10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

xQUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.

For the quarterly period ended June 30, 2006

OR

oTRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.

For the transition period from                                              to                                             

1-13948
(Commission file number)

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
(Address of principal executive offices)	(Zip code)

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

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 o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer.  See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.

Large accelerated filer o                           Accelerated filer  x                           Non-accelerated filer o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x

There were 15,450,339 shares of Common Stock, par value $0.10 per share, of the registrant outstanding as of August 7, 2006.

TABLE OF CONTENTS

		Page
Part I	FINANCIAL INFORMATION
Item 1.	Financial Statements	1
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	16
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	36
Item 4.	Controls and Procedures	36
	Report of Independent Registered Public Accounting Firm	37
Part II	OTHER INFORMATION
Item 1.	Legal Proceedings	38
Item 1A.	Risk Factors	38
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	38
Item 3.	Defaults Upon Senior Securities	38
Item 4.	Submission of Matters to a Vote of Security Holders	38
Item 5.	Other Information	38
Item 6.	Exhibits	39
SIGNATURES		40
GLOSSARY OF TERMS
INDEX TO EXHIBITS
EX 10.1	Electricity Supply Agreement, dated May 24, 2006, by and among Schweitzer-Mauduit do Brasil, S.A. and Companhia Energetica de Sao Paulo, or CESP
EX 10.2	Credit Agreement, dated July 31, 2006, by and among Schweitzer-Mauduit International, Inc. , Schweitzer-Mauduit France S.A.R.L and a group of lenders
EX 15	Letter from Deloitte & Touch LLP regarding unaudited interim financial information
EX 31.1	Section 302 Certification of CEO
EX 31.2	Section 302 Certification of CFO
EX 32	Section 906 Certification of CEO and CFO. *
	*These Section 906 certifications are not being incorporated by reference into the Form 10-Q filing or otherwise deemed to be filed with the Securities and Exchange Commission.

PART I

ITEM 1.  FINANCIAL STATEMENTS

SCHWEITZER-MAUDUIT INTERNATIONAL, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

(dollars in millions, except per share amounts)

(Unaudited)

	Three Months Ended					Six Months Ended
	June 30, 2006			June 30, 2005		June 30, 2006			June 30, 2005
Net Sales	$	162.1		$	168.2	$	327.5		$	328.8
Cost of products sold	139.9			142.0		280.7			278.5
Gross Profit	22.2			26.2		46.8			50.3
Selling expense	5.9			6.1		11.5			12.3
Research expense	1.9			2.5		3.7			5.0
General expense	6.8			6.9		14.5			12.7
Total nonmanufacturing expenses	14.6			15.5		29.7			30.0
Restructuring expense (see Note 4)	3.4			—		3.9			—
Operating Profit	4.2			10.7		13.2			20.3
Interest expense	1.4			1.5		2.8			2.8
Other (expense) income, net	(0.6		)	0.9		(0.6		)	1.5
Income Before Income Taxes, Minority Interest and Loss from Equity Affiliates	2.2			10.1		9.8			19.0
Provision for income taxes	0.4			2.9		2.4			5.5
Minority interest in earnings of subsidiaries	1.0			1.4		2.0			2.7
Loss from equity affiliates	0.1			—		0.1			—
Net Income	$	0.7		$	5.8	$	5.3		$	10.8
Net Income Per Share
Basic	$	0.04		$	0.39	$	0.34		$	0.72
Diluted	$	0.04		$	0.38	$	0.34		$	0.70
Cash Dividends Declared Per Share	$	0.15		$	0.15	$	0.30		$	0.30
Weighted Average Shares Outstanding
Basic	15,399,600			15,156,200		15,377,100			15,083,600
Diluted	15,528,000			15,499,000		15,529,200			15,501,700

The accompanying notes are an integral part of these consolidated financial statements.

1

SCHWEITZER-MAUDUIT INTERNATIONAL, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(dollars in millions, except per share amounts)

	June 30, 2006			December 31, 2005
	(Unaudited)
ASSETS
Current Assets
Cash and cash equivalents	$	2.7		$	5.1
Accounts receivable	93.1			99.8
Inventories	127.3			123.0
Other current assets	15.2			14.8
Total Current Assets	238.3			242.7
Property, Plant and Equipment, net	418.6			414.0
Other Assets	37.1			34.1
Total Assets	$	694.0		$	690.8
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities
Current debt	$	27.3		$	30.0
Accounts payable	54.4			64.3
Accrued expenses	73.7			71.7
Current deferred revenue	6.0			6.0
Total Current Liabilities	161.4			172.0
Long-Term Debt	79.4			83.7
Deferred Income Tax Liabilities	38.8			40.2
Pension and Other Postretirement Benefits	37.4			38.1
Deferred Revenue	26.7			30.0
Other Liabilities	20.9			20.1
Minority Interest	17.1			13.8
Total Liabilities	381.7			397.9
Stockholders’ Equity
Preferred stock, $0.10 par value; 10,000,000 shares authorized; none issued or outstanding	—			—
Common stock, $0.10 par value; 100,000,000 shares authorized; 16,078,733 shares issued; 15,441,163 and 15,307,756 shares outstanding at June 30, 2006 and December 31, 2005, respectively	1.6			1.6
Additional paid-in-capital	63.3			63.8
Common stock in treasury, at cost, 637,570 and 770,977 shares at June 30, 2006 and December 31, 2005, respectively	(12.9		)	(15.6		)
Retained earnings	282.4			281.8
Unearned compensation on restricted stock	—			(0.3		)
Accumulated other comprehensive loss, net of tax	(22.1		)	(38.4		)
Total Stockholders’ Equity	312.3			292.9
Total Liabilities and Stockholders’ Equity	$	694.0		$	690.8

The accompanying notes are an integral part of these consolidated financial statements.

2

SCHWEITZER-MAUDUIT INTERNATIONAL, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’

EQUITY AND COMPREHENSIVE INCOME (LOSS)

(dollars in millions, except per share amounts)

(Unaudited)

																		Accumulated
				Additional														Other
	Common Stock Issued			Paid-In			Treasury Stock					Retained			Unearned			Comprehensive
	Shares	Amount		Capital			Shares		Amount			Earnings			Compensation			Income (Loss)			Total
Balance, December 31, 2004	16,078,733	$	1.6	$	63.3		1,132,083		$	(22.3	)	$	271.5		$	(0.5	)	$	(21.0	)	$	292.6
Net income for the six months ended June 30, 2005												10.8									10.8
Adjustments to unrealized foreign currency translation																		(14.9		)	(14.9		)
Changes in the fair value of derivative instruments																		(0.5		)	(0.5		)
Comprehensive (loss)																					(4.6		)
Dividends declared ($0.30 per share)												(4.6		)							(4.6		)
Purchases of treasury stock							29,270		(1.0		)										(1.0		)
Restricted stock issuances				0.1			(4,500	)	0.1												0.2
Amortization of unearned compensation															0.1						0.1
Stock issued to directors as compensation							(1,596	)	—												—
Stock issued to directors from deferred compensation				0.1			(4,511	)	0.1												0.2
Excess tax benefits of stock-based awards				0.8																	0.8
Issuance of shares for options exercised	—	—		(0.4		)	(264,270	)	5.2			—			—			—			4.8
Balance, June 30, 2005	16,078,733	1.6		63.9			886,476		(17.9		)	277.7			(0.4		)	(36.4		)	288.5
Net income for the six months ended December 31, 2005												8.6									8.6
Adjustments to minimum pension liability																		(0.2		)	(0.2		)
Adjustments to unrealized foreign currency translation																		(2.3		)	(2.3		)
Changes in the fair value of derivative instruments																		0.5			0.5
Comprehensive income																					6.6
Dividends declared ($0.30 per share)												(4.5		)							(4.5		)
Restricted stock forfeitures				(0.1		)	2,000		(0.1		)										(0.2		)
Amortization of unearned compensation															0.1						0.1
Stock issued to directors as compensation							(2,068	)	0.1												0.1
Excess tax benefits of stock-based awards				0.2																	0.2
Issuance of shares for options exercised	—	—		(0.2		)	(115,431	)	2.3			—			—			—			2.1
Balance, December 31, 2005	16,078,733	1.6		63.8			770,977		(15.6		)	281.8			(0.3		)	(38.4		)	292.9
Net income for the six months ended June 30, 2006												5.3									5.3
Adjustments to unrealized foreign currency translation																		16.3			16.3
Comprehensive income																					21.6
Effect of adoption of new accounting standard				(0.3		)									0.3						—
Dividends declared ($0.30 per share)												(4.7		)							(4.7		)
Restricted stock issuances				(0.5		)	(27,000	)	0.5			—									—
Return of shares.							13
Restricted stock forfeitures				0.1			3,000		(0.1		)										—
Stock-based compensation expense				0.2																	0.2
Stock issued to directors as compensation							(3,020	)	0.1												0.1
Excess tax benefits of stock-based awards				0.4																	0.4
Issuance of shares for options exercised	—	—		(0.4		)	(106,400	)	2.2			—			—			—			1.8
Balance, June 30, 2006	16,078,733	$	1.6	$	63.3		637,570		$	(12.9	)	$	282.4		$	—		$	(22.1	)	$	312.3

The accompanying notes are an integral part of these consolidated financial statements.

3

SCHWEITZER-MAUDUIT INTERNATIONAL, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOW

(dollars in millions)

(Unaudited)

	Six Months Ended
	June 30, 2006			June 30, 2005
Operations
Net income	$	5.3		$	10.8
Non-cash items included in net income
Depreciation and amortization	22.3			19.3
Amortization of deferred revenue	(3.3		)	(3.9		)
Deferred income tax (benefit) provision	(2.9		)	0.3
Minority interest in earnings of subsidiaries	2.0			2.7
Other items	1.4			(0.8		)
Net changes in operating working capital	(2.6		)	(36.4		)
Cash Provided by (Used for) Operations	22.2			(8.0		)
Investing
Capital spending	(2.1		)	(8.2		)
Capitalized software costs	(0.7		)	(0.2		)
Acquisitions, net of cash acquired	—			(11.9		)
Investment in equity affiliates	(2.5		)	—
Other	(5.9		)	(4.7		)
Cash Used for Investing	(11.2		)	(25.0		)
Financing
Cash dividends paid to SWM stockholders	(4.7		)	(4.6		)
Changes in short-term debt	(3.5		)	19.2
Proceeds from issuances of long-term debt	21.2			17.2
Payments on long-term debt	(28.6		)	(4.9		)
Purchases of treasury stock	—			(1.0		)
Proceeds from exercise of stock options	1.8			4.8
Excess tax benefits of stock-based awards	0.4			—
Cash (Used for) Provided By Financing	(13.4		)	30.7
Effect of Exchange Rate Changes on Cash	—			—
Decrease in Cash and Cash Equivalents	(2.4		)	(2.3		)
Cash and Cash Equivalents at beginning of period	5.1			4.5
Cash and Cash Equivalents at end of period	$	2.7		$	2.2

The accompanying notes are an integral part of these consolidated financial statements.

4

SCHWEITZER-MAUDUIT INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 1.  GENERAL

Nature of Business

Schweitzer-Mauduit International, Inc., or the Company, is a multinational diversified producer of premium specialty papers headquartered in the United States of America and is the world’s largest supplier of fine papers to the tobacco industry. The Company manufactures and sells paper and reconstituted tobacco products to the tobacco industry as well as specialized paper products for use in other applications.  The primary products include cigarette, plug wrap and tipping papers used to wrap various parts of a cigarette, reconstituted tobacco leaf, or RTL, which is used as a blend with virgin tobacco in cigarettes, reconstituted tobacco wrappers and binders for cigars and paper products used in cigarette packaging.  These products are sold directly to the major tobacco companies or their designated converters in North and South America, western and eastern Europe, Asia and elsewhere.

The Company is the premier manufacturer of high porosity papers, which are used in manufacturing ventilated cigarettes, and the leading independent producer of RTL used in producing blended cigarettes.  The Company conducts business in over 90 countries and currently operates 11 production locations worldwide, with production facilities in the United States, France, the Philippines, Indonesia, Brazil and Canada.  The Company has a 50 percent equity interest in a joint venture to manufacture and sell tobacco-related papers in China.

The Company’s manufacturing facilities have a long history of producing paper, which dates back to 1545. The Company’s domestic mills led the development of the North American tobacco-related papers manufacturing industry, which was originated by Peter J. Schweitzer, Inc. and began as an importer of cigarette papers from France in 1908.

Basis of Presentation

The accompanying unaudited consolidated financial statements and the notes thereto have been prepared in accordance with the instructions of Form 10-Q and Rule 10-01 of Regulation S-X of the Securities and Exchange Commission, or the SEC, and do not include all of the information and disclosures required by accounting principles generally accepted in the United States of America, or GAAP.  However, such information reflects all adjustments (consisting of normal recurring adjustments) which are, in the opinion of management, necessary for a fair statement of results for the interim periods.

The results of operations for the three and six months ended June 30, 2006 are not necessarily indicative of the results to be expected for the full year.  The unaudited consolidated financial statements included herein should be read in conjunction with the audited consolidated financial statements and the notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2005 as filed with the SEC on March 7, 2006.

Principles of Consolidation

The consolidated financial statements include the accounts of Schweitzer-Mauduit International, Inc. and wholly owned, controlled majority-owned and financially controlled subsidiaries.  Minority interest represents minority stockholders’ proportionate share of the equity in LTRI Industries S.A., or LTRI, and Schweitzer-Mauduit do Brasil S.A., or SWM-B.  The Company’s share of the net income or loss of its 50 percent owned joint venture in China is included in the consolidated income statement as “Loss from equity affiliates.”  All significant intercompany balances and transactions have been eliminated.

Use of Estimates

The preparation of financial statements in conformity with GAAP requires estimates and assumptions that affect the reported amounts of assets and liabilities, revenues and expenses and related disclosures of contingent assets and liabilities in the consolidated financial statements and accompanying notes. Estimates are used for, but not limited to, inventory valuation, depreciable lives, sales returns, receivables valuation, pension, postretirement and other benefits, taxes and contingencies. Actual results could differ materially from those estimates.

5

Reclassifications

Certain prior year amounts in the Consolidated Statements of Cash Flow have been reclassified to conform to the current year financial statement presentation..  Historically, amounts relating to changes in currency translation had been included in changes in operating working capital.  These amounts had not been significant when aggregated.  However, recent increases in working capital and fluctuations in foreign currency exchange rates have increased the value related to each category of working capital.  Such currency translation amounts are now excluded from changes in operating working capital and are reported separately.  The net effects of the reclassifications on the Consolidated Statements of Cash Flow were to increase Cash Used for Operations by $0.9 million for the six months ended June 30, 2005, decrease Cash Used for Investing by $0.9 million for the six months ended June 30, 2005, and on a separate line report the Effect of Exchange Rate Changes on Cash, which had no effect for the six months ended June 30, 2005.

Share-Based Incentive Compensation

Accounting Prior to Adoption of SFAS  123R

Prior to the January 1, 2006 adoption of Statement of Financial Accounting Standards No. 123 (revised 2004), “Share-Based Payment,” or SFAS 123R, which revised SFAS 123, “Accounting for Stock Based Compensation,” and superseded Accounting Principles Board Opinion No. 25, or APB 25, “Accounting for Stock Issued to Employees,” the Company accounted for stock-based compensation using the intrinsic value method under APB 25 and related Accounting Interpretations thereof as permitted by SFAS 123.  SFAS 123 provided entities a choice of recognizing related compensation expense by adopting a fair value based method of accounting for stock compensation, including stock options to employees, or to measure compensation using the intrinsic value method under APB 25.  Prior to January 1, 2006, the Company had elected to continue to measure compensation cost for stock compensation based on the intrinsic value method under APB 25.  Payments in the form of the Company’s shares made to third parties, including outside directors, were and still are recorded at fair value based on the market value of the Company’s common stock at the time of payment.  Under APB 25, because the exercise price of employee stock options equaled the market price of the underlying stock on the date of grant, no compensation expense was recognized.  SFAS 123, as amended by SFAS 148, “Accounting for Stock-Based Compensation – Transition and Disclosure,” required presentation of pro forma net income and earnings per share as if the Company had accounted for its employee stock compensation under the fair value method of that statement.

