Steering Committee
(hereafter referred to as the "OSC") composed of an equal number of
representatives of each party. Buyer's Manager of Direct Materials Purchasing
shall be the chairman of the OSC. Seller's Senior Account Executive - Buyer,
shall be vice-chairman.

The OSC shall endeavor (a) to achieve the orderly administration of
this Agreement, including the achievement of the goals set forth in Article
XIII.A, (b) to identify and promote development of those areas where strategic
cooperation between Buyer and Seller might be mutually beneficial, (c) to
discuss appropriate methods to reward Seller (including possible additional
compensation) for developing a Grade, Group or Category of Fine Papers or

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<PAGE> 49

recommending changes to Buyer's receiving and inspection systems or
manufacturing processes, which development or changes would materially reduce
Buyer's cost of producing Cigarettes or Cigarette components and (d) to identify
opportunities to improve the quality of Fine Papers produced by Seller.

The OSC shall function only as an advisory body and shall have no
authority to take any action or make any decision concerning this Agreement or
any other agreements between the parties unless the parties mutually agree, in
writing, to refer such action or decision to the OSC. The parties agree to
cooperate with the OSC and to provide such support and staff services to the OSC
as it shall reasonably request.

The OSC shall meet at least once each calendar quarter during the
Term hereof, and more often if the majority of its members so agree. The OSC
shall consider such matters as are referred to it by the parties and such other
matters as its members deem appropriate and consistent with its charge,
including technology and product development, requirements and ordering, raw
materials, visible and other attributes, specifications, productivity
improvements and cost review. In addition, each party shall report the substance
of any major business decision to the OSC promptly after any such decision is
made (a) that could affect such party's ability to perform its obligations under
this Agreement, including decisions that could affect Buyer's Direct Purchase
Requirements, Buyer's Indirect Purchase Requirements or Seller's ability to sell
and deliver such requirements, or (b) with respect to the acquisition,
construction or development of additional domestic Cigarette or Fine Papers
manufacturing facilities, as the case may be.

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<PAGE> 50

2. [******]

3. REVIEW TEAM

There shall be a Review Team comprised of the following "from both
parties: from Seller [*****] and from Buyer [*****]." This Review Team shall
meet on a semi-annual basis, or more frequently if either party so requests, to
"assess the continuing viability of the strategic alliance between Buyer and
Seller, discuss their respective future plans and identify and agree upon those
changes or refinements to the relationship that are necessary to its continued
success and achievement of the goals identified herein."

Specifically, Review Team meetings shall address issues raised by
either party, including but not limited to the following:

[******][******][******][******][******][******][******][******][******][******]
[******][******][******][******][******][******][******][******][******][******]
[******][******][******][******][******][******][******][******][******][******]
Each party's senior representative at any such meeting of the Review Team shall
be authorized to make decisions and commitments binding on the parties, but no
such decision or commitment shall effect an amendment to this Agreement or any
of the agreements between the parties unless reduced to writing and signed by
the authorized representative of each party.

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<PAGE> 51

C. ALTERNATE SOURCES OF SUPPLY OF FINE PAPERS

If during the Term hereof Seller purchases or constructs facilities
which it uses to manufacture Fine Papers, in addition to the manufacturing
facilities for Fine Papers identified as production sources in this Agreement,
Seller will notify Buyer of the possibility that some or all of the quantities
of Fine Papers subject to this Agreement could be manufactured at such
additional facilities at prices and on terms mutually advantageous to each
party. In the event that Seller reports the existence of such possibility to
Buyer, the parties shall negotiate in good faith with the goal of amending this
Agreement in a mutually agreeable way to achieve such mutual advantages, but
nothing herein shall be deemed to obligate Buyer or Buyer's Contractors to agree
to accept deliveries of Fine Papers manufactured at facilities other than those
identified as production sources in this Agreement and then only if such
facilities have been qualified in accordance with Article XVI of this Agreement.

D. SALES TO BUYER'S AFFILIATES

Buyer's Affiliates use Fine Papers for Cigarette manufacturing
operations in various locations outside the United States. Buyer is in the
process of investigating the benefits of global purchasing. Upon Buyer's
request, the parties will negotiate in good faith with the objective of reaching
mutual agreement on the terms and conditions of appropriate amendments to this
Agreement or other agreements between the parties by which Seller would agree to
supply Fine Papers to some or all of Buyer's Affiliates.

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<PAGE> 52

E. PERFORMANCE EVALUATIONS

The parties intend that this Agreement should result in a
world-class supply relationship respecting Fine Papers quality, service,
technical cooperation and prices. To that end, it is contemplated that Buyer
shall be entitled [******]. Should Buyer reasonably conclude, as the result of
any such evaluation, that the above-stated goals are not being achieved, Buyer
shall refer any concerns it has to the OSC for the OSC's recommendation of those
measures, if any, that may be appropriate in furtherance of the above-stated
goals.

F. SPECIFICATION CHANGES OR PRODUCT OR MANUFACTURING ADVANCES

From time to time Buyer may desire to develop or implement either
(a) a Specification Change or (b) a Product or Manufacturing Advance. This
Article describes the processes that will be followed in developing and/or
implementing any such Specification Change or Product or Manufacturing Advance.
To the extent the parties may disagree whether a particular change or
development is subject to the process provided below for a Specification Change
or a Product or Manufacturing Advance, the determination of Buyer's Manager,
Cigarette Components Materials Purchasing shall be controlling and binding on
the parties.

1. SPECIFICATION CHANGES

Buyer shall communicate a proposed Specification Change to Seller in
writing. Seller shall have no obligation hereunder to sell and deliver Fine
Papers conforming to a new Specification until such time as Seller has agreed to
the Specification Change; provided, however, if Seller disagrees with any
Specification Change proposed by Buyer, Buyer and Seller shall negotiate in good
faith with the intention of resolving such disagreement as quickly

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<PAGE> 53

as possible but in no event later than 30 days after Buyer communicates the
proposed Specification Change to Seller.

2. PRODUCT OR MANUFACTURING ADVANCE

Buyer shall allow Seller the opportunity to become involved in the
development and/or implementation of all proposed Product or Manufacturing
Advances requiring development prior to requesting or obtaining development
support from another supplier. To that end, Buyer shall solicit Seller's support
and assistance in investigating and implementing all Product or Manufacturing
Advances requiring development by notifying Seller in writing of such request
for support and assistance (a "Request for Assistance"). Any such Request for
Assistance shall (a) identify the Product or Manufacturing Advance in general or
specific terms reasonably sufficient for Seller to understand the nature of the
request, (b) advise Seller of the date by which Buyer seeks to have the Product
or Manufacturing Advance developed and/or implemented into a new or existing
Fine Papers product or a manufacturing or processing technique respecting Fine
Papers, (c) request that Seller commit to participate in the development and/or
implementation of the Product or Manufacturing Advance and complete negotiation
of any agreement(s) necessary for Seller to develop and/or implement such
Product or Manufacturing Advance by either (a) the date to be specified in
Buyer's Request for Assistance or (b) another date agreeable to both parties.
Thereafter, [******]that may result from the development and/or implementation
effort respecting such Product or Manufacturing Advance. [******]

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<PAGE> 54

Notwithstanding the preceding paragraph of this Article XIII.F,
[******]. With respect to any proposed Product or Manufacturing Advance, if (a)
Seller declines to support or assist Buyer in response to a Buyer Request for
Assistance related to such Product or Manufacturing Advance, (b) Buyer and
Seller fail to reach agreement on the terms of a mutually acceptable
agreement(s) for development and/or implementation of such Product or
Manufacturing Advance within the period allowed pursuant to the preceding
paragraph, or (c) on request by Buyer Seller fails to demonstrate to Buyer's
reasonable satisfaction that Seller is able to implement such Product or
Manufacturing Advance into Seller's manufacturing processes or Fine Papers
products for sale and delivery to Buyer or Buyer's Contractors without
infringing patent(s) or without violating or misappropriating the trade secrets
or other intellectual property rights of persons or entities other than Seller
or Buyer, Buyer shall be free to participate in joint development programs with
Fine Papers suppliers other than Seller and subject to Article IV.D, to purchase
New Products resulting from such joint development programs from suppliers other
than Seller, notwithstanding Article IV.B and Article IV.C.

XIV. FORCE MAJEURE

A. DEFINITION OF FORCE MAJEURE

Neither Buyer nor Seller shall be responsible or liable, or deemed
in breach hereof, to the extent any delay or failure to perform hereunder
results from an occurrence, event or circumstance which could not have been
reasonably avoided by the party experiencing such delay or impediment to
performance, including, but not limited to, acts of God; unusually

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<PAGE> 55
severe weather; war; riots, civil commotions; act, demand or requirement of law
or of any competent governmental authority; inability despite due diligence to
obtain required licenses; strikes or other labor disturbances at Seller's or
Buyer's manufacturing facilities; explosion, fire, or flood; unavailability or
shortage of material, equipment or transportation, to the extent beyond such
party's reasonable control; or other similar causes beyond such party's
reasonable control (such causes are hereinafter called "Force Majeure"). If
Seller is delayed or its performance prevented due to delays experienced by or
failures to perform of Seller's Affiliates, such delay or impediment to
performance shall not constitute an event of Force Majeure hereunder except to
the extent such delay or impediment to performance is caused by Force Majeure as
defined above.

B. FORCE MAJEURE PROCEDURE

The party experiencing the Force Majeure shall exercise reasonable
efforts in endeavoring to overcome any resulting delay or impediment to its
performance. The party experiencing the Force Majeure shall promptly give
written notification to the other party. This written notification shall include
a full and complete description of the Force Majeure and its cause, the status
of the Force Majeure, and the actions such party is taking and proposes to take
to overcome the Force Majeure.