For purposes of the pro forma disclosures, the estimated fair value of the stock compensation was amortized to expense over the vesting period.  Under the fair value method, the Company’s net income and earnings per share would have been the pro forma amounts indicated below (dollars in millions, except per share amounts):

	Three Months Ended,		Six Months Ended,
	June 30, 2005		June 30, 2005
Net Income
As reported	$	5.8	$	10.8
Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related income tax effects	0.2		0.5
Pro forma	$	5.6	$	10.3
Basic net income per share
As reported	$	0.39	$	0.72
Pro forma	$	0.37	$	0.68
Diluted net income per share
As reported	$	0.38	$	0.70
Pro forma	$	0.36	$	0.66

6

Summary of Impact of SFAS 123R

As a result of adopting SFAS 123R on January 1, 2006, the Company’s net income for the three and six month periods ended June 30, 2006 were both lower by less than $0.1 million than what would have been reported under APB 25.  Excess tax benefits recognized related to stock-based awards for the three and six months ended June 30, 2006 were none and $0.4 million, respectively, and were $0.2 million and $0.8 million, respectively,  for the three and six months ended June 30, 2005.  Prior to the adoption of SFAS 123R, the Company presented all excess tax benefits resulting from the exercise of stock-based awards as operating cash flows in the Consolidated Statements of Cash Flow.  SFAS 123R requires the amounts of cash flow resulting from the tax benefits in excess of the compensation cost recognized (excess tax benefits) to be classified as financing cash flows.  Also, in connection with past awards of restricted stock, the unamortized compensation expense previously recognized as a reduction of stockholders’ equity in accordance with SFAS 123 was eliminated against additional paid-in-capital as of January 1, 2006 in accordance with SFAS 123R.

In prior years, the Company transitioned the primary form of its stock-based compensation from stock options to restricted stock, including the substitution of restricted stock for stock options for the equity component of the Long-Term Incentive Plan, or LTIP, beginning in 2006.  Also, on December 9, 2005, the Board of Directors accelerated vesting of certain unvested and “out-of-the-money” stock options previously awarded to employees and officers that had exercise prices above $30.00 per share.  As a result, options to purchase approximately 300,000 shares of the Company’s common stock vested immediately, but no underlying shares will be transferable by the Company’s officers prior to the original vesting schedule except in the event of an officer’s termination of employment.  Accelerated stock options held by the Company’s officers represented approximately 90 percent of the total accelerated options.  As a result of the transition by the Company to the use of restricted stock instead of stock options as the primary form of stock-based compensation and the acceleration of vesting of certain unvested and “out-of-the-money” stock options in December 2005, the impact of the adoption of SFAS 123R on the Company’s financial statements was not material.

Accounting After Adoption of SFAS 123R

Employee Stock Options

The Company’s Equity Participation Plan expired in 2005 and was not renewed.  Stock options are not expected to be granted after 2005.

The exercise price of each of the Company’s employee stock option grants was equal to the average of the high and low market price on the date of grant.  Under the Company’s stock option plan, the stock option’s maximum term was 10 years from the date of grant.  Awards vested 30 percent, 30 percent and 40 percent over each of the first three years, respectively.  Under APB 25, no compensation expense was recorded for stock options.  Under SFAS 123R, the fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model.  The Company used the fair value of each option grant on the date of grant in the determination of pro forma expense amounts reflected in past disclosures in accordance with SFAS 123.  The unamortized balances of those pro forma fair value amounts are being recorded as expense beginning January 1, 2006 in accordance with SFAS 123R.

A summary of the status of stock options outstanding as of June 30, 2006 and changes during the six months then ended is presented below:

			Weighted Average		Weighted Average
	Number of		Exercise Price		Remaining Contractual
	Shares		Per Share		Term (in years)
Options outstanding at January 1, 2006	1,162,592		$	24.48
Exercised	(106,400	)	16.20
Canceled	—		—
Options outstanding at June 30, 2006	1,056,192		$	25.31	6.3
Options vested and exercisable June 30, 2006	1,034,192		$	25.30	6.2

As of June 30, 2006, there was $0.1 million of unrecognized compensation cost related to outstanding stock options to be recorded during 2006, 2007 and 2008 in accordance with SFAS 123R.

7

Restricted Stock

The Company’s restricted stock grants generally vest upon completion of a specified period of time.  The fair value of each award is equal to the share price of the Company’s stock on the date of grant.  This cost is recognized over the vesting period of the respective award.  As of June 30, 2006, there was $0.6 million of unrecognized compensation cost related to outstanding restricted stock.  A summary of outstanding restricted stock awards as of June 30, 2006 and 2005 and changes during the six months ended is summarized below:

	2006				2005
			Weighted-Average				Weighted-Average
			Fair Value at				Fair Value at
	# of Shares		Date of Grant		# of Shares		Date of Grant
Nonvested restricted shares outstanding at January 1	28,500		$	25.43	54,000		$	16.45
Granted	27,000		24.51		4,500		33.09
Forfeited	(3,000	)	25.97		—		—-
Vested	(13,500	)	23.45		(27,000	)	22.90
Nonvested restricted shares outstanding at June 30	39,000		25.44		31,500		25.48

Long-Term Incentive Plan Performance Based Shares

The Company’s LTIP for key executives includes an equity-based award component.  The objectives under the LTIP are established for multiple years at the beginning of a performance cycle and are intended to focus management on longer-term strategic goals.  The Compensation Committee of the Board of Directors designates participants in the LTIP and determines the equity-based award opportunity in the form of restricted stock for each performance cycle, which is generally measured on the basis of a 3-year performance period.  Performance is measured on a cumulative basis and a portion of each performance cycle’s restricted stock award opportunity may be earned annually.  The restricted shares are issued and outstanding when the number of shares becomes fixed, after the annual performance is determined, and such awards vest at the end of the performance cycle.  The Company recognizes compensation expense over the performance period based on the fair value of the award, with compensation expense being adjusted cumulatively based on the expected level of achievement of performance goals and the Company’s stock price.  The expected number of restricted shares currently being used to calculate the LTIP equity-based compensation expense for 2006 is 15,590.  For the number of common and potential common shares outstanding used in the calculation of diluted net income per common share for the three and six month periods ended June 30, 2006, unamortized compensation expense associated with the equity-based LTIP award opportunity is treated as proceeds used to purchase shares in the treasury stock method of calculating the number of shares, and the net increase in diluted shares for the three and six month periods ended June 30, 2006 was 8,425 and 6,486, respectively.

Recent Accounting Pronouncements

In November 2004, the Financial Accounting Standards Board, or FASB, issued SFAS 151, “Inventory Costs — an amendment of ARB No. 43, Chapter 4 (“FAS 151”),” or SFAS 151.  SFAS 151 amends the guidance in Accounting Research Bulletin, or ARB, No. 43, Chapter 4, to clarify the accounting for abnormal amounts of idle facility expense, freight, handling costs and wasted material (spoilage).  SFAS 151 requires that these costs be recognized as current period charges regardless of whether they are abnormal.  In addition, SFAS 151 requires that allocation of fixed production overheads to the costs of manufacturing be based on the normal capacity of the production facilities.   The Company’s adoption of this new accounting standard effective January 1, 2006 had no material impact on the accompanying financial statements.

In May 2005, the FASB issued SFAS 154, “Accounting Changes and Error Corrections,” which replaces APB 20, “Accounting Changes,” and SFAS 3, “Reporting Accounting Changes in Interim Financial Statements.”  SFAS 154 applies to all voluntary changes in accounting principles and requires retrospective application (a term defined by the statement) to prior periods’ financial statements, unless it is impracticable to determine the effect of a change. It also applies to changes required by an accounting pronouncement that does not include specific transition provisions. SFAS 154 is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. The Company has adopted this new accounting standard effective January 1, 2006. Since

8

it applies to accounting changes and corrections of errors that occur after January 1, 2006, there was no impact on the Company’s consolidated financial position or results of operations.

On July 13, 2006, FASB Interpretation No. 48, or FIN 48, “Accounting for Uncertainty in Income Taxes - An Interpretation of FASB Statement No. 109,” was issued. This Interpretation is effective for years beginning after December 15, 2006.  FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with FASB Statement No. 109, “Accounting for Income Taxes.” FIN 48 also prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. The new FASB standard also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition.  The Company is currently in the process of reviewing this guidance to determine its impact on the Company’s consolidated financial position and results of operations.

NOTE 2.  NET INCOME PER SHARE

Basic net income per common share is computed based on net income divided by the weighted average number of common shares outstanding.  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.  Potential common shares during the respective periods are those related to stock options outstanding, restricted stock outstanding, directors’ accumulated deferred stock compensation, which may be received by the directors in the form of stock or cash, and restricted stock estimated to be earned as part of the LTIP.  A reconciliation of the average number of common and potential common shares outstanding used in the calculations of basic and diluted net income per share follows (in thousands):

	Three Months Ended		Six Months Ended
	June 30, 2006	June 30, 2005	June 30, 2006	June 30, 2005
Average number of common shares outstanding	15,399.6	15,156.2	15,377.1	15,083.6
Dilutive effect of:
·  stock options	60.3	293.8	86.5	361.6
·  restricted stock	38.9	32.5	39.0	40.3
·  directors’ deferred stock compensation	20.8	16.5	20.1	16.2
·  long-term incentive compensation	8.4	—	6.5	—
Average number of common and potential common shares	15,528.0	15,499.0	15,529.2	15,501.7

Certain stock options outstanding during the periods presented were not included in the calculations of diluted net income per share because the exercise prices of the options were greater than the average market prices of the common shares during the respective periods.  The average number of share equivalents resulting from these anti-dilutive stock options not included in the computations of diluted net income per share for the three and six month periods ended June 30, 2006 were approximately 600,000 and 489,900, respectively, and for the three and  six month periods ended  June 30, 2005 were approximately 188,600 and 186,100, respectively.

NOTE 3.  INVENTORIES

The following schedule details inventories by major class (dollars in millions):

	June 30, 2006		December 31, 2005
Raw materials	$	37.4	$	40.9
Work in process	14.7		17.0
Finished goods	53.9		45.1
Supplies and other	21.3		20.0
Total	$	127.3	$	123.0

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NOTE 4. RESTRUCTURING EXPENSE

At the Lee Mills facility in Massachusetts, the Company operates a machine that is owned by Kimberly-Clark Corporation.  Ownership of the machine was retained by Kimberly-Clark in the 1995 spin-off of the Company and is operated solely for the purpose of producing a proprietary product used as an in-process material by Kimberly-Clark.  Under the contract for its continued operation, the Company essentially invoices Kimberly-Clark the actual costs of operating the machine, including allocations of indirect and fixed overhead costs.  While the current term of the contract was scheduled to expire in December 2009, Kimberly-Clark gave notice of early termination in January 2006, which under the contract began an 18 month termination period for the contract now ending in August 2007.  While certain of the costs currently invoiced to Kimberly-Clark can be eliminated, the Company may be unable to eliminate a portion of the approximately $2 million of indirect and fixed overhead costs that are currently absorbed by that operation when the Kimberly-Clark contract expires in August 2007.  As a result, the Company has begun to evaluate the operational and financial impact that the Kimberly-Clark contract termination, as well as changes in tobacco-related paper customer sales volume forecasts and lack of profitability for certain commercial and industrial paper grades produced at the Lee Mills might have on its operations.  While the Company is still evaluating broader restructuring options, it was decided in February 2006 to transfer the production volume from one porous plug wrap paper machine to another currently under-utilized Lee Mills porous plug wrap paper machine and to commence accelerated depreciation on the affected equipment.  Additionally, the salaried and hourly Lee Mills workforces were reorganized to be more efficient and cost effective, which will result in the loss of approximately 25 jobs.  As a result of these decisions, the Company expects to incur restructuring expenses totaling approximately $1.3 million in 2006 and $1.0 million in each of 2007 and 2008.  Of the $1.3 million projected for 2006, $0.3 million and $0.5 million were recorded during the first and second quarters, respectively, of which $0.5 million represented non-cash accelerated depreciation and $0.3 million of cash costs were employee related.  The remaining estimated 2006 through 2008 expenses are primarily for non-cash accelerated depreciation.

Additionally, on May 26, 2006, the Company announced a decision to cease the production and sale of décor papers made at its mill in Lee.  As a result of this decision, the Company ceased operation of a paper machine in July, which will result in 2006 accelerated depreciation and other restructuring related expenses totaling approximately $4.5 million, including cash costs of approximately $0.5 million that are partly related to employee severance expenses.  This cessation is resulting in the loss of approximately 15 jobs in total at the Lee Mills and at the Company’s U.S. headquarters in Alpharetta, Georgia.  Of the $4.5 million of these estimated total restructuring expenses, $2.4 million were recorded in the second quarter of 2006 and the remainder is expected to be incurred during the balance of 2006, primarily in the third quarter.  Of the $2.4 million expensed in the current quarter, $2.2 million represented non-cash expenses of accelerated depreciation and inventory write-offs and $0.2 million represented cash costs, including severance benefits.

In France, a downturn in tobacco-related papers demand has resulted from a decrease in consumption of cigarettes in certain countries due to increased taxes and regulation on the cigarette industry.  Additionally, new tobacco-related papers capacity began operation in Europe during 2003 and 2004.  This has created a very competitive pricing environment during a time of high inflationary cost increases, resulting in some lost sales volumes for tobacco-related papers produced by the French operations.  This downturn in demand, as well as the Company’s decision to eliminate low margin products, has caused the Company to have excess capacity and machine shutdowns. As a result, the Company recorded $0.2 million of accelerated depreciation in the first quarter of 2006 and $0.5 million of restructuring expenses in the second quarter of 2006 in France, which consisted of accelerated depreciation of $0.3 million and severance and other cash costs of $0.2 million.   The Company expects to record an additional $0.3 million in cash restructuring expenses during the third quarter of 2006 based upon decisions made to date.

These restructuring expenses totaled $3.4 million during the second quarter of 2006, of which $0.7 million were cash costs.  Restructuring expenses were $3.9 million during the first six months of the year, of which $0.7 million were cash costs.

Restructuring liability reserves related to the cash costs for 2006 were classified in Accrued Expenses as a current liability on the Consolidated Balance Sheet and are summarized as follows (dollars in millions):

Balance at January 1, 2006	$	—
Accruals for new committed / announced programs	0.7
Cash payments	(0.5		)
Balance at June 30, 2006	$	0.2

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The Company is continuing to evaluate how to operate its production facilities in France and the United States more effectively.  Analyses are ongoing, and the Company has not committed to any actions beyond those identified above.   However, additional restructuring expenses in France or the United States may be required based on the outcome of these analyses.

NOTE 5.  COMMITMENTS AND CONTINGENCIES

Litigation

The Company is involved in various legal proceedings and disputes (see Note 7, Commitments and Contingencies, of the Notes to Consolidated Financial Statements in the Company’s Annual Report on Form 10-K for the year ended December 31, 2005).  There have been no material developments to these matters during 2006.

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 exposes 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.  While the Company has incurred in the past several years, and will continue to incur, capital and operating expenditures in order to comply with environmental laws and regulations, the Company believes that its future cost of compliance with environmental laws, regulations and ordinances, and the exposure to liability for environmental claims and its obligation to participate in the remediation and monitoring of certain hazardous waste disposal sites, will not have a material adverse effect on financial condition or results of operations.  However, future events, such as changes in existing laws and regulations, or unknown contamination of sites owned, operated or used for waste disposal by the Company (including contamination caused by prior owners and operators of such sites or other waste generators) may give rise to additional costs which could have a material adverse effect on the Company’s financial condition or results of operations.

The Company incurs spending necessary to meet legal requirements and otherwise relating to the protection of the environment at its facilities in the United States, France, the Philippines, Indonesia, Brazil and Canada.  For these purposes, the Company anticipates that it will incur capital expenditures of approximately $1 million in 2006 and approximately $2 to $3 million in 2007, of which no material amount is the result of environmental fines or settlements.  The foregoing capital expenditures are not expected to reduce the Company’s ability to invest in other appropriate and necessary capital projects and are not expected to have a material adverse effect on the Company’s financial condition or results of operations.

NOTE 6.  POSTRETIREMENT AND OTHER BENEFITS

The Company sponsors pension benefits in the United States, France, the Philippines and Canada and postretirement healthcare and life insurance benefits in the United States and Canada.  The Company’s Canadian and Philippines pension and postretirement benefits are not significant and therefore are not included in the following disclosures.

During May 2006, the Company implemented the terms of its last and final offer following an impasse in negotiations with the United Steelworkers of America on a collective bargaining agreement for the Lee Mills that had been extended since its original expiration date of July 31, 2005.  Pursuant to the terms of the offer that was unilaterally implemented by the Company, all affected hourly employees at the Lee Mills were notified that the further accrual of benefits under their defined benefit pension plan would be frozen as of July 17, 2006.  Consequently, hourly employees at the Lee Mills do not earn any additional benefits for future service (years or earnings) under the defined benefit plan beginning July 17, 2006.  This termination of the accrual of additional benefits for future service qualified this action for curtailment under SFAS No. 88, “Employers’ Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and for Termination Benefits.” This action is expected to reduce the Company’s future annual pension expense and pension fund contribution requirements. The plan has not been terminated, and benefits accrued as of July 17, 2006 will continue to be paid in accordance with

11

the plan terms.  Allowable contributions and the matching percentage for the defined contribution, or 401(k), plan for the Lee Mills hourly employees are being modified to partially offset the employee pension benefit reduction.

The Lee Mills action necessitated a remeasurement of the Company’s accumulated benefit obligation under the U.S. pension plan and resulted in a curtailment gain of $0.1 million during the second quarter.  As part of this remeasurement, the Company increased its discount rate assumption from 5.75 percent to 6.50 percent to reflect recent changes in the market interest rates.  Other actuarial assumptions (primarily asset returns, wage rate increases, plan population, retirement assumptions, mortality table and cash balance crediting rate) remained consistent with those previously disclosed.

In accordance with SFAS No. 88, the Company calculated its curtailment gain by first remeasuring its plan assets and projected benefit obligation, or PBO, as of the date of the curtailment, excluding the effects of the curtailment, but including the effects of the changes in assumptions.  The Company then had the plan assets and the PBO measured using the effects of the curtailment.  This enabled it to isolate the effect of the curtailment on the PBO, without affecting the measurement for any change in the actuarial assumptions since the prior measurement date.

The components of net pension and postretirement healthcare and life insurance benefit costs for U.S. employees for the three and six month periods ended June 30, 2006 and 2005 were as follows (dollars in millions):

	Three Months Ended						Six Months Ended
U.S. Pension Benefits	June 30, 2006			June 30, 2005			June 30, 2006			June 30, 2005
Service cost	$	0.3		$	0.8		$	0.9		$	1.5
Interest cost	1.8			1.6			3.3			3.1
Expected return on plan assets	(1.7		)	(1.6		)	(3.5		)	(3.2		)
Amortization and other	0.6			0.5			1.3			1.1
Pension curtailment gain	(0.1		)	—			(0.1		)	—
Net periodic benefit cost	$	0.9		$	1.3		$	1.9		$	2.5

	Three Months Ended				Six Months Ended
U.S. Postretirement Healthcare and Life Insurance Benefits	June 30, 2006		June 30, 2005		June 30, 2006		June 30, 2005
Service cost	$	—	$	—	$	0.1	$	0.1
Interest cost	0.2		0.2		0.4		0.4
Net periodic benefit cost	$	0.2	$	0.2	$	0.5	$	0.5

The components of net pension costs in France for the three and six month periods ended June 30, 2006 and 2005 were as follows (dollars in millions):

	Three Months Ended						Six Months Ended
French Pension Benefits	June 30, 2006			June 30, 2005			June 30, 2006			June 30, 2005
Service cost	$	0.4		$	0.4		$	0.8		$	0.8
Interest cost	0.5			0.4			1.0			0.8
Expected return on plan assets	(0.3		)	(0.2		)	(0.6		)	(0.4		)
Amortization and other	0.2			0.1			0.4			0.3
Net periodic benefit cost	$	0.8		$	0.7		$	1.6		$	1.5

The Company contributed $2.0 million and $5.0 million to its pension plans through the first six months of 2006 and 2005, respectively, and currently expects to make total pension contributions for the full year of 2006 of approximately $10 to $15 million.  The Company also made a total of $1.2 million of payments related to its U.S.

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postretirement healthcare and life insurance benefits for the six months ended June 30, 2006, and expects to make additional payments during the remainder of 2006 of approximately $1 million.

NOTE 7.  SEGMENT INFORMATION

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

Tobacco industry products comprised approximately 91 percent of the Company’s consolidated net sales in the three and six month periods ended June 30, 2006 and 2005.  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 segment disclosure in the following tables, the term “United States” includes operations in the United States and Canada.  The Canadian operation only produces flax fiber used as raw material in the U.S. operations.  The term “France” includes operations in France, the Philippines, beginning in June 2005, and Indonesia.  Since the results of the Philippine and Indonesian operations are not material for segment reporting purposes and their sales are coordinated with sales of the French operations in southeast Asia, they are included in the “France” segment.  Sales of products between segments are made at market prices and elimination of these sales is referred to in the following tables as intersegment sales.  Expense amounts not associated with segments are referred to as unallocated expenses.

Net Sales

(dollars in millions)

	Three Months Ended										Six Months Ended
	June 30, 2006					June 30, 2005					June 30, 2006					June 30, 2005
France	$	97.3		60.0	%	$	104.8		62.3	%	$	190.0		58.0	%	$	206.9		62.9	%
United States	55.8			34.4		54.8			32.6		118.2			36.1		106.7			32.5
Brazil	14.7			9.1		14.2			8.4		31.0			9.5		27.7			8.4
Subtotal	167.8			103.5		173.8			103.3		339.2			103.6		341.3			103.8
Intersegment sales by France	(3.7		)	(2.3	)	(3.5		)	(2.1	)	(7.1		)	(2.2	)	(9.0		)	(2.7	)
United States	(0.2		)	(0.1	)	(0.5		)	(0.3	)	(0.4		)	(0.1	)	(0.8		)	(0.3	)
Brazil	(1.8		)	(1.1	)	(1.6		)	(0.9	)	(4.2		)	(1.3	)	(2.7		)	(0.8	)
Subtotal	(5.7		)	(3.5	)	(5.6		)	(3.3	)	(11.7		)	(3.6	)	(12.5		)	(3.8	)
Consolidated	$	162.1		100.0	%	$	168.2		100.0	%	$	327.5		100.0	%	$	328.8		100.0	%

Operating Profit

(dollars in millions)

	Three Months Ended										Six Months Ended
	June 30, 2006					June 30, 2005					June 30, 2006					June 30, 2005
France	$	5.5		130.9	%	$	11.5		107.5	%	$	13.9		105.3	%	$	22.3		109.9	%
United States	0.7			16.7		—			—		3.2			24.2		(0.4		)	(2.0	)
Brazil	(0.3		)	(7.1	)	1.0			9.3		(0.1		)	(0.7	)	1.3			6.4
Unallocated	(1.7		)	(40.5	)	(1.8		)	(16.8	)	(3.8		)	(28.8	)	(2.9		)	(14.3	)
Subtotal	$	4.2		100.0	%	$	10.7		100.0	%	$	13.2		100.0	%	$	20.3		100.0	%

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NOTE 8.   SUBSEQUENT EVENTS

New Bank Credit Agreement

On July 20, 2006, Schweitzer-Mauduit International, Inc. and Schweitzer-Mauduit France S.A.R.L., a wholly-owned subsidiary of the Company, entered into a new unsecured credit agreement, or the Credit Agreement, with a group of banks led by Natexis Banques Populaires, Société Générale Corporate & Investment Banking and SunTrust Robinson Humphrey, a division of SunTrust Capital Markets, Inc. to refinance its existing bank credit agreement.  The Credit Agreement became effective July 31, 2006 and provides for (a) additional borrowing capacity of approximately $60 million, increasing the total facilities to $195 million from $135 million, (b) a reduced number of tranches from 4 to 2, (c) extended terms, with the maturity date of the new facilities being no earlier than 5 years, (d) lower interest rate margins and (e) fewer, less restrictive financial covenant requirements.  The Credit Agreement replaces the existing credit facility executed on January 31, 2002 that was scheduled to expire in January 2007.  Borrowings outstanding under the credit agreement existing as of June 30, 2006 of $64.2 million were classified as Long-Term Debt in the Consolidated Balance Sheet at June 30, 2006 as a result of the Company having refinanced the debt with a new Credit Agreement effective July 31, 2006.

The Credit Agreement provides for a $95 million U.S. revolving credit facility, or U.S. revolver, and an €80 million revolving credit facility, or Euro revolver, both with 5-year terms, plus 2 one-year extension options, with the extensions at the discretion of the participating banks.  The Credit Agreement is guaranteed by the Company and contains representations and warranties which are customary for facilities of this type and covenants and provisions that, among other things, require the Company to maintain (a) a Net Debt to Equity Ratio not to exceed 1.0 and (b) a Net Debt to Adjusted EBITDA Ratio not to exceed 3.0.  The increased amount of the facility and its favorable terms will provide greater flexibility to pursue possible restructuring activities in France and the United States and various strategic opportunities.  Repayment of amounts drawn under the Credit Agreement may be accelerated in limited circumstances, which include events of default not timely cured and change of control events.  Draws have been made to repay borrowings under the existing credit agreement.  Expected draws are also anticipated for (a) working capital needs  (b) funding the Company’s joint venture in China and (c) other general corporate purposes.  Borrowings, including repayments of the existing credit agreement, against the Credit Agreement are expected to aggregate the U.S. dollar equivalent of approximately $70 to $100 million during the balance of 2006.  Under the Credit Agreement, interest rates are at market rates, based on the London Interbank Offered Rate, or LIBOR, for U.S. dollar borrowings and the Euro Interbank Offered Rate, or EURIBOR, for euro borrowings, plus an applicable margin that varies from 0.35 percent to 0.75 percent per annum depending on the Net Debt to Adjusted EBITDA Ratio, as defined in the Credit Agreement.  The Company will incur commitment fees at an annual rate of either 0.30 or 0.35 percent of the applicable margin on the committed amounts not drawn, depending on the Net Debt to Adjusted EBITDA Ratio.

Changes in Executive Officers

On July 10, 2006, the Company issued a press release announcing that effective August 1, 2006, Paul C. Roberts,, current Chief Financial Officer and Treasurer , or CFO, would be assuming the newly created position of Vice President – Strategic Planning and Implementation, reporting to Wayne H. Deitrich, Chairman and Chief Executive Officer.  Mr. Roberts has served as CFO since August 1995.  In this new role, Mr. Roberts will be responsible for corporate projects including potential investment opportunities and strategic initiatives, while continuing to serve as Vice-Chairman of the Board of China Tobacco Mauduit (Jiangmen) Paper Industry Company Ltd., the Company’s tobacco-related papers joint venture in China.

Succeeding Mr. Roberts as CFO is Peter J. Thompson, President – U.S. Operations since November 1998.  Mr. Thompson joined the Company in January 1997 as Marketing Manager – U.S.  Previously, he was CFO and then Marketing Director for Tape, Inc. from May 1995 to January 1997.  Also, prior to May 1995, he held several key financial positions with Kimberly-Clark where he was involved in financial and business analysis, acquisitions and divestitures.

Coincident with the above changes, Otto R. Herbst, President – Brazilian Operations, became President – the Americas, with profit responsibility for the Brazilian and U.S. Business Units, reporting to Frédéric P. Villoutreix, Chief Operating Officer. This change will result in the consolidation of the positions of President – Brazilian Operations and President – U.S. Operations.   Mr. Herbst served as President of the Brazilian operations since 1999.  Prior to 1999, Mr. Herbst served as General Manager for New Business and Services from 1997 through 1999 for Interprint, a manufacturer of security documents, telephone cards, and business forms.  From 1990 through 1997,

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Mr. Herbst served as Director for Agaprint, a manufacturer of packaged materials, business forms, commercial printing papers, personalized documents and envelopes.

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ITEM 2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following is a discussion of our results of operations and current financial position. This discussion should be read in conjunction with our unaudited consolidated financial statements and related notes included elsewhere in this report and the audited consolidated financial statements and related notes and the selected financial data included in Item 6 of our Annual Report on Form 10-K for the year ended December 31, 2005. Our discussion of our results of operations and financial position includes various forward-looking statements about our markets, the demand for our products and our future results. These statements are based on certain assumptions that we consider reasonable. For information about risks and exposures relating to our business and our company, you should read the section entitled “Factors That May Effect Future Results” included in our Annual Report on Form 10-K for the year ended December 31, 2005.

The accompanying unaudited consolidated financial statements set forth certain information with respect to our financial position, results of operations and cash flows which should be read in conjunction with the following discussion and analysis. Unless the context indicates otherwise, references to “we,” “us,” “our,” “SWM,” “Schweitzer-Mauduit” or similar terms include Schweitzer-Mauduit International, Inc. and our consolidated subsidiaries.

Introduction

This management’s discussion and analysis of financial condition and results of operations is intended to provide you with an understanding of our recent performance, our financial condition and our prospects.  The following will be discussed and analyzed:

·Executive Summary

·Recent Developments

·Results of Operations

·Liquidity and Capital Resources

·Other Factors Affecting Liquidity and Capital Resources

·Outlook

·Forward-Looking Statements

Executive Summary

(dollars in millions, except per share amounts)

	Three Months Ended										Six Months Ended
	June 30, 2006					June 30, 2005					June 30, 2006					June 30, 2005
Net sales	$	162.	1	100.0	%	$	168.	2	100.0	%	$	327.	5	100.0	%	$	328.	8	100.0	%
Gross profit	22.		2	13.7		26.		2	15.6		46.		8	14.3		50.		3	15.3
Restructuring expense	3.		4	2.1		—			—		3.		9	1.2		—			—
Operating profit	4.		2	2.6		10.		7	6.4		13.		2	4.0		20.		3	6.2
Net income	$	0.	7	0.4	%	$	5.	8	3.4	%	$	5.	3	1.6	%	$	10.	8	3.3	%
Diluted earnings per share	$	0.	04			$	0.	38			$	0.	34			$	0.	70
Capital spending	$	0.	5			$	4.	7			$	2.	1			$	8.	2

The decline in earnings compared with the second quarter of 2005 was the result of our inability to fully offset unabsorbed fixed costs, inflationary cost increases and restructuring expenses through improved mill operations or higher selling prices.  Unabsorbed fixed costs increased operating expenses by $5.4 million and inflationary cost increases unfavorably impacted operating results by $3.7 million during the quarter.  Restructuring expenses of $3.4 million were also recognized in the quarter.