C. EFFECT OF FORCE MAJEURE

If performance by either party is delayed or prevented due to Force
Majeure, the time for that performance shall be extended for a period reasonably
necessary to overcome the effect of the Force Majeure. The party experiencing
the Force Majeure shall undertake

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<PAGE> 56

reasonable measures to make up for the time lost without additional
compensation. Any quantities of Fine Papers not delivered due to Force Majeure
affecting Seller shall not be made up, and such quantities shall be treated as
Direct Purchases or Indirect Purchases (as applicable) for purposes of
calculating Buyer's Prior Year purchases hereunder. Buyer shall have the right
to obtain alternate supplies of Fine Papers during any event of Force Majeure
that delays or prevents Seller's performance hereunder.

D. ALLOCATION OF SELLER'S PRODUCTION CAPACITY

If any event of Force Majeure hereunder delays or prevents Seller
from fulfilling its obligations to deliver the full quantities of Fine Papers to
all of its regular customers, including Buyer, [******].

E. TERMINATION FOR EXTENDED FORCE MAJEURE

If either party's ability to perform hereunder is reduced, delayed
or prevented, in whole or in part, for a period [******]as a result of an event
of Force Majeure, the other party shall have the right, at its sole option, to
terminate this Agreement in whole or in part, and any and all remaining
deliveries hereunder without further obligation, such option to be exercised, if
at all, by such other party giving written notice of termination to the
non-performing party. [******]

F. CONTINGENCY PLANS

1. Buyer and Seller acknowledge that although the
occurrence of any event of Force Majeure will be outside the control of either
party, certain types of Force Majeure are more likely to occur than others and
the adverse effects of such events can often

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be reduced or minimized through advance planning. Upon Buyer's request, Seller
shall prepare and submit for Buyer's review and comment a contingency plan to
address the possible occurrence of a strike or similar labor disturbance at
Seller's manufacturing facilities for Fine Papers and such other events of Force
Majeure as Buyer and Seller mutually agree. If, following Buyer's request,
Seller fails to develop reasonable contingency plans for each such event, or if
upon the occurrence of such an event, Seller fails to implement the applicable
contingency plan, any delay in or impediment to Seller's performance due to the
occurrence of such event of Force Majeure shall be deemed to have been within
the reasonable control of Seller and therefore not excused under this
Article[******]

From time to time during the term of this Agreement, Seller shall,
upon request of the OSC, review its strike contingency plan and any other of its
contingency plans developed pursuant to this Article to determine whether such
plans need revision. If requested by the OSC, Seller shall revise such
contingency plan in accordance with such review and shall notify the OSC of any
such revision.

2. If either party has reason to believe a strike or any
other event of Force Majeure is likely to occur at one or more of its facilities
and would interrupt the sale and purchase of Fine Papers contemplated hereunder,
the party likely to experience such event of Force Majeure shall notify the
other party, as soon as reasonably possible, of such likely occurrence and of
the expected duration of the period in which performance is likely to be delayed
or prevented. The party having reason to believe that it may experience a strike

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<PAGE> 58

affecting production shall advise the other party of any production changes that
are planned in anticipation of such strike.

XV. COMPLIANCE WITH LAWS; NONDISCRIMINATION; FINES

A. GENERAL

Each party shall comply with all foreign and United States (federal,
state and local) laws, rules, regulations and ordinances applicable to the
performance of their respective obligations under this Agreement.

Each party shall obtain and maintain all governmental licenses,
permits and approvals necessary for the operation of their facilities required
to perform their respective obligations under this Agreement. Seller shall
obtain all necessary licenses, permits and other clearances required to import
Fine Papers into the United States from the manufacturing facilities of its
non-domestic Affiliates. No later than the last day of January during each year,
each party, upon request of the other, shall provide the other a written
certification that their respective manufacturing facilities are being
maintained and operated in accordance with all applicable environmental laws,
rules, regulations, orders and permits.

B. NONDISCRIMINATION

Seller shall comply with all applicable provisions of Executive
Order 11246, as amended; ss. 503 of the Rehabilitation Act of 1973, as amended;
ss. 402 of the Vietnam Era Veterans Readjustment Assistance Act of 1974, as
amended; ss. 5152 of the Drug-Free Workplace Act of 1988; and the implementing
regulations set forth in 41 C.F.R. ss.ss. 60-1,

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<PAGE> 59

60-250 and 60-741 and 48 C.F.R. ss. 23.5. Each party shall comply with all
provisions of the Americans with Disabilities Act that are applicable to them.
The equal opportunity clause set forth in 41 C.F.R. ss. 60-1.4 and the
affirmative action clauses set forth in 41 C.F.R. ss. 60-250.4 and 41 C.F.R. ss.
60-741.4 are hereby incorporated by reference and made a part of this Agreement.
Seller certifies that it does not and will not maintain any facilities it
provides for its employees in a segregated manner and that it does not and will
not permit its employees to perform their services at any location under
Seller's control where segregated facilities are maintained. Seller further
agrees to submit and obtain such certifications of nonsegregated facilities as
are required by 41 C.F.R. ss. 60-1.8. The provisions of this paragraph shall
apply to Seller only to the extent that (a) such provisions are required of
Seller under existing law, (b) Seller is not otherwise exempt from said
provisions and (c) compliance with said provisions is consistent with and not
violative of 42 U.S.C. ss. 2000 et seq., 42 U.S.C. ss. 1981 et seq., or other
acts of Congress.

C. NO COLLUSION

Neither Seller nor any person or entity acting or purporting to act
on Seller's behalf shall enter into any combination, conspiracy, agreement or
other form of collusive arrangement with any person, corporation, partnership or
other entity that directly or indirectly lessens competition between potential
contractors, vendors or suppliers from whom goods or services may be obtained
that will be used by Seller in the performance of its obligations hereunder.
Furthermore, in performing its obligations hereunder, Seller shall submit to
Buyer such information as it may have respecting the occurrence of such
collusion among or between

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<PAGE> 60

potential contractors, vendors, suppliers or any other person.

D. FINES

Any fines or other penalties incurred by either party or its agents,
employees or subcontractors for noncompliance with any laws, rules, regulations
or ordinances with which compliance is required herein shall be the
responsibility of the non-complying party except that any non-compliance
relating to the payment of duties on imported materials shall not be reimbursed
by Buyer but shall be the sole responsibility of Seller. If fines, penalties or
legal costs are assessed against either party by any government authority or
court due to noncompliance by the other party or its agents, employees or
subcontractors with any of the laws, rules, regulations or ordinances with which
compliance is required herein, including but not limited to any laws, rules,
regulations or ordinances relating to the payment of duties on imported
materials, the noncomplying party shall indemnify and hold harmless the other
against any and all losses, liabilities, damages, claims and costs (including
reasonable attorneys' fees) suffered or incurred because of the failure of the
noncomplying party or its agents, employees or subcontractors to comply
therewith.

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<PAGE> 61

XVI. QUALITY ASSURANCE

Each Manufacturing Facility of Seller and its non-domestic
Affiliates used to produce Fine Papers to be incorporated into Cigarettes and
Cigarette components manufactured at the Plants must be qualified by Buyer as
capable of manufacturing Fine Papers that conform to the applicable
Specifications for each Grade of Fine Papers to be manufactured at that
facility. Buyer shall not unreasonably withhold any such qualification. In the
event that Buyer withholds its qualification of any Grade at any of Seller's or
its Affiliates' Manufacturing Facilities, Buyer shall give Seller written notice
of its specific reasons for so doing.

At Buyer's request, Seller shall develop and submit to Buyer for its
review a written plan for quality assurance and quality control at each such
Manufacturing Facility.

The parties acknowledge that they have undertaken to strive jointly
for managed continuous improvement in quality. To this end, Buyer and Seller
shall form a joint quality improvement team to identify opportunities to improve
the quality of Fine Papers produced by Seller.

XVII. INSPECTION

Buyer shall have reasonable access to Seller's Manufacturing
Facilities, as well as the facilities of Seller's suppliers or contractors who
are willing to permit such access, for the purpose of (a) auditing compliance
with Seller's quality control and quality assurance programs and (b) inspecting
Seller's manufacturing operations. Such inspections shall not relieve Seller of
its obligation to provide Fine Papers that conform in all respects with the
Specifications.

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<PAGE> 62

Buyer shall also be entitled to review all quality control and quality assurance
records, to inspect Fine Papers to be delivered to Buyer or Buyer's Contractors
during manufacture and to witness all tests. Seller shall seek from suppliers of
materials incorporated into Fine Papers to be delivered to Buyer or Buyer's
Contractors permission for Buyer to inspect such supplier's facilities upon
reasonable notice.

Seller shall have reasonable access to Buyer's manufacturing
facilities and the facilities of Buyer's Contractors who are willing to permit
such access to investigate Fine Papers quality complaints or claims and to
identify changes or refinements in Buyer's receiving and inspection systems and
its manufacturing processes that might enable Seller to improve the quality of
Fine Papers that it manufactures.

XVIII. CONFIDENTIALITY AND CONFIDENTIAL INFORMATION

A. CONFIDENTIAL INFORMATION OF THE PARTIES

The parties hereby acknowledge that all information disclosed to
each other pursuant to this Agreement, either orally, in writing or by
observation, including, but not limited to, the contents of this Agreement and
its Exhibits and any disclosure arising out of the implementation of Article
XVIII.B hereof (hereafter "Confidential Information") shall at all times, both
during and after the term of this Agreement, remain the exclusive property of
the party making the disclosure and that, in receiving such disclosure, the
other party shall not acquire any proprietary interest whatsoever therein. Each
party shall make use of the other

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party's Confidential Information only during the term of and solely to carry out
the purposes and intent of this Agreement.