Recent Developments

Operational Changes – United States and France

At the Lee Mills facility in Massachusetts, we operate a machine that is owned by Kimberly-Clark Corporation.  Ownership of the machine was retained by Kimberly-Clark in our 1995 spin-off and is operated solely for the purpose of producing a proprietary product used as an in-process material by Kimberly-Clark.  Under the contract

16

for its continued operation, we essentially invoice Kimberly-Clark the actual costs of operating the machine, including allocations of indirect and fixed overhead costs.  While the current term of the contract was scheduled to expire in December 2009, Kimberly-Clark gave notice of early termination in January 2006, which under the contract began an 18 month termination period for the contract now ending in August 2007.  While certain of the costs currently invoiced to Kimberly-Clark can be eliminated, we may be unable to eliminate a portion of the approximately $2 million of indirect and fixed overhead costs that are currently absorbed by that operation when the Kimberly-Clark contract expires in August 2007.  As a result, we have begun to evaluate the operational and financial impact that the Kimberly-Clark contract termination, as well as changes in tobacco-related paper customer sales volume forecasts and lack of profitability for certain commercial and industrial paper grades produced at the Lee Mills might have on its operations.  While we are still evaluating broader restructuring options, we decided in February 2006 to transfer the production volume from one porous plug wrap paper machine to another currently under-utilized Lee Mills porous plug wrap paper machine and to commence accelerated depreciation on the affected equipment.  Additionally, the salaried and hourly Lee Mills workforces were reorganized to be more efficient and cost effective, which will result in the loss of approximately 25 jobs.  As a result of these decisions, we expect to incur restructuring expenses totaling approximately $1.3 million in 2006 and $1.0 million in each of 2007 and 2008.  Of the $1.3 million projected for 2006, $0.3 million and $0.5 million were recorded during the first and second quarters, respectively, of which $0.5 million represented non-cash accelerated depreciation and $0.3 million of cash costs were employee related.  The remaining estimated 2006 through 2008 expenses are primarily for non-cash accelerated depreciation.

Additionally, on May 26, 2006, we announced a decision to cease the production and sale of décor papers made at our mill in Lee.  As a result of this decision, we ceased operation of a paper machine in July, which will result in 2006 accelerated depreciation and other restructuring related expenses totaling approximately $4.5 million, including cash costs of approximately $0.5 million that are partly related to employee severance expenses.  This cessation is resulting in the loss of approximately 15 jobs in total at the Lee Mills and at our U.S. headquarters in Alpharetta, Georgia.  Of the $4.5 million of these estimated total restructuring expenses, $2.4 million were recorded in the second quarter of 2006 and the remainder is expected to be incurred during the balance of 2006, primarily in the third quarter.  Of the $2.4 million expensed in the current quarter, $2.2 million represented non-cash expenses of accelerated depreciation and inventory write-offs and $0.2 million represented cash costs, including severance benefits. 

In France, a downturn in tobacco-related papers demand has resulted from a decrease in consumption of cigarettes in certain countries due to increased taxes and regulation on the cigarette industry. Additionally, new tobacco-related papers capacity began operation in Europe during 2003 and 2004.  This has created a very competitive pricing environment during a time of high inflationary cost increases, resulting in some lost sales volumes for tobacco-related papers produced by our French operations.  This downturn in demand, as well as our decision to eliminate low margin products, has caused us to have excess capacity and machine shutdowns. As a result, we recorded $0.2 million of accelerated depreciation in the first quarter of 2006 and $0.5 million of restructuring expenses in the second quarter of 2006 in France, which consisted of accelerated depreciation of $0.3 million and severance and other cash costs of $0.2 million.   We expect to record an additional $0.3 million in cash restructuring expenses during the third quarter of 2006 based upon decisions made to date.

These restructuring expenses totaled $3.4 million during the second quarter of 2006, of which $0.7 million were cash costs.  Restructuring expenses were $3.9 million during the first six months of the year, of which $0.7 million were cash costs.

We are continuing to evaluate how to operate our production facilities in France and the United States more effectively.  Analyses are ongoing, and we have not committed to any actions beyond those identified above.   However, additional restructuring expenses in France or the United States may be required based on the outcome of these analyses.

Lower Ignition Propensity Cigarettes

During 2005, Canada implemented a requirement for lower cigarette ignition propensity properties for all cigarettes manufactured or imported into Canada on or after October 1, 2005.  Accordingly, a full year of sales of these products in Canada is expected during 2006.  During the fourth quarter of 2005, the State of California enacted legislation that requires all cigarettes sold in California as of January 2007 to have lower ignition propensity properties.  California joins the State of New York, which already requires lower ignition propensity properties, and the State of Vermont, which requires cigarettes to have these properties as of May 2006.  An additional 3 U.S. states have regulations that become effective between October 2007 and January 2008, with the states of Illinois, New Hampshire and Massachusetts having recently passed lower ignition propensity cigarette legislation.  These 6 U.S.

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states with lower ignition propensity legislation are estimated to comprise approximately 16 percent of U.S. cigarette consumption and, with Canada, are estimated to comprise approximately 23 percent of combined U.S. and Canadian cigarette consumption.  Legislation could also be enacted in Australia this year which would reportedly require compliance beginning in 2008.

Pension Plan Curtailment at Lee Mills

During May 2006, we implemented the terms of our last and final offer following an impasse in negotiations with the United Steelworkers of America on a collective bargaining agreement for the Lee Mills.  Pursuant to the terms of the offer that was unilaterally implemented by us, all affected hourly employees at the Lee Mills were notified that the further accrual of benefits under their defined benefit pension plan would be frozen as of July 17, 2006.  Consequently, hourly employees at the Lee Mills do not earn any additional benefits for future service (years or earnings) under the defined benefit plan beginning July 17, 2006.  This action is expected to reduce our future annual pension expense and pension fund contribution requirements. The plan has not been terminated, and benefits accrued as of July 17, 2006 will continue to be paid in accordance with the plan terms.  Allowable contributions and the matching percentage for the defined contribution, or 401(k), plan for the Lee Mills hourly employees are being modified to partially offset the employee pension benefit reduction.

New Energy Contracts in Brazil

During May 2006, SWM-B entered into the first of a series of agreements for purchased electricity supply and the transmission and distribution of electricity to the mill. 

The contract for the electrical energy supply is for the period May 1, 2006 through December 31, 2010 to cover 100 percent of the mill’s consumption of electrical energy.  The absolute value of the electric energy to be provided under this contract is estimated at approximately $4.5 to $5.0 million annually.  Under our former contract, we expected electrical energy costs to be significantly higher than the prior year due to a general increase in energy costs.  However, we expect this contract to provide approximately $1 million in annual savings versus the previously expected increased cost for electrical energy, which will bring current year electrical costs to slightly higher than the prior year.

The agreements for transmission and distribution are revolving annual contracts and are estimated at approximately $3 million annually.

China Joint Venture

In July 2005, we announced execution of an agreement to form a joint venture to produce tobacco-related papers in China.  The joint venture is building a new state-of-the-art paper mill, with 2 paper machines that will produce cigarette paper and porous plug wrap in partnership with the China National Tobacco Corporation, or CNTC, which is the principal operating company under China’s State Tobacco Monopoly Administration.  CNTC and Schweitzer-Mauduit International China, Limited each own 50 percent of the joint venture.  We are accounting for this joint venture under the equity method of accounting.

The new mill will have an annual capacity of approximately 18,000 metric tons and is located in Jiangmen, in the Guangdong province.  Project spending, including capital expenditures and working capital requirements, is expected to total approximately $100 million.  Papeteries de Mauduit S.A.S., or PdM, one of our wholly owned indirect French subsidiaries, is providing technical support and project management.  In late 2005, governmental approval for the joint venture was obtained and the joint venture legal entity was incorporated.  Various governmental licenses and permits have now been obtained, the management team for the joint venture is now in place, administrative procedures and controls are being implemented and detailed engineering and long-lead item procurement are in process.  Construction of the new mill should take approximately 2 years, with mill operations expected to commence in early 2008.  We made our initial equity injection in the joint venture of $2.5 million during the second quarter of 2006 and we expect to make an additional equity investment of less than $1 million during the remainder of 2006.

Philippines Acquisition

On June 30, 2005, we acquired the tobacco-related paper manufacturing assets of KCPI, a Philippines company, and associated land and water rights.  The acquired assets included buildings, production equipment and related utilities, support assets and inventories.  The total acquisition cost was $11.9 million, funded through existing bank lines of

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credit.  The impact on the results of our operations and accompanying consolidated financial statements was not material.

New Bank Credit Agreement

We entered into a new bank Credit Agreement effective July 31, 2006 which provides for (a) additional borrowing capacity of approximately $60 million, increasing the total facilities to approximately $195 million from approximately $135 million, (b) a reduced number of tranches from 4 to 2, (c) extended terms, with the maturity date of the new facilities being no earlier than 5 years, (d) lower interest rate margins and (e) fewer, less restrictive financial covenant requirements.  The Credit Agreement replaces the prior existing credit facility executed on January 31, 2002 that was scheduled to expire in January 2007.

The increased amount of the facility and its favorable terms will provide greater flexibility to pursue possible restructuring activities in France and the United States and various strategic opportunities.  Draws have been made to repay borrowings under the prior existing credit agreement.  Expected draws are also anticipated for (a) working capital needs (b) funding of our joint venture in China and (c) other general corporate purposes.  Borrowings, including repayment of the prior existing credit agreement, against the Credit Agreement are expected to aggregate the U.S. dollar equivalent of approximately $70 to $100 million during the balance of 2006.

Results of Operations

This section presents a discussion and analysis of our second quarter and year-to-date 2006 net sales, operating profit and other information relevant to an understanding of the results of operations.  The following table represents the unaudited consolidated statements of operations for the periods indicated (dollars in millions, except per share amounts):

	Three Months Ended					Six Months Ended
	June 30, 2006			June 30, 2005		June 30, 2006			June 30, 2005
Net Sales	$	162.1		$	168.2	$	327.5		$	328.8
Cost of products sold	139.9			142.0		280.7			278.5
Gross Profit	22.2			26.2		46.8			50.3
Selling expense	5.9			6.1		11.5			12.3
Research expense	1.9			2.5		3.7			5.0
General expense	6.8			6.9		14.5			12.7
Total nonmanufacturing expenses	14.6			15.5		29.7			30.0
Restructuring expense	3.4			—		3.9			—
Operating Profit	4.2			10.7		13.2			20.3
Interest expense	1.4			1.5		2.8			2.8
Other (expense) income, net	(0.6		)	0.9		(0.6		)	1.5
Income Before Income Taxes, Minority Interest and Loss from Equity Affiliates	2.2			10.1		9.8			19.0
Provision for income taxes	0.4			2.9		2.4			5.5
Minority interest in earnings of subsidiaries	1.0			1.4		2.0			2.7
Loss from equity affiliates	0.1			—		0.1			—
Net Income	$	0.7		$	5.8	$	5.3		$	10.8
Net Income Per Share
Basic	$	0.04		$	0.39	$	0.34		$	0.72
Diluted	$	0.04		$	0.38	$	0.34		$	0.70

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Three Months Ended June 30, 2006 Compared with the Three Months Ended June 30, 2005

Net Sales

(dollars in millions)

	Three Months Ended								Consolidated Sales
	June 30, 2006			June 30, 2005			Percent Change		Volume Change
France	$	97.3		$	104.8		(7.2	)%	3.4	%
United States	55.8			54.8			1.8		(17.2	)
Brazil	14.7			14.2			3.5		0.3
Subtotal	167.8			173.8
Intersegment	(5.7		)	(5.6		)
Total	$	162.1		$	168.2		(3.6	)%	(2.1	)%

We reported net sales of $162.1 million in the quarter compared with $168.2 million in the same period a year ago.  The decrease of $6.1 million, or 3.6 percent, consisted of the following (dollars in millions):

	Amount			Percent
Changes in selling prices and product mix	$	2.4		1.4	%
Changes in sales volumes (acquisition)	1.6			1.0
Changes in sales volumes (internal growth)	(8.8		)	(5.2	)
Changes in currency exchange rates	(1.3		)	(0.8	)
Total	$	(6.1	)	(3.6	)%

Net sales decreased by $6.1 million, or 3.6 percent, as a result of decreased sales volumes and unfavorable currency exchange rate changes, partially offset by higher average selling prices and an improved mix of products sold.

·Unit sales volumes decreased 2.1 percent compared with last year, having a $7.2 million, or 4.2 percent, impact on the net sales comparison.

·Sales volumes in the United States decreased by 17.2 percent reflecting a reduction of commercial and industrial paper sales, as a result of paper machine rationalization, as well as lower sales of conventional tobacco-related papers.  Sales volumes of cigarette paper for lower ignition propensity cigarettes increased.

·Sales volumes of the French segment increased by 3.4 percent.  Sales volumes increased for reconstituted tobacco leaf products and for tobacco-related papers in both the Indonesian and Philippines operations.  Sales volumes were lower for tobacco-related papers in France.

·Brazil experienced increased sales volumes of 0.3 percent, compared with the second quarter of 2005. 

·Changes in currency exchange rates unfavorably impacted the net sales comparison by $1.3 million.  The euro was approximately 1.5 percent weaker against the U.S. dollar during the quarter, averaging 1.25 dollars per euro in the second quarter of 2006 versus 1.27 in the second quarter of 2005.  The Brazilian real was approximately 14 percent stronger against the U.S. dollar in the second quarter of 2006, partially offsetting the impact of the weaker euro.

·Higher average selling prices had a favorable impact on net sales of $2.4 million, or 1.4 percent.  Higher average selling prices in the United States were partially offset by lower average selling prices in our French and Brazilian operations.  The increase in average selling prices in the United States was primarily attributed to a change in the mix of products sold.

Sales of tobacco-related products accounted for approximately 91 percent of net sales for the quarters ended June 30, 2006 and 2005.

French segment net sales of $97.3 million declined $7.5 million, or 7.2 percent, compared with $104.8 million in 2005.  The decline was a result of the decline in tobacco-related paper sales volumes in France, lower average selling prices in France and unfavorable changes in currency exchange rates,   These unfavorable effects were partially offset by increased sales of RTL, increased sales in Indonesia and the added net sales of the Philippines business.

The U.S. segment net sales of $55.8 million represented an increase of $1.0 million, or 1.8 percent, compared with 2005 net sales of $54.8 million.  Net sales of the U.S. segment increased as a result of higher average selling prices, primarily due to the mix of products sold, partially offset by decreased sales volume.

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The Brazil segment net sales of $14.7 million increased $0.5 million, or 3.5 percent, compared with 2005 net sales of $14.2 million.  The Brazilian segment’s net sales increase was primarily due to the stronger Brazilian real.

Operating Expenses

(dollars in millions)

	Three Months Ended
	June 30,		June 30,					Percent		Percent of Net Sales
	2006		2005		Change			Change		2006		2005
Net Sales	$	162.1	$	168.2	$	(6.1	)	(3.6	)%
Cost of products sold	139.9		142.0		(2.1		)	(1.5	)	86.3	%	84.4	%
Gross Profit	$	22.2	$	26.2	$	(4.0	)	(15.3	)%	13.7	%	15.6	%

Gross profit was $22.2 million in the second quarter of the current year versus $26.2 million in the second quarter of 2005.  The gross profit margin was 13.7 percent, declining from 15.6 percent in the second quarter of 2005. The decline in gross profit was the result of the inability to fully offset unabsorbed fixed costs, caused by lower production volumes, and inflationary cost increases through improved mill operations or higher selling prices. Reduced paper machine operating schedules and lower production volumes were experienced, primarily in our French and U.S. operations.  This resulted in unfavorable fixed cost absorption impacts that increased operating expenses by $5.4 million.  Inflationary cost increases unfavorably impacted operating results by $3.7 million in the quarter compared with the prior year quarter.