B. NON-DISCLOSURE

Neither party shall directly or indirectly disclose, or permit
anyone on its behalf to disclose, except as may be required by law, any
Confidential Information disclosed to it by the other party, and each shall
carefully guard and keep secret all such Confidential Information of the other
with the same degree of care which it uses in protecting its own Confidential
Information. Confidential Information received by each party herein shall be
disclosed within such party's organization only on a need-to-know basis. Neither
party shall, at any time, allow anyone except the other party, or those
expressly authorized by such other party in writing, to have access to or use
any Confidential Information disclosed by the other party. Upon the termination
of this Agreement, however occurring, each party shall surrender to the other
all documents then in their possession including, but not limited to, plans,
Specifications, literature, samples and other tangible things relating to
Confidential Information disclosed by the other.

C. EXCEPTION TO NON-DISCLOSURE

Neither party shall be liable to the other for disclosure of
information:
1. which can be demonstrated to have been in the other
party's possession lawfully prior to receipt of the same from the party making
such disclosure; or

2. which was received from a third party having no
obligation to hold the same in confidence; or

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<PAGE> 64

3. which can be demonstrated to have been public prior
to the date of the disclosure; or

4. which thereafter becomes public through no fault of
the party receiving the disclosure.

XIX. OWNERSHIP OF DOCUMENTS; DEVELOPMENT PROGRAMS

All drawings, designs, blueprints, photographs, sketches, software
(including but not limited to each party's or its affiliates' CAD menus, cell
symbologies and user commands) and other materials prepared by or for the other
party or furnished to such other party in the course of this Agreement shall
belong to the disclosing party and shall not be used for, or revealed, divulged
or made known to, any person, firm or corporation without the prior written
consent of the disclosing party. Upon the disclosing party's request, the other
party shall return to the disclosing party all such materials, together with any
reproductions of such materials that the other party may have made, provided
that such other party may retain one copy of such materials for record purposes.

XX. RECORDS

Each party shall keep and maintain complete and accurate records,
books of account, reports and other data necessary for the proper administration
hereof ("Records"). Each party shall retain such Records in accordance with
their respective record retention programs and shall not dispose of such Records
without giving the other party at least 60 days prior written

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notice of its intent to discard such Records; provided, however, that no such
notice need be given unless such other party is entitled under the terms hereof
to inspect the Records in question. If the party to whom such notice is given so
requests, the party who gave the notice shall deliver the originals or copies of
such Records to the other party.

XXI. DISPUTE RESOLUTION

A. INTENT

It is the intention of the parties to make a good faith effort to
resolve, without resort to litigation, any dispute, controversy or claim arising
out of or relating to this Agreement or any breach, termination or invalidity
hereof (a "Dispute") according to the procedures set forth in this Article.

B. PROCEDURE

Buyer's and Seller's designated representatives shall attempt to
resolve all Disputes by negotiation. In the event of a Dispute that cannot be
resolved promptly by Buyer's and Seller's representatives, each party shall
immediately designate a senior executive with authority to resolve the Dispute.
The designated senior executives shall promptly begin discussions in an effort
to agree upon a resolution of the Dispute. If the senior executives do not agree
upon a resolution of the Dispute within 45 days of the referral to them, either
party may elect to abandon negotiations. If a Dispute cannot be resolved
pursuant to the procedures outlined in this paragraph, the parties may pursue
any remedy available to them at law or in equity.

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<PAGE> 66

XXII. INSURANCE

Seller shall maintain the following insurance:

1. Statutory workers' compensation coverage in
accordance with the law of the state where the facilities of Seller are used
to produce Fine Papers sold to Buyer hereunder.

2. Employer's liability with a limit of not less than
$1,000,000 per occurrence;

3. Comprehensive general liability, including coverage
for property damage, products liability/completed operations (for two years
after performance hereof) and contractual obligations, with a combined single
limit of $5,000,000 per occurrence; and

4. Comprehensive automobile liability with a combined
single limit of $1,000,000 per occurrence covering all vehicles of Seller
whether owned or nonowned.

Upon Buyer's request, Seller shall furnish certificates of insurance
in a form and manner reasonably acceptable to Buyer evidencing that the above
insurance is in effect and otherwise complies with the requirements of this
Article. Seller shall require its insurance carriers to give Buyer 30 days
written notice of any material change or alteration in or cancellation of any
policy of insurance required hereunder. Seller shall require its comprehensive
general liability carrier and its comprehensive automobile liability carrier to
name Buyer as an additional insured on those policies and to include on such
policies endorsements indicating that such coverage is intended to be primary to
any other coverage

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<PAGE> 67

Buyer may maintain in connection with liability Buyer may incur for which Buyer
may be entitled to coverage under such policy.

XXIII. CANCELLATION FOR DEFAULT

A. DEFAULT BY SELLER

1. If, during the term of this Agreement, one or more
of the following events (an "Event of Default") shall occur, Seller shall be
deemed in default:

a. The rejection rate for any Category of Fine
Papers delivered by Seller shall exceed either [******]

b. Seller shall, for any reason other than (a)
delays to the extent caused by Buyer or Force Majeure, where such delays are not
the result of a breach by Seller of its obligations hereunder, or (b) material
breach by Buyer of its obligations hereunder, fail to meet [******]specified in
Buyer's monthly orders issued in accordance with Article V hereof in [******];

c. Seller shall default in the payment of any
sum which it acknowledges to be due and payable to Buyer hereunder and such
default shall continue for [******]after receipt of written demand from Buyer
for payment of such sum;

d. Any representation made by Seller herein or
in any certificate, statement or document required to be made by Seller pursuant
to the terms of this Agreement shall prove to be false in any material respect
as of the date on which it was made, and any material adverse consequences to
Buyer directly caused thereby shall not have been remedied

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<PAGE> 68

within 30 days after written notice thereof shall have been given to Seller by
Buyer; provided, however, that if the material adverse consequences cannot
reasonably be remedied in a 30-day period, and if Seller shall have commenced a
remedy based on a plan of remedy and a schedule acceptable to Buyer, the 30-day
period shall be extended consistent with such plan of remedy;

e. Seller shall (a) file a petition commencing
a voluntary case under the United States Bankruptcy Code, (b) file a petition
for liquidation, reorganization or an arrangement pursuant to any other federal
or state bankruptcy law, (c) be adjudicated a debtor or be declared bankrupt or
insolvent under any federal or state law relating to bankruptcy, insolvency,
winding-up or adjustment of debts, as now or hereafter in effect, (d) make an
assignment for the benefit of creditors, (e) admit in writing its inability to
pay its debts as they become due; or if a petition commencing an involuntary
case under the United States Bankruptcy Code or an answer proposing the
adjudication of Seller as a debtor or a bankrupt or proposing its liquidation or
reorganization pursuant to the United States Bankruptcy Code or any other
federal or state bankruptcy law shall be filed in any court and Seller shall
consent to or acquiesce in the filing thereof, if such petition or answer shall
not be discharged or denied within 60 days after the filing thereof;

f. A custodian, receiver, trustee or liquidator
of Seller, or of all or substantially all of the assets of Seller shall be
appointed in any proceeding brought against Seller and shall not be discharged
within 60 days after such appointment, or if Seller shall consent to or
acquiesce in such appointment; or

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<PAGE> 69

g. Seller shall default in any material respect
in the observance or performance of any covenant, condition or obligation of
Seller contained herein (other than as provided in paragraphs a, b, c and d of
this Article XXIII.A.1, and such default continues for 30 days after written
notice to Seller specifying the default and demanding that the same be remedied;
provided, however, that if the default cannot reasonably be remedied in a 30-day
period and if Seller shall have commenced a remedy based on a plan of remedy and
a schedule acceptable to Buyer, the 30-day period shall be extended consistent
with such plan of remedy.

2. In the event of a Default by Seller, Buyer, at its
option, may (a) cancel this Agreement by providing written notice to Seller,
such cancellation to be effective as of the date set forth in such notice but
not earlier than 15 days after such notice is received by Seller, and in any
event, (b) subject to the provisions of Article XII, pursue such remedies as may
be available at law or equity as a consequence of such default.

B. DEFAULT BY BUYER

1. If during the term of this Agreement, one or more
of the following events (an "Event of Default") shall occur, Buyer shall be
deemed in Default:

a. Buyer shall fail or refuse to pay Seller's
invoice as required by Article IX hereof and such failure or refusal shall
continue for 10 business days after receipt of written demand from Seller;

b. Buyer fails or refuses to accept delivery of
any Direct Purchase of Fine Papers as required by this Agreement, and such
failure or refusal has not been

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<PAGE> 70

remedied by Buyer within 30 days after written notice thereof shall have been
given by Seller to Buyer;

c. Buyer shall (a) file a petition commencing a
voluntary case under the United States Bankruptcy Code, (b) file a petition for
liquidation, reorganization, or for an arrangement pursuant to any other federal
or state bankruptcy law, (c) be adjudicated a debtor or be declared bankrupt or
insolvent under the United States Bankruptcy Code, or any other federal or state
law as now or hereafter in effect relating to bankruptcy, insolvency, winding-up
or adjustment of debts, (d) make an assignment for the benefit of creditors or
(e) admit in writing its inability to pay its debts as they become due; or if a
petition commencing an involuntary case under the United States Bankruptcy Code
or an answer proposing its liquidation or reorganization pursuant to the United
States Bankruptcy Code or any other federal or state bankruptcy law shall be
filed in any court and Buyer shall consent to or acquiesce in the filing thereof
or such petition or answer shall not be discharged or denied within 60 days
after the filing thereof;

d. A custodian, receiver, trustee or liquidator
of Buyer or of all or substantially all of the assets of Buyer, shall be
appointed in any proceeding brought against Buyer and shall not be discharged
within 60 days after such appointment, or if Buyer shall consent to or acquiesce
in such appointment; or

e. Buyer shall default in any material respect
in the observance or performance of any covenant, condition or obligation of
Buyer contained herein, (other than as provided in paragraphs a. and b. of this
Article XXIII.B.1 and such default continues for 30

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<PAGE> 71

days after written notice to Buyer specifying the default and demanding that the
same be remedied; provided, however, that if the default cannot reasonably be
remedied in a 30-day period, and if Buyer shall have commenced a remedy based on
a plan of remedy and a schedule acceptable to Seller, the 30-day period shall be
extended consistent with such plan of remedy.

2. In the event of a Default by Buyer, Seller may (a)
cancel this Agreement by providing written notice to Buyer, such cancellation to
be effective as of the date set forth in such notice but not earlier than 15
days after such notice is received by Buyer, and in any event, (b) subject to
the provisions of Article XII, to pursue such remedies as may be available at
law or equity as a consequence of such default.

XXIV. INDEMNITY

A. INDEMNITY BY BUYER

Buyer shall indemnify and hold Seller harmless from and against any
and all claims, actions, causes of action, losses, liabilities, damages
(including punitive damages), costs and expenses, including reasonable
attorneys' fees, arising out of a claim or claims for [******] except that this
indemnity shall not apply to any actions, causes of action, liabilities, damages
(including punitive damages), costs and expenses, including reasonable
attorneys' fees, caused solely and directly by [******]or otherwise as
authorized by Buyer. Buyer's indemnity obligation pursuant to the preceding
sentence shall be conditioned upon (a) Seller providing Buyer timely notice of
such claim, suit or proceeding ("Claim"), (b) Seller not settling,

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<PAGE> 72

releasing or otherwise disposing of such Claim without Buyer's written consent
and (c) Buyer having exclusive control over the defense of any such Claim. Buyer
shall notify Seller of important developments affecting the defense of any such
Claim and shall conduct or otherwise provide such defense in a manner consistent
with Seller's best interests. Prior to the settlement, release or other
disposition ("Disposition") of any such Claim as it relates to Seller, Buyer
shall give written notice to Seller of the proposed terms and conditions of the
proposed Disposition. Within 10 days of Buyer's notice, Seller shall either give
written notice to Buyer of its consent to the proposed Disposition or its
objection to the proposed Disposition. If Seller objects to the proposed
Disposition of such Claim, Buyer shall not settle, release, or otherwise dispose
of such Claim as it relates to Seller, but shall withdraw from and promptly
surrender to Seller the defense of such Claim as it relates to Seller. Upon such
withdrawal, Buyer's obligation to Seller pursuant to this Article XXIV.A shall
cease.

B. INDEMNITY BY SELLER

Seller shall indemnify and hold Buyer harmless from and against any
and all claims, actions, causes of action, losses, liabilities, damages
(including punitive damages), costs and expenses, including reasonable
attorneys' fees, arising out of a claim or claims for [******]or otherwise as
authorized by Buyer. Seller's indemnity obligation pursuant to the preceding
sentence shall be conditioned upon (a) Buyer providing Seller timely notice of
such claim, suit or proceeding ("Claim"), (b) Buyer not settling, releasing or
otherwise disposing of such Claim without Seller's written consent and (c)
Seller having exclusive control of the defense of

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<PAGE> 73

any such Claim. Seller shall notify Buyer of important developments affecting
the defense of any such Claim and shall conduct or otherwise provide such
defense in a manner consistent with Buyer's best interests. Prior to the
settlement, release or other disposition ("Disposition") of any such Claim as it
relates to Buyer, Seller shall give written notice to Buyer of the proposed
terms and conditions of the proposed Disposition. Within 10 days of Seller's
notice, Buyer shall either give written notice to Seller of its consent to the
proposed Disposition or its objection to the proposed Disposition. If Buyer
objects to the proposed Disposition of such Claim, Seller shall not settle,
release, or otherwise dispose of such Claim as it relates to Buyer, but shall
withdraw from and promptly surrender to Buyer the defense of such Claim as it
relates to Buyer. Upon such withdrawal, Seller's obligation to Buyer pursuant to
this Article XXIV.B shall cease.

XXV. NOTICES

All certificates or notices required hereunder shall be given in
writing and addressed or delivered to the representative(s) specified in this
Agreement. Any notice or communication required hereunder shall be given by
hand; courier service; registered, certified, express or first class mail
(postage prepaid); TWX, telex or facsimile transmission. The date of receipt of
any notice sent by mail (except for confirmatory notices) shall be the date the
notice shall be deemed to have been given.

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Notices required hereunder shall be directed to the following
individuals:

Notices to Seller:

President, U.S. Operations

100 North Point Center East
Suite 600
Alpharetta, Georgia 30022

Copy to: Director of Sales
General Counsel

Notices to Buyer:

Buyer's Manager-Cigarette Components,
Direct Materials Purchasing
Philip Morris U.S.A.
P. O. Box 26603
Richmond, Virginia 23261

Copy to: Director of Materials Purchasing

Buyer or Seller may change the representative(s) designated to receive notice
hereunder by written notice to the other party.

XXVI. GOVERNING LAW

The statutes and judicial interpretations of the Commonwealth of
Virginia shall govern this Agreement without regard to conflict of law
principles.

XXVII. NONWAIVER

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The failure of either party to demand strict performance of the
terms hereof or to exercise any right conferred hereby shall not be construed as
a waiver or relinquishment of its right to assert or rely on any such term or
right in the future.

XXVIII. SEVERABILITY

The remainder hereof shall not be voided or otherwise affected by
the invalidity of one or more of the terms herein.

XXIX. ASSIGNMENT

Neither party shall assign or transfer any of its rights or
obligations hereunder without the prior written consent of the other party,
which consent shall not be unreasonably withheld.

XXX. SURVIVAL

All warranties, limitations of liability, indemnities and
confidentiality rights and obligations provided herein shall survive the
cancellation, expiration or termination hereof.

XXXI. AMENDMENTS

No amendment, modification or waiver of any term hereof shall be
effective unless set forth in a writing signed by Buyer and Seller.

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XXXII. INDEPENDENT CONTRACTOR

Seller is an independent contractor for all purposes hereof. This
Agreement is a contract for the sale of goods and the relationship between the
parties is that of buyer and seller, and is not intended to be one of hiring
under the provisions of any workers' compensation or other laws and shall not be
so construed. Nothing herein shall be deemed to constitute a partnership or
joint venture between the parties hereto.

XXXIII. HEADINGS

Headings contained herein are inserted for convenience and shall
have no effect on the interpretation or construction hereof.

XXXIV. PUBLICITY

Except as required by Law (with prior written notice to the
non-disclosing party), neither party shall release any information relative to
this Agreement for publication, advertising or any other purpose without the
other party's prior written consent.

XXXV. ENTIRE AGREEMENT

This Agreement constitutes the entire agreement of the parties with
respect to its subject matter and supersedes any prior or contemporaneous
agreement or understanding between the parties.

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IN WITNESS WHEREOF, the parties have executed this Agreement by
their authorized representatives, effective as of the date set forth in Article
III.A. hereof.

PHILIP MORRIS INCORPORATED
By
Name Henry P. Long, Jr.
Title Director of Purchasing

SCHWEITZER-MAUDUIT INTERNATIONAL, INC.
By
Name N. Dan Whitfield
Title President -- U.S. Operations

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EXHIBIT A
PHILIP MORRIS/SCHWEITZER-MAUDUIT
1998 STRATEGIC SUPPLY AGREEMENT
BASE YEAR PRICING

<TABLE>
<CAPTION>
SWM SWM BASE PRICE
SALES GRADE
PRODUCT CODE CODE

[******] [******] [******] [******] [******]
</TABLE>

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EXHIBIT B

METHOD FOR CONVERSION FROM BOBBINS OF FINISHED TIPPING PAPER TO POUNDS AND FROM
NUMBER OF ARTICLES (ITEMS) TO STANDARD BOBBINS OF CIGARETTE OR PLUG WRAP PAPER.

1. Determine the quantity of Tipping Paper in pounds included
in a number of Bobbins of Finished Tipping Paper as follows:

a) for each size of Bobbin made using a Grade of
Tipping Paper, multiply the length in meters of such Bobbin by the Bobbin width
in meters to determine the area of each such Bobbin;

b) multiply the area for each size made using a Grade
of Tipping Paper by the target basis weight of the Grade in grams per square
meter and divide the products so obtained by [*****]to determine the weight of
each different size Bobbin in pounds;

c) multiply the Bobbin weight obtained above for each
size of Bobbin made using a Grade of Tipping Paper by the number of such Bobbins
purchased by the Buyer during the specified period and add the several products
so obtained to determine the pounds of Tipping Paper of each Grade.

2. Determine the quantity of Cigarette Paper or Plug Wrap
Paper in Standard Bobbins included in a number of articles as follows:

a) for each article made using a Grade of Fine Paper,
multiply the length of paper in meters incorporated into such article by the
width of the paper in meters incorporated into the article to determine the area
of paper incorporated into the article;

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b) multiply the area of paper incorporated into each
article using a Grade of Fine Paper by the number of such articles purchased by
or delivered to the Buyer in the specified period and sum the several products
so obtained for each Grade;

c) for each Grade divide the sum obtained above by
[*****] to determine the number of Standard Bobbins of such Grade purchased by
the Buyer during the specified period.