Purchased energy costs increased by $3.0 million compared with the second quarter of 2005, with higher energy costs experienced in all business units, related to higher electricity, natural gas and fuel oil costs.  Higher labor rates increased manufacturing expenses by $0.5 million during the quarter.  Changes in the per ton costs of wood pulp increased our operating expenses by $0.5 million in the current quarter comparison with the prior year.  The U.S. list price of northern bleached softwood kraft pulp, a bell-weather pulp grade, averaged $705 per metric ton during the second quarter of 2006, an 8 percent increase compared with an average market list price of $655 per metric ton in the second quarter of 2005.  Decreases in prices for purchased materials other than wood pulp had a favorable impact on the operating results of $0.3 million. 

These unfavorable factors were partially offset by improved mill operations.  Significant operational improvements were achieved in each of our business units through increased productivity and reduced waste.

Nonmanufacturing Expenses

(dollars in millions)

	Three Months Ended
	June 30,		June 30,					Percent		Percent of Net Sales
	2006		2005		Change			Change		2006		2005
Selling expense	$	5.9	$	6.1	$	(0.2	)	(3.3	)%	3.6	%	3.6	%
Research expense	1.9		2.5		(0.6		)	(24.0	)	1.2		1.5
General expense	6.8		6.9		(0.1		)	(1.4	)	4.2		4.1
Nonmanufacturing expenses	$	14.6	$	15.5	$	(0.9	)	(5.8	)%	9.0	%	9.2	%

Nonmanufacturing expenses were $14.6 million in the second quarter of 2006, a decrease of $0.9 million, or 5.8 percent, less than the prior year of $15.5 million.  Selling, research and general expenses were all lower, reflecting cost reduction efforts in these areas.  Nonmanufacturing expenses were 9.0 percent of net sales in the second quarter of 2006, slightly below the prior-year period.

Restructuring Expense

We decided in February 2006 to transfer the production volume from one Lee Mills porous plug wrap paper machine to another currently under-utilized Lee Mills porous plug wrap paper machine and to commence accelerated depreciation on the affected equipment.  Additionally, the salaried and hourly Lee Mills workforce was reorganized to be more efficient and cost effective.  As a result of these decisions, we incurred restructuring expenses of $0.5 million during the second quarter, of which $0.2 million represented non-cash accelerated depreciation and $0.3 million of cash costs were employee related.

Additionally, during May 2006, we announced a decision to cease the production and sale of décor papers made at our mill in Lee.  As a result of this decision, we ceased operation of a paper machine in July, which resulted in

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accelerated depreciation and other restructuring related expenses totaling $2.4 million during the second quarter, of which $2.2 million represented non-cash expenses of accelerated depreciation and inventory write-offs and $0.2 million represented cash costs, including severance benefits.

In France, a downturn in demand for tobacco-related papers has resulted from a decrease in consumption of cigarettes in certain countries due to increased taxes and regulation on the cigarette industry.  Additionally, new tobacco-related papers capacity began operation in Europe during 2003 and 2004.  This has created a very competitive pricing environment during a time of high inflationary cost increases resulting in some lost sales volumes for tobacco-related papers produced by our French operations.  This downturn in demand, as well as our decision to eliminate low margin products, has caused us to have excess capacity and machine shutdowns. As a result, we recorded restructuring expense of $0.5 million in the second quarter of 2006, which consisted of accelerated depreciation of $0.3 million and severance and other cash restructuring charges of $0.2 million.

Total restructuring expenses of $3.4 million were recorded during the second quarter of 2006. 

Operating Profit

(dollars in millions)

	Three Months Ended
	June 30,			June 30,			Percent		Return on Net Sales
	2006			2005			Change		2006		2005
France	$	5.5		$	11.5		(52.2	)%	5.7	%	11.0	%
United States	0.7			—			N.M.		1.3		N.M.
Brazil	(0.3		)	1.0			N.M.		(2.0	)	7.0
Subtotal	5.9			12.5
Unallocated expenses	(1.7		)	(1.8		)
Total	$	4.2		$	10.7		(60.7	)%	2.6	%	6.4	%

N.M.       Not Meaningful

Operating profit was $4.2 million for the quarter, a decline of $6.5 million, or 60.7 percent, from $10.7 million operating profit for the second quarter of 2005.  Operating profit return on sales was 2.6 percent compared with 6.4 percent in the second quarter of last year.  During the quarter, operating profit was lower in our French and Brazilian business units but increased in our U.S. operations.

The French segment’s operating profit was $5.5 million for the quarter, $6.0 million, or 52.2 percent, less than the $11.5 million realized in the second quarter of 2005.  The decline was primarily due to:

·A decline in production volume. Unabsorbed fixed costs due to lower production volume decreased operating profit by $3.8 million.

·Increased purchased energy, labor and purchased wood pulp expenses.  Inflationary cost increases reduced operating profit by $2.4 million during the quarter.

·Restructuring expenses of $0.5 million that were incurred during the second quarter of 2006.

·Lower average selling prices due to an unfavorable mix of products sold.

These factors were partially offset by:

·Improved mill operations.

·Positive exchange rate impacts related to the weaker euro compared with the dollar.

·Reduced nonmanufacturing expenses.

The U.S. business unit’s operating profit was $0.7 million for the quarter, an increase of $0.7 million from the prior year, which was breakeven.  This improvement was realized despite $2.9 million in restructuring expenses during the second quarter of 2006.  This improvement was primarily related to:

·Higher average selling prices, resulting primarily from an improved sales mix that included increased sales of cigarette paper for lower ignition propensity cigarettes.

·Significant improvement in mill operations, primarily from cost reduction activities combined with improved machine efficiencies.

·Lower nonmanufacturing expenses.

These gains were partially offset by:

·$2.9 million of restructuring expenses in 2006.

·$1.3 million of unabsorbed fixed costs due to lower production volume.

·$1.1 million of inflationary cost increases, primarily related to higher purchased energy, wood pulp and labor costs.

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Brazil’s operating loss of $0.3 million during the quarter was a decline of $1.3 million from an operating profit of $1.0 million in the second quarter of 2005.  This decrease was related to:

·The strengthening of the Brazilian real versus the U.S. dollar that had an unfavorable impact on operating profit of $1.0 million.

·Inflationary cost increases of $0.2 million, primarily related to increased wood pulp and purchased energy expenses.

Non-Operating Expenses

Interest expense was $1.4 million for the quarter, $0.1 million lower during the second quarter of 2006 compared with $1.5 million in the second quarter of the prior year, primarily due to a reduced amount of debt in the 2006 period, largely offset by higher interest rates.  The weighted average effective interest rates on our 5-year revolving debt facilities were approximately 4.9 and 3.4 percent for the quarters ended June 30, 2006 and 2005, respectively.

Other (expense) income, net was an expense of $0.6 million for the quarter, $1.5 million unfavorable versus $0.9 million in income during the second quarter of 2005, primarily due to foreign currency transaction losses in 2006 versus gains in 2005.

Income Taxes

The provision for income taxes reflected an effective income tax rate of 18 percent for the second quarter of 2006 compared with 29 percent for the second quarter of 2005.  The lower effective income tax rate in 2006 versus that of 2005 was primarily the result of lower earnings and a different mix of earnings by jurisdiction.

Minority Interest

Minority interest declined to $1.0 million in the second quarter of 2006 from $1.4 million in the 2005 period.  This decrease reflected lower earnings of LTR Industries, or LTRI, a French subsidiary, which produces reconstituted tobacco leaf products and has a minority owner that owns 28 percent of its shares.

Loss from Equity Affiliates

The $0.1 million loss from equity affiliates represents our 50 percent share of the pre-operating costs associated with our joint venture in China.

Net Income and Earnings per Share

Net income for the second quarter of 2006 was $0.7 million, a decline of $5.1 million from net income of $5.8 million in the second quarter of 2005.  Diluted earnings per share were $0.04 compared with $0.38 for the second quarter of 2005, an 89 percent decline.  The decline in both net income and diluted earnings per share compared with the prior year quarter was caused by lower operating profit, including restructuring expenses, and the increase in other expense, partially offset by the lower effective income tax rate and lower minority interest.

Six Months Ended June 30, 2006 Compared with the Six Months Ended June 30, 2005

Net Sales

(dollars in millions)

	Six Months Ended								Consolidated Sales
	June 30, 2006			June 30, 2005			Percent Change		Volume Change
France	$	190.0		$	206.9		(8.2	)%	3.5	%
United States	118.2			106.7			10.8		(8.2	)
Brazil	31.0			27.7			11.9		5.1
Subtotal	339.2			341.3
Intersegment	(11.7		)	(12.5		)
Total	$	327.5		$	328.8		(0.4	)%	0.9	%

We reported net sales of $327.5 million in the first six months of 2006, a 0.4 percent decrease compared with $328.8 million in the first six months of 2005.  The decrease of $1.3 million consisted of the following (dollars in millions):

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	Amount			Percent
Changes in selling prices and product mix	$	6.6		2.0	%
Changes in sales volumes (acquisition)	4.2			1.3
Changes in sales volumes (internal growth)	(5.8		)	(1.8	)
Changes in currency exchange rates	(6.3		)	(1.9	)
Total	$	(1.3	)	(0.4	)%

·Unit sales volumes increased by 0.9 percent compared with the first six months of last year, having the effect of a decrease on net sales of $1.6 million, or 0.5 percent.  Despite the increase in unit sales volumes, the corresponding net sales dollars decreased due to product mix changes.

·Brazil experienced increased sales volumes of 5.1 percent compared with the first six months of 2005.  This improvement was the result of increased sales of tobacco-related papers, primarily in export markets.

·Sales volumes of the French segment increased by 3.5 percent, primarily as a result of increased sales of reconstituted tobacco leaf products and tobacco-related papers in both the Indonesian and Philippines operations.  Sales volumes were lower for tobacco-related papers in France.

·Sales volumes in the United States decreased by 8.2 percent, reflecting a reduction of commercial and industrial paper sales and lower sales of tobacco-related papers. Tobacco-related sales volumes included an increase in the sale of cigarette paper for lower ignition propensity cigarettes.

·Higher average selling prices had a favorable $6.6 million, or 2.0 percent, impact on the net sales comparison.  The improvement in average selling prices was primarily due to the mix of products sold in the United States, which more than offset lower average selling prices in our French operations.

·Changes in currency exchange rates unfavorably impacted the net sales comparison by $6.3 million.  The euro was approximately 6 percent weaker against the U.S. dollar, and the real was approximately 17 percent stronger against the U.S. dollar.

Sales of tobacco-related products accounted for approximately 91 percent of net sales for the six months ended June 30, 2006 and 2005.

The U.S. segment net sales of $118.2 million represented an increase of $11.5 million, 10.8 percent, compared with $106.7 million in 2005.  Net sales of the U.S. segment increased primarily as a result of higher average selling prices and an improved mix of products sold, partially offset by decreased sales volumes.

Brazil realized an increase in net sales of $3.3 million, or 11.9 percent, to $31.0 million from $27.7 million in 2005.  The Brazilian segment’s net sales increase was primarily due to increased sales volumes of tobacco-related papers and the stronger Brazilian real.

French segment 2006 net sales of $190.0 million declined $16.9 million, or 8.2 percent, from $206.9 million in 2005.  The decline was a result of the decline in tobacco-related paper sales volumes in France, unfavorable changes in currency exchange rates and lower average selling prices in France.  These unfavorable effects were partially offset by increased RTL sales volumes, increased sales in Indonesia and the added net sales of the Philippines business acquired in June 2005.

Operating Expenses

(dollars in millions)

	Six Months Ended
	June 30,		June 30,					Percent		Percent of Net Sales
	2006		2005		Change			Change		2006		2005
Net Sales	$	327.5	$	328.8	$	(1.3	)	(0.4	)%
Cost of products sold	280.7		278.5		2.2			0.8		85.7	%	84.7	%
Gross Profit	$	46.8	$	50.3	$	(3.5	)	(7.0	)%	14.3	%	15.3	%

Gross profit was $46.8 million in the six months ended June 30, 2006, a decline of $3.5 million, or 7.0 percent, versus $50.3 million in 2005.  The gross profit margin was 14.3 percent in the first six months of 2006, declining from 15.3 percent in the first six months of 2005.  Gross profit was unfavorably impacted by inflationary cost increases and unabsorbed fixed costs as a result of lower production volumes.

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Inflationary cost increases unfavorably impacted operating results by $9.6 million during the first half of 2006, and unabsorbed fixed costs, related to decreased production volumes, increased operating expenses by $8.8 million.  Reduced paper machine operating schedules and lower production volumes were experienced in our French and U.S. operations, resulting in the unfavorable fixed cost absorption impacts.

During the first six months of 2006, purchased energy costs increased by $7.7 million compared with the first six months of 2005, with higher energy costs experienced in all business units, related to higher electricity, natural gas and fuel oil costs.  Higher labor rates increased manufacturing expenses by $1.1 million during the first six months of 2006.  Changes in the per ton cost of wood pulp increased our operating expenses by $0.7 million in the first six months of 2006 compared with the first six months of 2005.

These unfavorable factors were partially offset by an improved mix of products sold, primarily in the United States due to higher sales of cigarette paper for lower ignition propensity cigarettes, and improved mill operations.  Significant operational improvements were achieved in each of our business units through increased productivity and reduced waste.

Nonmanufacturing Expenses

(dollars in millions)

	Six Months Ended
	June 30,		June 30,					Percent		Percent of Net Sales
	2006		2005		Change			Change		2006		2005
Selling expense	$	11.5	$	12.3	$	(0.8	)	(6.5	)%	3.5	%	3.7	%
Research expense	3.7		5.0		(1.3		)	(26.0	)	1.1		1.5
General expense	14.5		12.7		1.8			14.2		4.5		3.9
Nonmanufacturing expenses	$	29.7	$	30.0	$	(0.3	)	(1.0	)%	9.1	%	9.1	%

Nonmanufacturing expenses decreased by $0.3 million, or 1.0 percent, to $29.7 million from $30.0 million in 2005, with lower selling and research expenses largely offset by higher general expense.  Nonmanufacturing expenses remained consistent at 9.1 percent of net sales in the first six months of both 2006 and 2005.  The reduction in research expense was primarily due to reduced new product mill trials in 2006.  General expense was $1.8 million higher compared with the first six months of 2005 primarily as a result of increased employee compensation costs, the addition of the Philippines operation, which was acquired in June 2005, and costs associated with the implementation of our joint venture in China.

Restructuring Expense

We decided in February 2006 to transfer the production volume from one Lee Mills porous plug wrap paper machine to another currently under-utilized Lee Mills porous plug wrap paper machine and to commence accelerated depreciation on the affected equipment.  Additionally, the salaried and hourly Lee Mills workforces were reorganized to be more efficient and cost effective.  As a result of these decisions, we incurred restructuring expenses of $0.8 million during the six months ended June 30, 2006, of which $0.5 million represented non-cash accelerated depreciation and $0.3 million of cash costs were employee related.

Additionally, during May 2006, we announced a decision to cease the production and sale of décor papers made at our mill in Lee.  As a result of this decision, we ceased operation of a paper machine in July, which resulted in accelerated depreciation and other restructuring related expenses totaling $2.4 million during the six months ended June 30, 2006, of which $2.2 million represented non-cash expenses of accelerated depreciation and inventory write-offs and $0.2 million represented cash costs, including severance benefits.

In France, a downturn in demand for tobacco-related papers resulted from a decrease in consumption of cigarettes in certain countries due to of increased taxes and regulation on the cigarette industry.  Additionally, new tobacco-related papers capacity began operation in Europe during 2003 and 2004.  This has created a very competitive pricing environment during a time of high inflationary cost increases resulting in some lost sales volumes for tobacco-related papers produced by our French operations.  This downturn in demand, as well as the Company’s decision to eliminate low margin products, has caused us to have excess capacity and machine shutdowns. As a result, $0.7 million was recorded as restructuring expense in the first six months of 2006, which consisted of accelerated depreciation of $0.5 million and severance and other cash costs of $0.2 million. 