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EXHIBIT C

PRECISION OF CALCULATION

INPUT DATA

<TABLE>
<CAPTION>
QUANTITY UNIT PRECISION
- -------- ---- ---------

<S> <C> <C>
Bobbin Length meter Nearest [******]
Bobbin Width millimeter Nearest [******]
[******] Invoice Price
Cigarette $ per bobbin Nearest [******]
Plug Wrap $ per bobbin Nearest [******]
Tipping Paper $ per CWT Nearest [******]
Volumes:
Cigarette Standard Bobbin Nearest [******]
Plug Wrap Standard Bobbin Nearest [******]
Tipping Paper pound Nearest [******]
Pulp Price $ per metric ton Nearest [******]
Net Book Value dollars Nearest [******]
Unit Grade Cost
Cigarette $ per Standard Bobbin Minimum nearest
[******]

Plug Wrap $ per Standard Bobbin Minimum nearest
[******]

Tipping Paper $ per pound Minimum nearest
[******]

Standard Grade Cost
Cigarette $ per Standard Bobbin Minimum nearest
[******]
Plug Wrap $ per Standard Bobbin Minimum nearest
[******]
Tipping Paper $ per pound Minimum nearest
[******]
</TABLE>

[******] Dimensionless Minimum nearest
[******]
CALCULATED DATA

<TABLE>
<CAPTION>
QUANTITY PRECISION
- -------- ---------
<S> <C>
All calculated values
Minimum [******][******]
</TABLE>

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COMPARATIVE VALUES

<TABLE>
<CAPTION>
QUANTITY UNIT PRECISION
- -------- ---- ---------
<S> <C> <C>
Percentage Change 1/ percent Nearest [******]
</TABLE>

OUTPUT DATA

<TABLE>
<CAPTION>
QUANTITY UNIT PRECISION
- -------- ---- ---------
<S> <C> <C>
Prices
Cigarette $ per Standard Bobbin Minimum [******]
Plug Wrap $ per Standard Bobbin Minimum [******]
Tipping Paper $ per pound Minimum [******]

Invoice Prices
Cigarette $ per bobbin Nearest [******]
Plug Wrap $ per bobbin Nearest [******]
Tipping Paper $ per CWT Nearest [******]

Carry Forward percent Nearest [******]

</TABLE>

- --------
1/ To use in comparisons for decision making.

<PAGE> 1
EXHIBIT 10.2

TECHNOLOGY OWNERSHIP, TECHNICAL ASSISTANCE AND TECHNOLOGY
LICENSE AGREEMENT

This Agreement, effective as of April 1, 1998, is by and among Philip
Morris Incorporated (PMUSA), Philip Morris Products Inc. (PMPI) and
Schweitzer-Mauduit International Inc. (SWM), for itself and as agent for and on
behalf of the SWM Affiliates.

WHEREAS, pursuant to the Joint Development Agreement PMUSA and SWM
undertook to develop the [******] Technology;

WHEREAS, pursuant to the Implementation Agreement PMUSA and SWM have
undertaken to implement the [******] Technology at the Mill for use in the
manufacture of [******];

WHEREAS, the Parties desire to set forth their ownership rights in,
and respective rights to exploit, the [******] Technology and the [******];

[******];

WHEREAS, SWM is willing to provide PMUSA and PMPI with the [******] to
assist the PM Affiliates in the exploitation of the [******] Technology and the
[******] and to provide certain Technical Assistance to PMUSA, PMPI and Third
Party Licensees of [******] Technology and the [******] in accordance with the
terms and conditions set forth herein, if and as requested by PMUSA or PMPI and
in return for certain compensation as described herein; and

WHEREAS, PMUSA and PMPI are willing to grant SWM certain rights to
exploit the [******] Technology and the [******] in accordance with the terms
and conditions set forth in this Agreement, and SWM is willing to accept and
exercise such rights in accordance with and subject to the limitations of the
terms and conditions set forth in this Agreement.

NOW THEREFORE, in consideration of the foregoing recitals, and for
other good and valuable consideration, the receipt and sufficiency of which are
hereby acknowledged, the Parties agree as follows:

1. Definitions. The following terms shall have the specified meanings
when used in this Agreement.

(a) [******]

(b) [******]

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(c) Confidential Information: means (i) all information
(including documents, data, samples, schematics and other tangibles or
intangibles) that relates to the [******] Technology or any [******] Technology
development efforts between the Parties under the JDA, the Implementation
Agreement or related PMUSA purchase orders, (ii) any information related to SWM
paper manufacturing facilities or processes, (iii) any information related to
the business plans, production facilities or technology of any PM Affiliate,
including but not limited to all production planning information, and (iv) any
other information disclosed by one Party to another pursuant to this Agreement,
either orally, in writing or by observation, including but not limited to, the
contents of this Agreement and the JDA.

(d) Fine Papers: Cigarette Paper, plug wrap and tipping
paper to be used in the manufacture of cigarettes or cigarette components.

(e) Full Commercial Production Date: means the last day
of the sixth full calendar month following the date on which [******] at the
Mill that [******] pursuant to the Implementation Agreement [******].

(f) Implementation Agreement: means that certain addendum
to the SSA between PMUSA and SWM, dated April 1, 1998, respecting the [******]
and respecting the sale and purchase of [******] by SWM and PMUSA,
respectively.

(g) Joint Development Agreement or JDA: means that
certain agreement between PMUSA and SWM, [******], respecting
the development of equipment, processes and know-how required to manufacture
[******].

(h) Mill: means [******].

(i) [******] the Joint Development Agreement, the
Implementation Agreement or PMUSA purchase orders issued to SWM for [******],
including but not limited to information contained in the [******]. [******]
Technology does not include technology, expertise and know-how that (i) was
possessed by SWM as of [******] or (ii) was developed thereafter by
SWM other than pursuant to the JDA, Implementation Agreement, or PMUSA purchase
orders issued to SWM for [******] development (collectively "SWM Know-how") but
does include any new technology, expertise and know-how developed from SWM
Know-how that have applications in the manufacture of [******] or that may have
applications in the manufacture of other products other than Fine Papers.

(j) Other Cigarette Manufacturers: means cigarette
manufacturers other than the PM Affiliates and PM Contract Manufacturers.

(k) Parties: means PMUSA, PMPI and SWM.

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(l) Party: means PMUSA, PMPI or SWM.

(m) PMPI: means Philip Morris Products Inc., a Virginia
corporation.

(n) PMUSA: means Philip Morris Incorporated, a Virginia
corporation.

(o) PMI: means Philip Morris International, Inc. a
Delaware Corporation and the parent company of PMPI.

(p) PM Affiliates: means the PMUSA Affiliates and the PMI
Affiliates.

(q) PMI Affiliates: means PMI and those entities, whether
presently existing or as may be created in the future, that are or become owned
by PMI or that PMI now or in the future controls, directly or indirectly,
individually or jointly, through the power to vote more than thirty percent of
the voting stock or voting rights of such entities. An entity that is today or
that may become in the future a PMI Affiliate shall cease to be a PMI Affiliate
when it ceases to be owned or controlled by PMI.

(r) PMUSA Affiliates: means PMUSA and those entities,
whether presently existing or as may be created in the future, that are or
become owned by PMUSA or that PMUSA now or in the future controls, directly or
indirectly, individually or jointly, through the power to vote more than thirty
percent of the voting stock or voting rights of such entities. An entity that
is today or that may become in the future a PMUSA Affiliate shall cease to be a
PMUSA Affiliate when it ceases to be owned or controlled by PMUSA.

(s) PM Brand: means any of those brands of cigarettes
that are subject to trademarks owned by or licensed to a PM Affiliate.

(t) PM Contract Manufacturers: means persons or entities
taking delivery of [******] for incorporation in cigarettes manufactured by
them under contract for a PM Affiliate or pursuant to a licensee manufacturing
agreement with a PM Affiliate covering a PM Brand.

(u) [******]

(v) SSA: means that certain amended and restated
agreement between SWM and PMUSA, effective April 1, 1998, under which PMUSA has
agreed to purchase, accept and pay for, and SWM has agreed to manufacture, sell
and deliver Fine Papers.

(w) [******]

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(x) SWM: means Schweitzer-Mauduit International Inc., a
Delaware corporation.

(y) SWM Affiliates: means those entities, whether
presently existing or as may be created in the future, that are or become owned
by SWM or that SWM now or in the future controls, directly or indirectly,
individually or jointly, through the power to vote more than fifty percent of
the voting stock or voting rights of such entities; provided, however, as used
herein, the term shall not include any entity engaged in the manufacture or
sale of cigarettes, nor shall it include any entity that shall acquire, by
purchase or otherwise, the right to vote or control the vote of any or all of
the voting stock of SWM. An entity that is today or that may become in the
future a SWM Affiliate shall cease to be a SWM Affiliate when it ceases to be
owned or controlled by SWM. Nothing contained herein shall prevent SWM from
restructuring its businesses or result in the loss of any rights hereunder
following any restructuring; provided, that the composition of the majority of
the SWM Board of Directors preceding any restructuring shall be the same as the
composition of the majority of the Board of Directors of any entity that
becomes the ultimate parent entity of the SWM group of businesses after such
restructuring.

(z) SWM Patents: means issued patents and patents for
which the applications are filed, including any later filed continuation or
divisional applications thereof, throughout the world, of whatever type, (i)
owned or controlled by SWM or SWM Affiliates and (ii) related to (a) the
manufacture, utilization or sale of [******], (b) the manufacture, utilization
or sale of products incorporating [******] or (c) the properties, structures or
raw and finished components of [******] or cigarettes incorporating [******];
provided, however, the SWM Patents shall be limited to (i) those patents
already issued or for which the applications are filed, including any later
filed continuation or divisional applications thereof, as of the Full
Commercial Production Date and (ii) patents issued to SWM or patents for which
the applications are filed, including any later filed continuation or
divisional applications thereof, pursuant to applications filed pursuant to
Section 3(d) below; and provided further that if the Implementation Agreement
shall be terminated prior to the Full Commercial Production Date, by either
Party, the SWM Patents will be limited to those patents described above that
are already issued or for which applications are filed, including any later
filed continuation or divisional applications thereof, as of the effective date
of such termination.

(aa) [******].

(ab) [******].

(ac) Third Party Licensees: means Fine Papers suppliers,
other than SWM and the SWM Affiliates, that may be licensed by PMUSA or PMPI
pursuant to Section 5(b) hereof to exploit the [******] and the [******]
Technology through the manufacture and sale of [******].

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2. Relationship to the Joint Development Agreement and the
Implementation Agreement. The Joint Development Agreement addressed the
[******] resulting from their efforts to develop the [******] [******]
necessary to manufacture [******] on a commercial basis. The Implementation
Agreement addresses the agreement of PMUSA and SWM to implement that [******]
[******] at the Mill. This Agreement replaces the provisions of the Joint
Development Agreement relating to [******] arising from their joint and
individual development efforts related to the manufacture of [******] during
the period beginning [******] and continuing through the Full
Commercial Production Date. Specifically, the provisions of the Joint
Development Agreement relating to the [******].

3. Ownership of the [******] Technology and Patents.

(a) Technology and Patents Pre-dating the Joint
Development Agreement: PMUSA and SWM each shall retain ownership of their
respective patents and technology, expertise and know-how [******].

(b) [******] Technology: PMUSA and PMPI are the sole
owners of the [******] Technology and, subject to Section 3(d) below, have the
exclusive right to file patent applications in the United States and elsewhere
on any [******] Technology and on any applications thereof or products derived
therefrom. This right includes the right to file patent applications respecting
applications of [******] Technology and products derived therefrom that are
unrelated to [******]. To the extent PMUSA or PMPI may be granted patents on
any [******] Technology, applications thereof or products derived therefrom,
PMUSA and PMPI shall have the right (i) to exploit such patents and to practice
and license the rights thereunder and (ii) to license other PM Affiliates to
exploit such patents and to practice the rights thereunder. [******]. PMUSA's
and PMPI's ownership of the [******] Technology shall not create any right,
implied or otherwise, for any PM Affiliate or licensee to require the
disclosure by SWM to any PM Affiliate or licensee of any document or
information respecting the manufacture of [******], including [******], that
has not already been disclosed to PMUSA or PMPI, or that is not disclosed to
PMUSA or PMPI in the future, voluntarily or as required by, or in the course of
performance of, any agreement between SWM and PMUSA or PMPI.

(c) PMUSA and PMPI Patent Applications: If PMUSA or PMPI
elects to exercise its option to file a patent application respecting any
patentable [******] Technology, applications thereof or products derived
therefrom, SWM shall cause all SWM employees determined to be inventors to
assign their right, title and interest in such technology to PMUSA or PMPI and
SWM shall assist in prosecuting the patent application by furnishing
information or data as reasonably requested. PMUSA or PMPI, as the case may be,
shall reimburse SWM for reasonable costs incurred in providing such requested
assistance. SWM

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shall have the right to review any such patent application prior to filing and
to make recommendations with respect thereto.

(d) SWM Patent Applications: If PMUSA and PMPI both
decline to exercise their option with regard to the filing of a patent
application respecting any patentable [******] Technology, then SWM may, at
SWM's expense, file a patent application on such technology and SWM shall own
any resulting patent rights; provided, however, SWM's right to file patent
applications respecting [******] Technology [******]. In such event, PMUSA and
PMPI shall require all PMUSA and PMPI employees determined to be inventors to
assign their right, title and interest in said technology to SWM and PMUSA
shall, at SWM's expense, assist in prosecuting the patent application by
furnishing information or data as reasonably requested. PMUSA shall have the
right to review any such SWM patent application prior to filing and to make
recommendations with respect thereto. [******].

4. Preparation and Updating of [******].

(a) Within [******] days after the [******] (as such term
is defined in the Implementation Agreement), SWM shall prepare and submit to
PMUSA those [******] in Attachment A hereto that are identified with the
notation "(SWM)". Within [******] days after the [******] (as such term is
defined in the Implementation Agreement), SWM shall update those portions of
the [******] at the Mill.

(b) SWM's initial delivery of those [******] to be
prepared by SWM, and PMUSA's acceptance thereof, not to be unreasonably
withheld, shall be a condition of SWM's rights to any payments to be made to
SWM by PMUSA or PMPI pursuant to Article 8 hereof.

(c) PMUSA and PMPI shall have the right to disclose the
[******] to Third Party Licensees, provided such licensees enter into
confidentiality agreements comparable to those in Article 11 hereof respecting
the use and further disclosure of the information provided in such [******].
PMUSA or PMPI, as the case may be, shall take reasonable measures to enforce
any breach of any such confidentiality agreement by one of its Third Party
Licensees that shall be brought to its attention.

(d) The [******] shall contain a legend stating that SWM
does not warrant to any Third Party Licensee the accuracy of the information in
such documents or in any way guarantee that a recipient of the [******] will be
able to [******].

5. (a) The PM Affiliates' Right to Manufacture and PMUSA's
and PMPI's Right to License the Manufacture of [******].

(b) The PM Affiliates shall have the right, without
limitation, to exploit the [******] and the [******] Technology through the
manufacture or sale of [******] for

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incorporation into cigarettes manufactured (i) by the PM Affiliates and PM
Contract Manufacturers or (ii) by Other Cigarette Manufacturers. Nothing herein
shall be interpreted as a grant by SWM to any or all of the PM Affiliates of
any license under the SWM Patents to exploit those patents through the
manufacture or sale of [******] or cigarettes incorporating [******]
manufactured by a PM Affiliate or as a right granted by SWM for any PM
Affiliate [******].

(c) PMUSA and PMPI shall have the right, without
limitation, to license Fine Papers suppliers to exploit the [******] and the
[******] Technology through the manufacture and sale of [******].

(d) PMUSA and PMPI shall have the right to grant licenses
to Other Cigarette Manufacturers to exploit the [******] and the [******]
Technology through the manufacture and sale of cigarettes incorporating
[******].

6. [******].

[******].

(d) Upon request by PMUSA or PMPI, SWM [******].

(e) SWM acknowledges and agrees that [******].

(f) SWM covenants that it will not assign or otherwise
transfer, and will not permit or suffer the SWM Affiliates to assign or
otherwise transfer, the SWM Patents to any person or entity unless such
assignee or transferee (i) [******] shall provide covenants for the benefit of
the PM Affiliates, Third Party Licensees and Other Cigarette Manufacturers that
are substantially equivalent to those provided by SWM in Section 6(a) and
Section 6(b) and (ii) shall agree to be bound by the undertakings and
acknowledgements made by SWM in Section 6(d) and Section 6(e) hereof.

(g) PMUSA and PMPI each covenants that it will not assign
or otherwise transfer any of the [******] to any person or entity unless the
document under which such assignment or transfer is made contains a requirement
that the assignee or transferee agrees to be bound by covenants for the benefit
of SWM that are substantially equivalent to those made in Section 8(a) hereof
and shall agree to be bound by the undertakings made by PMUSA and PMPI in
Article 8 hereof; provided, however, that the covenant made in this Section
6(g) shall not apply to any assignment or transfer of any or all of the
[******] between PMUSA and PMPI or to any assignment by PMUSA to PMPI of the
right to file patent applications respecting the [******] Technology as
provided in Article 3. Nothing in this Section 6(g) is intended to impose any
limitation or restriction on PMUSA and PMPI's right to sublicense the right to
exploit the [******] Technology and [******] to any other PM Affiliate.

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7. [******].
[******]

8. SWM Compensation for Role in Developing Technology.

(a) PMUSA and PMPI
[******].
[******]
[******]
[******]
[******]
[******].
[******].

9. SWM Licenses.

(a) Rights Granted to SWM:

(i) PMUSA and PMPI each hereby grant to SWM,
upon the terms and subject to the conditions and restrictions of this
Agreement, [******]

(ii) PMUSA and PMPI each hereby grant to SWM,
upon the terms and subject to the conditions and restrictions of this
Agreement, [******].

(iii) PMUSA and PMPI hereby grant to SWM [******].

(iv) PMUSA and PMPI each hereby grant to SWM
[******].

(b) Conditions of Licenses: The rights granted to SWM
under Section 9(a)(i) through Section 9(a)(iii) above shall be subject to the
following:

(i) SWM shall not manufacture [******] for, or
sell or deliver [******] to, persons or entities other than a PM Affiliate or a
PM Contract Manufacturer that have not received a license from PMUSA or PMPI
authorizing such person or entity to make and/or sell cigarettes incorporating
[******]. Before first accepting an order for [******] from any such person or
entity, SWM shall request and receive confirmation from PMUSA or PMPI that such
person or entity is licensed to manufacture and/or sell cigarettes
incorporating [******];

(ii) Contemporaneous with every delivery of
[******] placed by, on behalf of, or for the benefit of a cigarette
manufacturer other than a PM Affiliate or a PM Contract Manufacturer, SWM shall
provide notice in a form reasonably acceptable to PM and PMPI to such person or
entity that by taking delivery of [******] from SWM no right or license to the
[******] or the [******] Technology, express or implied, shall be gained,
granted or transferred with regard to the manufacture of cigarettes
incorporating such [******]. In addition, prior to acceptance of the first such
order, SWM shall require that the person or entity taking delivery of such
[******] complete and return a form, approved by PMUSA and PMPI, that evidences
acknowledgement of such notice and limitation. SWM

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shall forward copies of all such acknowledgement forms to PMUSA and PMPI on a
quarterly basis; and

(iii) SWM shall provide PMUSA and PMPI copies of
all sublicenses granted pursuant to Section 9(a)(iv).

SWM shall thereafter be excused from the requirements of Section 9(b)(i) and
Section 9(b)(ii) above if any Third Party Licensee is licensed by PMUSA or PMPI
to manufacture [******] pursuant to a license that does not include
requirements substantially equivalent to those contained in Section 9(b)(i) and
Section 9(b)(ii) above.