Total restructuring expenses of $3.9 million were recorded during the first six months of 2006.

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Operating Profit

(dollars in millions)

	Six Months Ended
	June 30,			June 30,			Percent		Return on Net Sales
	2006			2005			Change		2006		2005
France	$	13.9		$	22.3		(37.7	)%	7.3	%	10.8	%
United States	3.2			(0.4		)	N.M.		2.7		(0.4	)
Brazil	(0.1		)	1.3			N.M.		(0.3	)	4.7
Subtotal	17.0			23.2
Unallocated expenses	(3.8		)	(2.9		)
Total	$	13.2		$	20.3		(35.0	)%	4.0	%	6.2	%

N.M. Not Meaningful

Operating profit was $13.2 million for the first six months of 2006, a decline of $7.1 million, or 35.0 percent, from $20.3 million operating profit for the first six months of 2005.  Operating profit return on sales was 4.0 percent compared with 6.2 percent in the first six months of last year.  During the first six months of 2006, improved profitability in our U.S. operations was more than offset by lower operating profit in the French and Brazilian segments.

The French segment’s operating profit was $13.9 million for the first six months of 2006, $8.4 million, or 37.7 percent, less than the $22.3 million realized in the first half of 2005.  The decline was primarily due to:

·Inflationary cost increases of $5.2 million, primarily related to increased purchased energy and labor expenses.

·Unabsorbed fixed costs of $6.1 million as a result of lower production volumes.

·Lower average selling prices due to an unfavorable mix of products sold.

·Restructuring expenses of $0.7 million.

These factors were partially offset by:

·Improved mill operations.

·Positive effects of currency exchange rate changes related to the weaker euro versus the U.S. dollar.

·Lower nonmanufacturing expense.

The U.S. business unit’s operating profit was $3.2 million for the first six months of 2006, a $3.6 million improvement from the prior year operating loss of $0.4 million.  This improvement was primarily related to:

·Higher average selling prices, resulting primarily from an improved sales mix that included increased sales of cigarette paper for lower ignition propensity cigarettes.

·Significant improvement in mill operations, primarily from cost reduction activities combined with improved machine efficiencies.

·Lower nonmanufacturing expenses.

These gains were partially offset by:

·Inflationary cost increases of $3.4 million, including higher purchased energy, labor and wood pulp expenses.

·$3.2 million of restructuring expenses in the form of accelerated depreciation, severance costs and other restructuring expenses.

·Unabsorbed fixed costs of $2.4 million as a result of lower production volumes.

Brazil’s operating loss was $0.1 million during the first six months of 2006, a decline of $1.4 million from an operating profit of $1.3 million in the first half of 2005.  This decrease was related to:

·Unfavorable currency impacts of $2.2 million caused by the strengthening of the Brazilian real versus the U.S. dollar.

·Inflationary cost increases of $1.0 million, primarily related to increased wood pulp and purchased energy expenses.

These unfavorable items were partially offset by:

·Improved mill operations.

·Higher sales and production volumes.

Non-Operating Expenses

Interest expense remained constant at $2.8 million in the first half of both 2006 and 2005.  Lower debt levels in 2006 have been offset by higher interest rates.  The weighted average effective interest rates on our 5-year revolving debt facilities were approximately 4.6 and 3.2 percent for the six months ended June 30, 2006 and 2005, respectively.

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Other (expense) income, net in the first six months of 2006 was an expense of $0.6 million compared to income of $1.5 million in 2005, primarily due to foreign exchange losses in 2006 compared with foreign currency gains in 2005.  In addition, 2005 benefited from a gain on the sale of property in Indonesia. 

Income Taxes

The provision for income taxes reflected an effective income tax rate of 24 percent for the first six months of 2006 compared with 29 percent for the first six months of 2005. The lower effective income tax rate in 2006 versus that of 2005 was primarily the result of lower earnings and a different mix of earnings by jurisdiction.

Minority Interest

Minority interest declined to $2.0 million in the first six months of 2006 from $2.7 million in the first six months of 2005.  This $0.7 million, or 25.9 percent, decrease reflected lower earnings at LTRI.  

Loss from Equity Affiliates

The loss from equity affiliates was $0.1 million during the six months ended June 30, 2006 and represents our 50 percent share of the pre-operating costs associated with our China joint venture.

Net Income and Earnings per Share

Net income for the first six months of 2006 was $5.3 million, a decline of $5.5 million, or 50.9 percent, from net income of $10.8 million in the first six months of 2005.  Diluted earnings per share decreased by 51.4 percent to $0.34 compared with diluted earnings per share of $0.70 for the prior-year period.  The decline in both net income and diluted earnings per share was caused by the lower operating profit, including restructuring expenses, and the increase in other expense, partially offset by the lower effective income tax rate and  lower minority interest.

Liquidity and Capital Resources

A major factor in our liquidity and capital resource planning is our generation of cash flow from operations, which is sensitive to changes in the sales mix, volume and pricing for our products, production volumes, cost increases and changes in working capital.

Cash Requirements

At June 30, 2006, we had net operating working capital of $101.1 million and cash and cash equivalents of $2.7 million, compared with net operating working capital of $94.3 million and cash and cash equivalents of $5.1 million at December 31, 2005. The increase in net operating working capital was primarily the result of a decrease in accounts payable at June 30, 2006.  Based upon our existing cash and operating working capital levels, expected operating cash flows and capital spending, and availability of borrowings under our Credit Agreement and other credit facilities, we believe we have the necessary financial resources to satisfy our liquidity needs for the foreseeable future.

Cash Flows from Operating Activities

(dollars in millions)

	Six Months Ended
	June 30, 2006			June 30, 2005
Net income	$	5.3		$	10.8
Non-cash items included in net income
Depreciation and amortization	22.3			19.3
Amortization of deferred revenue	(3.3		)	(3.9		)
Deferred income tax (benefit) provision	(2.9		)	0.3
Minority interest in earnings of subsidiaries	2.0			2.7
Other items	1.4			(0.8		)
Net changes in operating working capital	(2.6		)	(36.4		)
Cash Provided by (Used for) Operations	$	22.2		$	(8.0	)

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Net cash provided by operations was $22.2 million for the six months ended June 30, 2006 compared with cash used for operations of $8.0 million for the six months ended June 30, 2005, a favorable change of $30.2 million.  Net changes in operating working capital were unfavorable by $2.6 million in the current period, which was a favorable change of $33.8 million compared with the prior year.  Depreciation and amortization increased by $3.0 million, primarily due to accelerated depreciation related to restructuring activities.  Other items changed favorably by $2.2 million, due primarily to the timing of pension funding in 2006 versus 2005.

Prior to 2002, our cash provided by operations included advanced payments from customers for future product purchases.  We recorded these advance payments as deferred revenue, which is being amortized into net sales as earned and credited to customers based upon a mutually agreed-upon amount per unit of product sales.  At the current level of expected volumes, the deferred revenue balance is expected to be fully amortized by December 31, 2011.

Operating Working Capital

(dollars in millions)

	Six Months Ended
	June 30, 2006			June 30, 2005
Changes in operating working capital
Accounts receivable	$	13.1		$	(5.3	)
Inventories	1.3			(21.9		)
Prepaid expenses	(1.9		)	(5.0		)
Accounts payable	(13.6		)	(9.6		)
Accrued expenses	(2.9		)	0.1
Accrued income taxes	1.4			5.3
Net changes in operating working capital	$	(2.6	)	$	(36.4	)

During the first six months of 2006, changes in operating working capital contributed unfavorably to cash flow by $2.6 million due primarily to a decrease in accounts payable, largely offset by lower accounts receivable.  The decrease in accounts payable was primarily due to reduced purchasing activity, especially in France where mill production levels have decreased. In the first six months of 2005, changes in operating working capital contributed unfavorably to cash flow by $36.4 million due primarily to higher inventories and lower accounts payable.  Increased levels of inventory decreased net working capital by $21.9 million during the first six months of 2005 due to higher finished goods inventory levels and higher manufacturing costs.  In 2006, we implemented initiatives to reduce the levels of inventories.

Cash Flows from Investing Activities

(dollars in millions)

	Six Months Ended
	June 30, 2006			June 30, 2005
Capital spending	$	(2.1	)	$	(8.2	)
Capitalized software costs	(0.7		)	(0.2		)
Acquisitions, net of cash acquired	—			(11.9		)
Investment in equity affiliates	(2.5		)	—
Other	(5.9		)	(4.7		)
Cash Used for Investing	$	(11.2	)	$	(25.0	)

Cash used for investing activities in 2006 decreased from 2005 primarily due to acquisition spending in 2005 for PDM Philippines Industries, Inc., a wholly-owned indirect subsidiary, for $11.9 million and a lower level of capital spending in 2006.  The lower level of capital spending reflects the completion of recent major strategic capital spending plans and our control over capital spending given the recent lower level of earnings.  Cash used for investing in 2006 included $2.5 million of equity investment in our joint venture in China.

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Capital Spending

	Six Months Ended
	June 30, 2006		June 30, 2005
Cigarette paper manufacturing strategy	$	—	$	0.8
Other capital projects	2.1		7.4
Total capital spending	$	2.1	$	8.2

Cigarette paper manufacturing strategy.  In April 2003, we announced a new cigarette paper manufacturing strategy.  In support of this strategy, $12.7 million of capital was spent to add cigarette paper manufacturing capacity at our mill in Brazil and $4.6 million of capital spending was incurred to rebuild a cigarette paper machine at our Spotswood, New Jersey mill.  These capital projects were completed during the second quarter of 2005.  Funding for this capital spending came from our internally generated funds and existing bank credit facilities.  This strategy resulted in improved product quality and productivity and facilitates our global sourcing of customers’ requirements in order to take better advantage of our low-cost production capabilities. 

Other capital projects.  No other single project accounted for more than $1.0 million of capital spending in the first six months of either 2006 or 2005.

We incur spending necessary to meet legal requirements and otherwise relating to the protection of the environment at our facilities in the United States, France, the Philippines, Indonesia, Brazil and Canada.  For these purposes, we anticipate that we will incur capital expenditures of approximately $1 million in 2006 and approximately $2 to $3 million in 2007, of which no material amount is the result of environmental fines or settlements.  The foregoing capital expenditures are not expected to reduce our ability to invest in other appropriate and necessary capital projects and are not expected to have a material adverse effect on our financial condition or results of operations. 

We currently expect our capital spending to be approximately $20 million in 2006, financed with internally generated funds.

Cash Flows from Financing Activities

(dollars in millions)

	Six Months Ended
	June 30, 2006			June 30, 2005
Cash dividends paid to SWM stockholders	$	(4.7	)	$	(4.6	)
Net changes in debt	(10.9		)	31.5
Purchases of treasury stock	—			(1.0		)
Proceeds from exercise of stock options	1.8			4.8
Excess tax benefits of stock-based awards	0.4			—
Cash (Used for) Provided by Financing	$	(13.4	)	$	30.7

Financing activities during the first six months of 2006 included net repayments of debt of $32.1 million and borrowings totaling $21.2 million for a net decrease in debt of $10.9 million.  Other 2006 financing requirements included dividends paid to SWM stockholders of $4.7 million.

Financing activities during the first six months of 2005 included borrowings of $36.4 million and repayments totaling $4.9 million for a net increase in debt of $31.5 million.  The proceeds from the increased debt were used to fund working capital expenditures.

Dividend Payments

On July 27, 2006, we announced that the Board of Directors had declared a quarterly cash dividend of $0.15 per share of common stock.  The dividend will be payable on September 11, 2006 to stockholders of record on August 14, 2006.

We have declared and paid quarterly dividends of $0.15 per share since the second quarter of 1996.  We currently expect to continue this level of quarterly dividend.  Our Credit Agreement covenants require us to maintain certain financial ratios, none of which, under normal business conditions, materially limit our ability to pay such dividends,

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and we do not currently anticipate any change in business conditions of a nature that would cause future restrictions on dividend payments as a result of our need to maintain these financial ratios.

Debt Instruments and Related Covenants

(dollars in millions)

	Six Months Ended
	June 30, 2006			June 30, 2005
Changes in short-term debt	$	(3.5	)	$	19.2
Proceeds from issuances of long-term debt	21.2			17.2
Payments on long-term debt	(28.6		)	(4.9		)
Net changes in debt	$	(10.9	)	$	31.5

We maintain short-term and long-term credit facilities.  In addition to uncommitted bank overdrafts and lines of credit totaling approximately $35.3 million in the United States, France and Brazil, of which approximately $21.3 million was still available for borrowing as of June 30, 2006, we had credit facilities with a group of banks which, as of June 30, 2006, included 364-day and 5-year committed revolving credit facilities in the United States and France.  At June 30, 2006, we had approximately $18.2 million still available for borrowing under our 364-day revolving facilities, which were scheduled to expire January 25, 2007.  Additionally, at June 30, 2006, we had approximately $44.7 million still available for borrowing under our 5-year revolving facilities, for which repayment of borrowings could have been extended until maturity of the facility on January 31, 2007.

Under the credit agreement that was in place during the quarter, interest rates were at market rates, based on LIBOR for the U.S. dollar borrowings and EURIBOR for the euro borrowings plus either (a) for 364-day revolver borrowings, applicable margin of either 0.45 percent per annum or 0.55 percent per annum, or (b) for 5-year revolver borrowings, applicable margin of either 0.70 percent per annum or 0.80 percent per annum.  The applicable margin was determined in each instance by reference to our Net Debt to Equity Ratio, as defined in the prior existing credit agreement.

New Bank Credit Agreement

On July 20, 2006, Schweitzer-Mauduit International, Inc. and Schweitzer-Mauduit France S.A.R.L., a wholly-owned subsidiary of the Company, entered into a new unsecured Credit Agreement with a group of banks led by Natexis Banques Populaires, Société Générale Corporate & Investment Banking and SunTrust Robinson Humphrey, a division of SunTrust Capital Markets, Inc. to refinance our existing bank credit agreement.  The Credit Agreement became effective July 31, 2006 and provides for (a) additional borrowing capacity of approximately $60 million, increasing the total facilities to approximately $195 million from approximately $135 million, (b) a reduced number of tranches from 4 to 2, (c) extended terms, with the maturity date of the new facilities being no earlier than 5 years, (d) lower interest rate margins and (e) fewer, less restrictive financial covenant requirements.  The Credit Agreement replaces the existing credit facility executed on January 31, 2002 that was scheduled to expire in January 2007.  We repaid the outstanding amount of the prior existing credit agreement with proceeds from borrowings under the Credit Agreement on July 31, 2006.

The Credit Agreement provides for a $95 million U.S. revolving credit facility, or U.S. revolver, and an €80 million revolving credit facility, or Euro revolver, both with 5-year terms, plus 2 one-year extension options, with the extensions at the discretion of the participating banks.  The Credit Agreement is guaranteed by the Company and contains representations and warranties which are customary for facilities of this type and covenants and provisions that, among other things, require us to maintain (a) a Net Debt to Equity Ratio not to exceed 1.0 and (b) a Net Debt to Adjusted EBITDA Ratio not to exceed 3.0.  The increased amount of the facility and its favorable terms will provide greater flexibility to pursue possible restructuring activities in France and the United States and various strategic opportunities.  Repayment of amounts drawn under the Credit Agreement may be accelerated in limited circumstances, which include events of default not timely cured and change of control events.  Draws have been made to repay borrowings under the existing credit agreement.  Expected draws are also anticipated for (a) working capital needs (b) funding our joint venture in China and (c) other general corporate purposes.  Borrowings, including repayments of the existing credit agreement, against the Credit Agreement are expected to aggregate the U.S. dollar equivalent of approximately $70 to $100 million during the balance of 2006.  Under the Credit Agreement, interest rates are at market rates, based on LIBOR for U.S. dollar borrowings and EURIBOR for euro borrowings, plus an applicable margin that varies from 0.35 percent to 0.75 percent per annum depending on the Net Debt to Adjusted EBITDA Ratio, as defined in the Credit Agreement.  We will incur commitment fees at an annual rate of either 0.30 or 0.35 percent of the applicable margin on the committed amounts not drawn, depending on the Net Debt to Adjusted EBITDA Ratio.