(c) Conditions of Sublicenses: Any sublicense granted by
SWM pursuant to Section 9(a)(iv) shall be subject to the following:

[******]
[******]
[******]
[******]
[******]

[******].
[******].

(d) The grant of licenses to the [******] Technology and
the [******] contained herein shall not create any right, implied or otherwise,
for SWM to require the disclosure by PMUSA or PMPI to SWM or any SWM Affiliate
of any document or information respecting the manufacture of [******] that has
not already been disclosed to SWM, or that is not disclosed to SWM in the
future, voluntarily or as required by, or in the course of performance of, any
agreement between SWM and PMUSA.

10. Protection of Technology and Patents.

(a) SWM shall (i) give PMUSA and PMPI prompt notice in
writing of any infringement or possible infringement of the [******] Technology
or the [******] that may come to its attention; (ii) assign back to PMUSA and
PMPI any right SWM may acquire through use or otherwise in or to the [******]
Technology or the [******]; (iii) upon termination of this Agreement other than
upon expiration, cease to practice the [******]; and (iv) render reasonable
assistance, at PMUSA's or PMPI's request and expense, to aid PMUSA or PMPI to
stop any infringement of the [******] and the [******] Technology or to
otherwise protect the [******] and [******] Technology.

(b) SWM shall not acquire nor shall it at any time claim
any right, title or interest in or to the [******] Technology or the [******],
other than the right to use the same as set forth herein and subject to all the
terms and conditions hereof. SWM shall not, and shall cause the SWM Affiliates
not to, at any time do or permit to be done any act [******] Technology or the
[******] Technology or the [******]; provided, however, nothing herein shall
prevent SWM from pursuing development and commercialization of [******]

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manufactured utilizing technology other than [******] Technology. PMUSA or PMPI
may, in its sole discretion and at its expense, take such action as may be
necessary or desirable to protect or defend the value of the [******]
Technology or the [******].

(c) PMUSA and PMPI will maintain the [******] and
satisfying any other requirements necessary [******] provided, however, neither
PMUSA nor PMPI [******] PMUSA or PMPI, as the case may be [******] PMUSA or
PMPI, as the case may be [******].

11. Confidentiality.

(a) Non-Disclosure:

PMUSA, PMPI and SWM each shall make use of the Confidential
Information of the other Parties solely to carry out the purposes and intent of
this Agreement. Except as provided in Section 11(b) below or as required by
law, no Party shall directly or indirectly disclose, or permit its employees or
agents to disclose, the Confidential Information of any other Party hereto and
each Party shall carefully guard and keep secret the Confidential Information
of the other Parties with the same degree of care that it uses to protect its
own most sensitive proprietary information. Confidential Information of the
other Parties shall be disclosed within a Party's organization only on a
need-to-know basis.

Except in connection with the disclosure of [******] Technology to PM
Affiliates pursuant to Section 5(a) and Third Party Licensees who receive
licenses pursuant to Section 5(b) hereof, PMUSA and PMPI shall not disclose any
[******] Technology for Fine Paper manufacture derived from SWM Know-how (as
defined in Section 1(i)) to any other paper manufacturer with respect to the
manufacture of Fine Papers.

(b) Exceptions to Non-Disclosure: The prohibitions on the
disclosure of Confidential Information set forth in this Article 11 shall not
apply to any information:

(i) which can be demonstrated to have been in a
Party's possession lawfully prior to receipt of the same from another Party
hereunder; or

(ii) which was received from a third party having
no obligation to hold the same in confidence; or

(iii) which can be demonstrated to have been in
the public domain prior to the date of the disclosure; or

(iv) which after receipt from another Party
hereto becomes public through no fault of the Party receiving the information.

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12. Records and Accounts.

SWM shall keep proper and accurate accounts and records of all
quantities of [******] sold to persons or entities other than the PM Affiliates
and the PM Contract Manufacturers, commencing with the effective date hereof and
through the expiration of the [******]. Within 30 days after the end of each
calendar month and within 30 days after the termination of this Agreement for
any reason, SWM and the SWM Affiliates shall render to PMUSA and PMPI a written
statement setting forth the identities of all such purchasers of [******] and
the number of bobbins of [******] sold to each in the most recently completed
month (or in the period prior to termination, if applicable), such statement to
be signed by an authorized representative of SWM or the applicable SWM
Affiliate, as the case may be; provided, however, that SWM's and the SWM
Affiliates' obligation to provide such written statement with respect to any
particular purchaser of [******] shall be conditioned on PMUSA or PMPI, as
licensor, as the case may be, providing evidence that such purchaser consents to
SWM or the SWM Affiliates, as the case may be, providing such information to
PMUSA and PMPI. To the extent allowed by law, PMUSA and PMPI, as the case may
be, shall provide SWM with the identities of all licensed Other Cigarette
Manufacturers [******] from each and the duration of each license. On request by
SWM, but not more often than once per year, PMUSA and PMPI each shall provide
SWM with a list of their respective affiliates that manufacture cigarettes and
of their respective contractors who are PM Contract Manufacturers.

13. Effective Date; Term; Termination.

(a) Effective Date; Term: This Agreement shall be
effective as of April 1, 1998, and shall continue in effect through the
expiration of the [******], unless earlier terminated pursuant to the
provisions of this Agreement.

(b) Early Termination for Cause:

(i) By PMUSA or PMPI. PMUSA or PMPI may
terminate this Agreement immediately in the event that:

(1) SWM defaults in the performance of
any of the terms of this Agreement or otherwise breaches any material duty or
obligation imposed on SWM under this Agreement and such default or breach shall
continue uncured for a period of ten days after PMUSA or PMPI gives SWM written
notice of such default or breach;

(2) PMUSA rightfully cancels the SSA or
the [******] as the result of any SWM default or breach
thereunder relating to [******].

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(ii) By SWM. SWM may terminate this Agreement
immediately in the event that:

(1) As to PMUSA (but not PMPI) if PMUSA
defaults in the performance of any of the terms of this Agreement or otherwise
breaches any material duty or obligation imposed on PMUSA under this Agreement
and such default or breach shall continue uncured for a period of ten days
after SWM gives PMUSA written notice of such default or breach; or

(2) As to PMPI (but not PMUSA) if PMPI
defaults in the performance of any of the terms of this Agreement or otherwise
breaches any material duty or obligation imposed on PMPI under this Agreement
and such default or breach shall continue uncured for a period of ten days
after SWM gives PMPI written notice of such default or breach; or

(3) SWM rightfully cancels the SSA or
the [******] as the result of any PMUSA default or breach
thereunder relating to [******].

(c) Termination Upon Insolvency or Nationalization: This
Agreement shall expire and terminate automatically and without notice in the
event that:

(i) SWM files a petition in bankruptcy, is
adjudicated bankrupt or files a petition or otherwise seeks relief under or
pursuant to any bankruptcy, insolvency or reorganization statute or proceeding,
or if a petition in bankruptcy is filed against it or if it becomes insolvent
or makes an assignment for the benefit of its creditors, or a custodian,
receiver or trustee is appointed for it or a substantial portion of its
business or assets. No assignee for the benefit of creditors, custodian,
receiver, trustee in bankruptcy, sheriff, or any other officer of the court or
official charged with taking over custody of SWM's assets or business shall
have any right to continue or assume this Agreement or to exploit or in any way
use the [******] Technology or the [******] if this Agreement terminates
pursuant to this paragraph. Nothing contained herein shall be deemed to
preclude or impair any rights that PMUSA or PMPI may have as a creditor in any
bankruptcy proceeding; or

(ii) SWM or its business is nationalized, in
whole or in part, or the shares of SWM or control over SWM or over any
substantial portion of its assets or over its management is seized by any
government or any of its branches, departments or agencies, including, but not
limited to, the military.

(d) Effect of Termination: Upon the termination of this
Agreement by PMUSA or PMPI for cause, all of the rights of the Parties granted
hereunder except as expressly reserved in Section 13(e) below and all of the
duties and obligations owed to each other by the Parties hereunder shall
terminate forthwith; [******]. Upon the termination of this Agreement

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by SWM as to PMUSA for cause, all of the rights of PMUSA granted hereunder
except as expressly reserved in Section 13(e) below and all of the duties and
obligations owed to PMUSA by SWM hereunder shall terminate forthwith. Upon the
termination of this Agreement by SWM as to PMPI for cause, all of the rights of
PMPI granted hereunder except as expressly reserved in Section 13(e) below and
all of the duties and obligations owed to PMPI by SWM hereunder shall terminate
forthwith. Notwithstanding the preceding three sentences, the expiration or
termination of this Agreement for any reason shall not release any Party hereto
from any liability which, at the time of expiration or termination, had already
accrued to another Party or which may accrue thereafter in respect of any act or
omission occurring prior to such expiration or termination. Notwithstanding any
termination in accordance with this Section, the Parties shall have and hereby
reserve all rights and remedies which each may have, or which each may be
granted by operation of law, including, but not limited to, the right to be
compensated for damages for breach of this Agreement.

(e) Survival: The Parties' rights and obligations under
Article 3, Article 5, Section 9(a)(iii) and Article 11 shall survive the
expiration, cancellation or termination of this Agreement.

14. Notices. All notices, requests, demands, approvals,
consents or other communications under this Agreement shall be in writing and
delivered in person, by telefax or telex, by overnight courier service or by
registered or certified mail, return receipt requested, to the following
addresses or such other address or addresses as either party shall designate
with respect to its own address:

If to PMUSA:

Philip Morris Incorporated
P.O. Box 26603
Richmond, VA 23261
Telefax: (804) 274-4068
Attention: Manager - Cigarette Components, Direct Materials
Purchasing

If to PMPI:

Philip Morris International
800 Westchester Avenue
Rye Brook, NY 10573-1301
Telefax: (914) 335-9374
Attention: Assistant General Counsel

-13-
<PAGE> 14

If to SWM:

100 North Point Center East
Suite 600
Alpharetta, Georgia 30022
Telefax: (770) 569-4212
Attention: President, U.S. Operations
Copy to: General Counsel

15. Governing Law; Arbitration.

(a) Governing Law: The provisions of this Agreement shall
be governed by and construed in accordance with the laws of the Commonwealth of
Virginia, without regard for provisions respecting choice of law.

(b) Arbitration: It is the intention of the Parties to
make a good faith effort to resolve any dispute, controversy, claim or question
arising under this Agreement. The Parties each shall use their best efforts to
resolve any dispute, whether resolved by negotiation or arbitration, in the
most expeditious manner reasonably possible. In the event of a dispute that
cannot be promptly resolved by the Parties' regular representatives, any Party
may elect to abandon negotiations. Any and all such disputes (other than
disputes involving SWM's alleged breach of the covenants in Section 6(a) or
6(b) hereof, or a dispute involving the right of any Party to terminate this
Agreement for cause or otherwise) shall be finally settled under the Rules of
Conciliation and Arbitration of the International Chamber of Commerce ("ICC
Rules of Arbitration") presently in force at the time of the dispute. There
shall be three arbitrators who all must be fluent in the English language.
PMUSA and PMPI, on the one hand, and SWM on the other, each shall nominate in
the Request for Arbitration and the Answer thereto, respectively, one
arbitrator for confirmation by the ICC Court of Arbitration. If a Party fails
to nominate an arbitrator, the appointment shall be made by the ICC Court of
Arbitration. The third arbitrator, who shall serve as chairman of the arbitral
tribunal, will be appointed by the first two arbitrators in accordance with
Article 2(4) of the ICC Rules of Arbitration. If the two party-appointed
arbitrators fail to appoint the third presiding arbitrator, the third
arbitrator will be appointed by the Appointing Authority in accordance with
Article 2(4) of the ICC Rules of Arbitration. The place of arbitration shall be
Richmond, Virginia, and the arbitration shall be conducted in the English
language. All documents in another language shall be accompanied by an English
language translation. Any award of the arbitrators shall be enforceable by any
court of competent jurisdiction.

16. Representations and Warranties.

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<PAGE> 15

In addition to their other representations, warranties and
covenants elsewhere herein contained, the Parties represent, each to the other,
as follows:

(a) PMUSA: PMUSA represents and warrants that it has full
right, power and authority to enter into this Agreement and to perform all of
its obligations hereunder.

(b) PMPI: PMPI represents and warrants that it has full
right, power and authority to enter into this Agreement and to perform all of
its obligations hereunder.

(c) SWM: SWM represents and warrants that it has full
right, power and authority to enter into this Agreement and to perform all of
its obligations hereunder.

17. Amendment.

This Agreement shall not be modified or amended except by an
agreement in writing signed by the authorized representatives of each of the
Parties hereto.

18. Binding Effect; Assignments.

This Agreement shall be binding upon and shall inure to the
benefit of the Parties and their respective successors and assigns, provided
that SWM shall not assign this Agreement or any part of its interest herein
except with the prior written consent of PMUSA and PMPI.

19. Final Agreement.

This Agreement sets forth the entire agreement of the Parties
with respect to its subject matter and supersedes any and all prior
understandings and agreements with respect to such subject matter.

20. Counterparts.

This Agreement may be executed in one or more counterparts,
each of which shall be deemed an original, and all of such counterparts shall
constitute but one and the same agreement.

21. No Rights of Third Parties.

Except as specifically contemplated herein, this Agreement
shall not be deemed to confer any rights or benefits on any person or entity
not a Party to this Agreement.

22. Partial Invalidity.

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<PAGE> 16

If one or more provisions of this Agreement shall be invalid,
illegal or unenforceable in any respect in any jurisdiction or with respect to
any Party, such invalidity, illegality or unenforceability in such jurisdiction
or with respect to such Party shall not, to the fullest extent permitted by
applicable law, invalidate or render illegal or unenforceable such provision in
any other jurisdiction or with respect to any other party, or any other
provision of this Agreement. To the fullest extent it may effectively do so
under applicable law, each of the Parties hereto waives any provision of law
which renders any provision hereof invalid or illegal in any respect.

23. No Waiver; Cumulative Remedies.

No delay or omission or failure to exercise, or any
abandonment or discontinuance of steps to enforce any right or remedy provided
for herein shall be deemed to be a waiver thereof or acquiescence in the event
giving rise to such right or remedy, but every such right and remedy may be
exercised from time to time and so often as may be deemed expedient by the
Party exercising such right or remedy. The rights and remedies provided herein
are cumulative and not exclusive of any remedies provided at law or in equity.

24. Relationship of the Parties.

Except as provided in Article 8, nothing contained herein
shall be construed to create a partnership, joint venture or agency
relationship between PMUSA and PMPI, on the one hand, and SWM, on the other,
and no Party shall become bound by any representation, act or omission of any
other.

25. Obligation of PM Affiliates

The obligations of each of PMUSA and PMPI hereunder shall be
several not joint. Neither PMUSA nor PMPI shall be liable to SWM or any SWM
Affiliate for the non-performance or breach hereof by the other, and no act or
omission that constitutes a breach hereof by one of PMUSA or PMPI shall be
deemed to constitute a breach hereof by the other.

[REMAINDER OF PAGE LEFT INTENTIONALLY BLANK]

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<PAGE> 17

IN WITNESS WHEREOF, the Parties hereto have caused these presents to
be signed and their corporate seals to be hereunto affixed as of the day and
year first above written.

PHILIP MORRIS INCORPORATED (Seal)

By:
------------------------------------------

Title:
---------------------------------------

PHILIP MORRIS PRODUCTS INC. (Seal)

By:
------------------------------------------

Title:
---------------------------------------

SCHWEITZER MAUDUIT INTERNATIONAL, INC. (Seal)

By:
------------------------------------------

Title:
---------------------------------------

-17-
<PAGE> 18

ATTACHMENT A

[******]

-18-

<PAGE> 1
EXHIBIT 15

INDEPENDENT ACCOUNTANTS' REPORT

Schweitzer-Mauduit International, Inc.:

We have reviewed the accompanying consolidated balance sheet of
Schweitzer-Mauduit International, Inc. and subsidiaries as of September 30,
1998, the related consolidated statements of income for the three and nine month
periods ended September 30, 1998 and 1997, and the related consolidated
statements of cash flow for the nine month periods ended September 30, 1998 and
1997. These financial statements are the responsibility of the Company's
management.

We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures to financial
data, and making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in accordance
with generally accepted auditing standards, the objective of which is the
expression of an opinion regarding the financial statements taken as a whole.
Accordingly, we do not express such an opinion.

Based on our review, we are not aware of any material modifications that should
be made to such consolidated financial statements for them to be in conformity
with generally accepted accounting principles.

We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet of Schweitzer-Mauduit International,
Inc. as of December 31, 1997 and the related consolidated statements of income
and cash flow for the year then ended (not presented herein); and in our report
dated January 23, 1998 (February 11, 1998 as to Note 16 and February 13, 1998 as
to the third paragraph of Note 13), we expressed an unqualified opinion on those
consolidated financial statements. In our opinion, the information set forth in
the accompanying consolidated balance sheet as of December 31, 1997 is fairly
stated in all material respects in relation to the balance sheet from which it
has been derived.

Deloitte & Touche LLP

Atlanta, Georgia
October 21, 1998

<PAGE> 1
EXHIBIT 23

November 10, 1998

Schweitzer-Mauduit International, Inc.
100 North Point Center East, Suite 600
Alpharetta, Georgia 30022-8246

Dear Sirs:

We have made a review, in accordance with standards established by the American
Institute of Certified Public Accountants, of the unaudited interim financial
information of Schweitzer-Mauduit International, Inc. and subsidiaries for the
periods ended September 30, 1998 and 1997 as indicated in our report dated
October 21, 1998; because we did not perform an audit, we expressed no opinion
on that information.

We are aware that our report referred to above, which was included in your
Quarterly Report on Form 10-Q for the quarter ended September 30, 1998, is
incorporated by reference in Registration Statements No. 33-99812, No. 33-99814,
No. 33-99816, and No. 33-99848 on Form S-8.

We are also aware that the aforementioned report, pursuant to Rule 436(c) under
the Securities Act of 1933, is not considered a part of the Registration
Statement prepared or certified by an accountant or a report prepared or
certified by an accountant within the meaning of Sections 7 and 11 of that Act.

Yours truly,

Deloitte & Touche LLP
Atlanta, Georgia

<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF SCHWEITZER-MAUDUIT FOR THE NINE MONTHS ENDED SEPTEMBER
30, 1998, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000

<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1998
<CASH> 2,400
<SECURITIES> 0
<RECEIVABLES> 77,300
<ALLOWANCES> 0
<INVENTORY> 74,700
<CURRENT-ASSETS> 161,500
<PP&E> 468,000
<DEPRECIATION> 189,200
<TOTAL-ASSETS> 477,500
<CURRENT-LIABILITIES> 123,500
<BONDS> 108,600
0
0
<COMMON> 1,600
<OTHER-SE> 196,700
<TOTAL-LIABILITY-AND-EQUITY> 477,500
<SALES> 412,700
<TOTAL-REVENUES> 412,700
<CGS> 327,200
<TOTAL-COSTS> 327,200
<OTHER-EXPENSES> 34,100
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 4,800
<INCOME-PRETAX> 47,500
<INCOME-TAX> 14,300
<INCOME-CONTINUING> 29,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 29,000
<EPS-PRIMARY> 1.81
<EPS-DILUTED> 1.79

</TABLE>