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Our net debt to capital ratios at June 30, 2006 and December 31, 2005 were 24 percent and 27 percent, respectively, both near or in our target range of 25 to 35 percent.

Share Repurchases

We did not repurchase any shares of our common stock during the first six months of 2006.  Share repurchases can be made under a Board of Directors’ authorization covering the period January 1, 2005 through December 31, 2006 in an amount not to exceed $20.0 million.  A total of $1.0 million of share repurchases were made under this authorization in 2005.  We generally use corporate 10b5-1 plans so that share repurchases can be made at predetermined stock price levels, without restricting such repurchases to specific windows of time.  Future common stock repurchases will be dependent upon various factors, including the stock price, strategic opportunities and cash availability.

Stock Option Exercises

During the first six months of 2006, we received $1.8 million in proceeds from the exercise of stock options by employees, a decrease of $3.0 million compared with $4.8 million in proceeds from stock option exercises in the first six months of 2005.  Most of the options exercised were exercised by officers in accordance with 10b5-1 plans.  As part of our corporate governance activities, a policy was implemented in 2002 requiring that our Exchange Act Rule 16 reporting officers, and certain other officers that could be exposed to material non-public information by virtue of their positions, exercise their stock options through Exchange Act Rule 10b5-1 plans for transactions in stock that involve a market transaction.  Additional stock option exercises are not likely to occur in the remaining six months of 2006 based on the 10b5-1 plans currently in effect.

Other Factors Affecting Liquidity and Capital Resources

Postretirement Benefits.  After being in a net overfunded position in 2000 and prior years, our U.S. and French pension plans changed to an underfunded status in 2001 as a result of the poor performance of the equities markets and lower interest rates that caused estimated future pension liabilities to increase because of the necessity to use a lower discount rate.  The underfunded pension status has continued since 2001 (see additional disclosure regarding our pension plans in Note 5 of the Notes to Consolidated Financial Statements in our Annual Report on Form 10-K for the year ended December 31, 2005).  During 2003, interest rates declined, but the equities markets improved and we made pension contributions of $10.7 million in the United States and France.  During 2004 and 2005, long-term interest rates declined further, equities markets improved and we made pension contributions of $10.8 million and $13.7 million, respectively.  As of December 31, 2005, these plans were still underfunded by $33.4 million as it relates to the associated accumulated pension benefit obligations.  In April 2006, we made a $2.0 million pension contribution and have made an additional $2.0 million pension contribution in July 2006.  We currently expect to make total pension contributions for the full year of 2006 of approximately $10 to $15 million and additional amounts in future years in the United States and France in order to help improve the funded status of these plans.

In May 2006, the decision was made and communicated to all affected Lee Mills hourly employees that their benefits related to our defined benefit plan in the United States would be frozen as of July 17, 2006.  This action is expected to reduce our future annual pension expense and pension fund contribution requirements, improving the pension funding status in the United States.  The plan has not been terminated and benefits accrued as of July 17, 2006 will continue to be paid in accordance with the plan terms.  Allowable contributions and our matching percentage for the defined contribution, or 401(k), plan for the Lee Mills hourly employees are being modified to partially offset the employee pension benefit reduction.

Other Commitments. Our mill in Quimperle, France has a minimum annual commitment for calcium carbonate purchases, a raw material used in the manufacturing of some paper products, which totals approximately $3 million per year.  Our future purchases at this mill are expected to be at levels that exceed such minimum levels under the contract.  The current calcium carbonate contract expires in 2009, although a tentative agreement has been reached to extend the purchase agreement by an additional 5 years.

In March 2004, LTRI, our 72 percent indirectly owned subsidiary in France, entered into an agreement with an energy cogeneration supplier whereby the supplier would construct and operate a cogeneration facility at the LTRI mill and supply steam which would be used in the operation of the mill.  In April 2004, a similar agreement was entered into with the same supplier to install and operate a cogeneration facility at PdM.  These agreements are expected to reduce the energy cost of these mills.  The construction phase of the LTRI cogeneration facilities was completed in late 2005 and the construction of the PdM cogeneration facility should be completed in late 2006, with

31

the supplier bearing the capital cost of both projects.  Following start-up of these facilities, LTRI and PdM will be committed to purchasing minimum annual amounts of steam generated by each of these facilities for a period of 15 years under the agreements.  These minimum annual commitments together will total approximately $3 million.  LTRI’s and PdM’s current and expected requirements for steam are at levels that exceed the minimum levels under the respective contracts.

The table of future “Contractual Obligations” presented in Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations, Other Factors Affecting Liquidity and Capital Resources, in our Form 10-K for the year ended December 31, 2005 included  $78.7 million of current and long-term debt commitments under our prior existing bank credit agreement.  All of this debt was shown as being due in 2006 and 2007.  This bank debt was refinanced on July 31, 2006 under the new Credit Agreement, which debt is now not due until 2011.

As of December 31, 2005 in the table of future “Contractual Obligations” in our Form 10-K, the contractual obligations for our joint venture funding obligations in China were dependent on obtaining project financing and various governmental approvals.  We have since obtained the necessary project financing and governmental approvals, and our contractual obligations for these equity investments are now expected to be approximately $3 million, $12 million and $2 million for 2006, 2007 and 2008, respectively.

Employee Labor Agreements.  On May 18, 2006 at the Lee Mills, we implemented the terms of our last and final offer following an impasse in negotiations with the United Steelworkers of America on a collective bargaining agreement. The implemented offer will expire on May 18, 2008.

Collective bargaining agreements at our Quimperle, Spay and Saint-Girons mills in France expired December 31, 2005, February 28, 2006 and May 31, 2006, respectively.  As allowed under French law, after failure to reach agreement with the collective bargaining units, these mills implemented new terms which will be in effect through December 31, 2006, February 29, 2008 and June 5, 2007, respectively.

On May 1, 2006, we entered into a new collective bargaining agreement at our mill in Medan, Indonesia.  This agreement has a term of two years, ending on April 30, 2008.

The annual collective bargaining agreement at our Pirahy mill in Brazil was ratified in July 2006, with a one year term ending on May 31, 2007.

Outlook

Worldwide Cigarette Consumption

Consistent with recent historical trends, worldwide cigarette consumption is expected to increase at a rate of approximately one-half to one percent per year.  The anticipated decline in the production of cigarettes in developed countries is expected to be more than offset by increased cigarette production in developing countries that currently represent approximately 70 percent of worldwide cigarette production.  Age demographics and expected increases in disposable income are expected to support the increased consumption of cigarettes in developing countries.  In addition, the litigation environment is different in most foreign countries compared with the United States, having less of an impact on the pricing of cigarettes, which, in turn, affects cigarette consumption.  Cigarette production in the United States is expected to continue to decline as a result of reduced cigarette exports and a decline in domestic cigarette consumption caused by increased cigarette prices, health concerns and public perceptions, including restrictions on where smoking is allowed.  As well, cigarette consumption has been declining in western Europe following recent tax increases on cigarette sales and smoking restrictions.

In developing countries, there is a trend toward consumption of more sophisticated cigarettes, which utilize higher quality tobacco-related papers, such as those we produce, and reconstituted tobacco leaf.  This trend toward more sophisticated cigarettes reflects, in part, increased governmental regulations concerning tar delivery levels and increased competition from multinational cigarette manufacturers.

Based on these trends, we expect worldwide demand for tobacco-related papers and reconstituted tobacco leaf products to continue to increase, with a shift from developed countries to developing countries.  As a result, we have increased our production capacity in developing countries such as Brazil, the Philippines and Indonesia and entered into a joint venture in China.

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Results of Changing Demand for Cigarettes

We are experiencing increased weakness in the sale of conventional tobacco-related products.  Reduced demand for tobacco-related paper products in western Europe and the United States, as well as below planned growth in new markets for our reconstituted tobacco leaf products, have caused us to have excess production capacity and increased machine downtime. Continuing weakness in both sales volumes and selling prices is the result of reduced cigarette consumption, in part due to increased taxes, and a surplus of cigarette paper manufacturing capacity as a result of capacity additions by European competitors.  The unfavorable impact of this downtime, reflected in unabsorbed fixed costs, is expected to increase our operating expenses during 2006 by roughly $20 million compared with 2005.

In addition to decisions already made, we are continuing to evaluate how to operate our production facilities in France and the United States more effectively with the reduced conventional tobacco-related paper volumes.  During 2006, decisions have been made to recognize accelerated depreciation on certain production equipment in both countries.  This accelerated depreciation, as well as employee and other related costs, are expected to total approximately $6 to $7 million in 2006.  Although analyses are ongoing, no further decisions have been made, and we have not committed to any actions beyond the steps already taken. However, additional restructuring expenses in France or the United States may be required based on the outcome of these analyses.

During 2006, we will continue to upgrade, expand and integrate the operations that we acquired during the past 2 years in the Philippines and Indonesia.  We have also embarked upon the construction of our tobacco-related papers joint venture mill in China.  The management team for this joint venture is in place, administrative practices and controls are being implemented and detailed engineering and long-lead item procurement are in process.  A cornerstone laying ceremony for the new mill occurred in July.  Construction should take approximately 2 years, with mill operations currently expected to commence in early 2008.

Lower Ignition Propensity Cigarettes

Momentum continues to build for lower ignition propensity cigarettes.  Two U.S. states, New York and Vermont, plus Canada have implemented legislation requiring cigarettes to meet the same lower cigarette ignition propensity standards.  An additional 4 U.S. states have regulations that become effective between January 2007 and January 2008, with the states of Illinois, New Hampshire and Massachusetts joining California in passing lower ignition propensity cigarette legislation.  These 6 U.S. states with lower ignition propensity legislation are estimated to comprise approximately 16 percent of U.S. cigarette consumption and, with Canada, are estimated to comprise approximately 23 percent of combined U.S. and Canadian cigarette consumption.  In addition to these 6 states, 13 additional states have introduced legislation addressing lower ignition propensity properties for cigarettes.  Outside of North America, Australia is the most active jurisdiction working on possible lower ignition propensity legislation.  Legislation could be implemented in Australia later this year which would reportedly require compliance beginning in 2008.  Cigarette consumption in Australia is estimated to be approximately equal in size to the State of California, or the equivalent of approximately 7 percent of U.S. demand.

We continue to experience increased production and sales of cigarette papers for lower ignition propensity cigarettes, compared to the prior year, in support of the new regulations in Canada and Vermont.  Sales of cigarette papers for lower ignition propensity cigarettes have and are expected to continue to contribute positively to operating results in future periods.  These papers sell for a significantly higher price and a better margin than the conventional cigarette papers they replace.  With increasing sales volumes of this cigarette paper, we are achieving improvement in our manufacturing costs for these products.

Other Factors

The significant inflationary cost increases experienced during 2005 are continuing in 2006, reflected in higher purchased energy, purchased materials, wood pulp and labor expenses.  These inflationary cost increases are expected to have an unfavorable impact on the year of approximately $15 million compared with 2005, with approximately $12 million of this amount related to higher purchased energy costs.  With nearly $10 million in inflationary cost increases already realized this year, the rate of cost increases is expected to lessen somewhat in the second half of the year and increasingly be offset through improved mill operations and continued efforts to systematically control all areas of cost.

The weakened U.S. dollar is expected to continue to put pressure on our profitability in Brazil, similar to 2005 and the first half of 2006.

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With the current difficult market conditions, lower than previously anticipated sales volumes, the unfavorable impact of reduced paper machine operating schedules, significant inflationary cost increases and associated restructuring activities, 2006 will continue to be a very challenging year. We do expect to be able to increasingly offset these unfavorable factors to some degree, through improved mill operations, continued efforts to systematically control all areas of cost and increased sales of both reconstituted tobacco leaf products and cigarette papers for lower ignition propensity cigarettes.

We currently expect our capital spending for 2006 to total approximately $20 million.

Forward-Looking Statements

This report contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and are subject to the safe harbor created by that Act.  These statements include those in the “Outlook” section and our expectations elsewhere in Management’s Discussion and Analysis of Financial Condition and Results of Operations.  They also include statements containing “expect,” “anticipate,” “project,” “appears,” “should,” “could,” “may,” “typically” and similar words.  Actual results may differ materially from the results suggested by these statements for a number of reasons, including the following:

·We have manufacturing facilities in 6 countries and sell products in over 90 countries.   As a result, we are subject to a variety of import and export, tax, foreign currency, labor and other regulations within these countries.  Changes in these regulations, or adverse interpretations or applications, as well as changes in currency exchange rates, could adversely impact our business in a variety of ways, including increasing expenses, decreasing sales, limiting our ability to repatriate funds and generally limiting our ability to conduct business.

·Our financial performance is dependent upon the cost of raw materials, particularly wood pulp, purchased energy, chemicals and labor.  Recently, the total cost of these items has increased significantly, and competitors’ selling prices for certain products and the nature of our agreements with our customers may make it difficult to pass changes in these costs on to our customers in a timely and effective manner.

·Our sales are concentrated to a limited number of customers.  In 2005, approximately 49 percent of our sales were to our 2 largest customers.  The loss of one or both such customers, or a significant reduction in one or both of these customers’ purchases, could have a material adverse effect on our results of operations.

·Our financial performance is materially impacted by sales of both reconstituted tobacco leaf products and lower ignition propensity cigarette papers.  A significant change in the sales or production volumes, pricing or manufacturing costs of these products could have a material impact on future financial results.

·As a result of current excess capacity in the tobacco-related papers industry and increased operating costs experienced in the last 12 to 24 months, particularly related to purchased energy, competitive levels of selling prices for certain of our products are not sufficient to cover those costs with a margin that we consider reasonable.  Such competitive pressures have resulted in downtime of certain paper machines and, in some cases, accelerated depreciation of certain equipment.  In addition to decisions that have already been made, management continues to evaluate how to operate our production facilities more effectively with reduced tobacco-related papers volumes.  Further changes are possible that might require accelerated depreciation or write-offs of some additional equipment and could potentially include expenses for employee-related costs associated with possible downsizing activities, particularly in France or the United States.

·In recent years, governmental entities around the world, particularly in the United States, have taken or have proposed actions that may have the effect of reducing consumption of tobacco products.  Reports with respect to the possible harmful physical effects of cigarette smoking and use of tobacco products have been publicized for many years and, together with actions to restrict or prohibit advertising and promotion of cigarettes or other tobacco products, to limit smoking in public places and to increase taxes on such products, are intended to discourage the consumption of cigarettes and other such products.  Also in recent years, certain governmental entities, particularly in North America, have enacted, considered or proposed actions that would require cigarettes to meet specifications aimed at reducing their likelihood of igniting fires when the cigarettes are not actively being smoked.  Furthermore, it is not possible to predict what additional legislation or regulations relating to tobacco products will be enacted, or to what extent, if any, such legislation or regulations might affect our business.

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For additional factors and further discussion of these factors, please see our Annual Report on Form 10-K for the year ended December 31, 2005.

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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Our market risk exposure at June 30, 2006 is consistent with, and not materially different than, the types of market risk and amount of exposures presented under the caption “Market Risk” in Part I, Item 1A in our Annual Report on Form 10-K for the year ended December 31, 2005 filed with the SEC.

ITEM 4. CONTROLS AND PROCEDURES

We currently have in place systems relating to disclosure controls and procedures with respect to the accurate and timely recording, processing, summarizing and reporting of information required to be disclosed in our periodic Exchange Act reports. We periodically review and evaluate these disclosure controls and procedures to ensure that such information is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions about required disclosure. In completing our review and evaluation of the effectiveness of our disclosure controls and procedures as of June 30, 2006, our Chief Executive Officer and Chief Financial Officer have concluded that these controls and procedures were effective as of June 30, 2006. No changes in our internal control over financial reporting were identified as having occurred in the fiscal quarter ended June 30, 2006 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

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

We have reviewed the accompanying consolidated balance sheet of Schweitzer-Mauduit International, Inc. and subsidiaries (the “Company”) as of June 30, 2006, and the related consolidated statements of income, changes in stockholders’ equity and comprehensive income (loss) and cash flow for the three-month and six-month periods ended June 30, 2006 and 2005.  These interim financial statements are the responsibility of the Company’s management.

We conducted our reviews in accordance with the standards of the Public Company Accounting Oversight Board (United States).  A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters.  It is substantially less in scope than an audit conducted in accordance with the standards of the Public Company Accounting Oversight Board (United States), 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 reviews, we are not aware of any material modifications that should be made to such consolidated interim financial statements for them to be in conformity with accounting principles generally accepted in the United States of America.

We have previously audited, in accordance with standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet of Schweitzer-Mauduit International, Inc. and subsidiaries as of December 31, 2005, and the related consolidated statements of income, changes in stockholders’ equity and comprehensive income (loss) and cash flow for the year then ended (not presented herein); and in our report dated March 3, 2006, 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, 2005 is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.

/s/ DELOITTE & TOUCHE LLP

Atlanta, Georgia
August 8, 2006

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PART II

ITEM 1. LEGAL PROCEEDINGS

Our description of legal proceedings is in Part I, Item 3 of our Annual Report on Form 10-K for the year ended December 31, 2005 filed with the SEC and in Note 5 in the Notes to Unaudited Consolidated Financial Statements in Part I, Item 1 of this Quarterly Report on Form 10-Q.  As of June 30, 2006, no material change has occurred with respect to the matters discussed therein and there are no material new matters to report.

ITEM 1A. RISK FACTORS

There were no material changes from the risk factors previously disclosed in our Form 10-K for the year ending December 31, 2005.  For a full description of these risk factors, please refer to Part I, Item 1A, “Risk Factors” therein, together with the “Forward-Looking Statements” section within Part I, Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of this Form 10-Q.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

We did not repurchase any shares of our Common Stock during the first six months of 2006.  The following table indicates the amount of shares of our Common Stock we have repurchased during 2006 and the remaining amount of share repurchases currently authorized by our Board of Directors as of June 30, 2006:

			Total Number of		Maximum Amount
	Total Number	Average	Shares Repurchased		Of Shares that May
	Of Shares	Price Paid	As Part of Publicly		Yet be Repurchased
	Repurchased	Per Share	Announced Programs		Under the Program
			(# Shares)	($ in millions)	($ in millions)
First Quarter	—	—	—	—
April	—	—	—	—
May	—	—	—	—
June	—	—	—	—
Second Quarter	—	—	—	—
Year-To-Date 2006	—	—	—	—	$	19.0	*

* On December 2, 2004, our Board of Directors authorized the repurchase of shares of our Common Stock during the period January 1, 2005 to December 31, 2006 in an amount not to exceed $20.0 million.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

Not applicable.

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

Election of New Director

The Board of Directors of the Company elected Mr. Robert F. McCullough as a Director, effective October 1, 2006.  Mr. McCullough is expected to join the Audit Committee.  There have been no related transactions between Mr. McCullough and the Company.  From April 1996 to May 2004, Mr. McCullough was CFO and a member of the Board of Directors of AMVESCAP PLC, one of the world’s largest mutual fund companies.  From 1987 to 1996, Mr. McCullough was Managing Director of the Atlanta Office of Arthur Andersen.

ITEM 5. OTHER INFORMATION

On July 10, 2006, the Company issued a press release announcing that effective August 1, 2006, Paul C. Roberts, current Chief Financial Officer and Treasurer, or CFO, would be assuming the newly created position of Vice President – Strategic Planning and Implementation, reporting to Wayne H. Deitrich, Chairman and Chief Executive Officer.  Mr. Roberts has served as CFO since August 1995.  In this new role, Mr. Roberts will be responsible for corporate projects including potential investment opportunities and strategic initiatives, while continuing to serve as

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Vice-Chairman of the Board of China Tobacco Mauduit (Jiangmen) Paper Industry Company Ltd., the Company’s tobacco-related papers joint venture in China.

Succeeding Mr. Roberts as CFO is Peter J. Thompson, President – U.S. Operations since November 1998.  Mr. Thompson joined the Company in January 1997 as Marketing Manager – U.S.  Previously, he was CFO and then Marketing Director for Tape, Inc. from May 1995 to January 1997.  Also, he held several key financial positions with Kimberly-Clark where he was involved in financial and business analysis, acquisitions and divestitures.

Coincident with the above changes, Otto R. Herbst, President, Brazilian Operations, became President, the Americas, with profit responsibility for the Brazilian and U.S. Business Units, reporting to Frédéric P. Villoutreix, Chief Operating Officer.  This change will result in the consolidation of the positions of President – Brazilian Operations and President – U.S. Operations.  Mr. Herbst served as President of the Brazilian operations since 1999.  Prior to 1999, Mr. Herbst served as General Manager for New Business and Services from 1997 through 1999 for Interprint, a manufacturer of security documents, telephone cards, and business forms.  From 1990 through 1997, Mr. Herbst served as Director for Agaprint, a manufacturer of packaged materials, business forms, commercial printing papers, personalized documents and envelopes.

ITEM 6. EXHIBITS

(a) Exhibits:

10.1	Electricity Supply Agreement, dated May 24, 2006, by and among Schweitzer-Mauduit do Brasil, S.A. and Companhia Energetica de Sao Paulo, or CESP.
10.2	Credit Agreement, dated July 31, 2006, by and among, Schweitzer-Mauduit International, Inc., Schweitzer-Mauduit France S.A.R.L and a group of banks.
15	Letter from Deloitte & Touche LLP regarding unaudited interim financial information.
31.1	Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2	Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32	Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes Oxley Act of 2002.*

*These Section 906 certifications are not being incorporated by reference into the Form 10-Q filing or otherwise deemed to be filed with the Securities and Exchange Commission.

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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/  PETER J. THOMPSON	By:	/s/  WAYNE L. GRUNEWALD
	Peter J. Thompson		Wayne L. Grunewald
	Chief Financial Officer and		Controller
	Treasurer		(principal accounting officer)
	(duly authorized officer and
	principal financial officer)
	August 8, 2006		August 8, 2006

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GLOSSARY OF TERMS

The following are definitions of certain terms used in this Form 10-Q filing:

·“Banded cigarette paper” is a type of paper, used to produce lower ignition propensity cigarettes, with fire-retardant bands added to the paper during the papermaking process.

·“Binder” is used to hold the tobacco leaves in a cylindrical shape during the production process of cigars.

·“Cigarette paper” wraps the column of tobacco within a cigarette and has varying properties such as basis weight, porosity, opacity, tensile strength, texture and burn rate.

·“Commercial and industrial products” include lightweight printing and writing papers, coated papers for packaging and labeling applications, business forms, battery separator paper, drinking straw wrap and other specialized papers.

·“Décor paper” is non-tobacco paper that is saturated and laminated to particleboard for use in furniture, cabinet and flooring applications.

·“Flax” is a cellulose fiber from a flax plant used as a raw material in the production of certain cigarette papers.

·“Lower ignition propensity cigarette paper” which includes banded and print banded cigarette paper, contains fire-retardant bands, which increase the likelihood that an unattended cigarette will self-extinguish.

·“Net debt to adjusted EBITDA ratio” is a financial measurement used in bank covenants where “Net Debt” is defined as the current portion of long term debt plus other short term debt plus long term debt less cash and cash equivalents, and “Adjusted EBITDA” is defined as net income excluding extraordinary or one-time items, minority interest in earnings, loss from equity of affiliates, interest expense, income taxes and depreciation and amortization less amortization of deferred revenue.

·“Net debt to capital ratio” is current and long term debt less cash and cash equivalents, divided by the sum of current debt, long term debt, minority interest and total stockholders’ equity.

·“Net debt to equity ratio” is current and long term debt less cash and cash equivalents, divided by minority interest and total stockholders’ equity.

·“Net operating working capital” is accounts receivable, inventory, current income tax refunds receivable and prepaid expense, less accounts payable, accrued liabilities and accrued income taxes payable.

·“Opacity” is a measure of the extent to which light is allowed to pass through a given material.

·“Operating profit return on assets” is operating profit divided by average total assets.

·“Plug wrap paper” wraps the outer layer of a cigarette filter and is used to hold the filter materials in a cylindrical form.

·“Porosity” is a measure of air flow permeability.

·“Print banded cigarette paper” is a type of paper, used to produce lower ignition propensity cigarettes, with fire-retardant bands added to the paper during a printing process, subsequent to the papermaking process.

·“Reconstituted tobacco” is produced in two forms:  leaf, or RTL, and wrapper and binder products.  RTL is blended with virgin tobacco as a design aid to achieve certain attributes of finished cigarettes.  Wrapper and binder are reconstituted tobacco products used by manufacturers of cigars.

·“Tipping paper” joins the filter element to the tobacco-filled column of the cigarette and is both printable and glueable at high speeds.

·“Wrapper” covers the outside of cigars providing a uniform, finished appearance.

SCHWEITZER-MAUDUIT INTERNATIONAL, INC.

Quarterly Report on Form 10-Q
for the Quarterly Period Ended June 30, 2006

INDEX TO EXHIBITS

Exhibit
Number	Description
10.1	—	Electricity Supply Agreement, dated May 24, 2006, by and among Schweitzer-Mauduit do Brasil, S.A. and Companhia Energetica de Sao Paulo, or CESP
10.2	—	Credit Agreement, dated July 31, 2006, by and among, Schweitzer-Mauduit International, Inc., Schweitzer-Mauduit France S.A.R.L and a group of banks
15	—	Letter from Deloitte & Touche LLP regarding unaudited interim financial information.
31.1	—	Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2	—	Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32	—	Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.*

*These Section 906 certifications are not being incorporated by reference into the Form 10-Q filing or otherwise deemed to be filed with the Securities and Exchange Commission.

EX-10.1

Exhibit 10.1

I, the undersigned, Sworn Public Translator and Commercial Interpreter in and for the City and State of Rio de Janeiro, Federative Republic of Brazil, duly registered under No 147 at JUCERJA, on February 7th 2001, CERTIFY and ATTEST that a document written in PORTUGUESE was presented to me for translation into ENGLISH, which I have duly performed by reason of my official capacity, as follows:

TRANSLATION No. 12.044/06

[Logos] CESP & SCHWEITZER-MAUDUIT DO BRASIL

ELECTRIC POWER PURCHASE AND SALES AGREEMENT ENTERED INTO BETWEEN SCHWEITZER-MAUDUIT DO BRASIL S/A AND CESP – COMPANHIA ENERGÉTICA DE SÃO PAULO

Bt the current instrument, on one hand CESP – COMPANHIA ENERGÉTICA DE SÃO PAULO, a power generating public service concessionaire, with head offices in the city of São Paulo, the State of São Paulo, at Avenida Nossa Senhora do Sabará, No. 5,312, enrolled at the National Register of Legal Persons of the Ministry of Finance [CNPJ] under the number 60.933.603/0001-78, in this act represented in the terms of its articles of association, hereinafter named SELLER; and on the other, SCHWEITZER-MAUDUIT DO BRASIL S/A, with head offices in the city of Piraí, The State of Rio de Janeiro, at Avenida Darcy Vargas No. 325, Santanésia enrolled at the National Register of Legal Persons of the Ministry of Finance [CNPJ] under the number 33.073.008/0001-37, with State Enrollment under the number 80.446.527, in this act represented in the terms of its articles of association, hereinafter named BUYER, any of them treated indistinctly as a PARTY, and when together named PARTIES,

WHEREAS

a) the legislation applicable to the Brazilian electrical sector, in particular the one contained in Law 9,074, dated July 7th, 1995, in Law 10,438, dated April 26th, 2002, in Law 10,848, dated March 15th, 2004, in Decree 2,655, dated July 2nd, 1998, Decree 5,163, dated July 30th, 2004 and in the ANEEL resolutions;

b) Law 10,438, dated April 26th, 2002, that set forth, among others, that the electric power from the public service generating concessionaires under corporate control of the States is commercialized on a manner that ensures publicity, transparency and equality of access to the interested parties;

c) the BUYER held a Public Offer by means of action No. 001/2006, in accordance with the conditions published in the ED – LE 063/06 dated 04/10/2006;

d) the SELLER participated and was chosen as the Winner of the Public Offer;

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 and Exchange Act of 1934, as amended.  Omitted information has been replaced with asterisks.

e) the BUYER is characterized as a FREE CONSUMER, in the form of the law, which assures it the exercise of choosing to purchase electric power to attend his needs in full or in part;

have decided to enter into the current Electric Power Purchase and Sales Agreement, hereinafter named “AGREEMENT”, which will be governed by the following ARTICLES and conditions:

TITLE I

DEFINITIONS AND PREMISES APPLICABLE TO THE AGREEMENT

ARTICLE 1 – Seeking the perfect understanding and accuracy of the terminology employed in this AGREEMENT and its attachments, from this moment on the concept of the following terms and expressions is agreed between the PARTIES

a) “ANEEL”: Agência Nacional de Energia Elétrica [The National Electric Power Agency], a normative and inspection agency of electric power services, established by Law No. 9,427, dated December 26th, 1996, regulated by Decree No. 2,335, dated December 3rd, 1997;

b) “COMPETENT AUTHORITY”: any governmental agency that is competent to intervene in this AGREEMENT or in the activities of the PARTIES;

c) “CCEE” : Câmara de Comercialização de Energia Elétrica [The Chamber of Commerce for Electric Power], a private law non-profit legal entity, under authorization from the Assignor Power and regulation and inspection from the Agência Nacional de Energia Elétrica – ANEEL, which creation was authorized in the terms of clause 4 of Law No. 10,848, dated March 15th, 2004 and Decree No. 5,177, dated August 12th, 2004, for the purpose of making the commercialization of electric power viable in the NATIONAL INTERCONNECTED SYSTEM – SIN [Sistema Interligado Nacional], which is the successor of the MAE, in the terms of clause 5 of Law No. 10,848/2004;

d) “CENTER OF GRAVITY”: A virtual point defined in the RULES OF COMMERCIALIZATION, where the symbolic delivery of CONTRACTED POWER will be carried out and where the total generation is equal to the total consumption from that SUBMARKET;

e) “FREE CONSUMER”: a consumer who can choose to hire its supply, in all or in part, with any concessionaire, permittee, or authorized party of the NATIONAL INTERCONNECTED SYSTEM as

determined by clauses 15 and 16 of Law 9,074, dated July 07th, 1995, and specific rules from the ANEEL;

f) “CONVENTION FOR COMMERCIALIZATION”: a judicial instrument established by the ANEEL Resolution No. 109, October 26th, 2004, in the terms of law No. 10.848, dated March 15th, 2004, which set forth the working structure and form for the CCEE;

g) “AGREEMENT FOR CONNECTION TO THE TRANSMISSION SYSTEM”: an agreement entered into between the users and the transmission concessionaires, which sets forth the terms and conditions for connection of the users to the BASIC NETWORK;

h) “AGREEMENT FOR CONNECTION TO THE DISTRIBUTION SYSTEM”: an agreement entered into between the users and the transmission concessionaires, which sets forth the terms and conditions for connection of the users to the distribution network from the local concessionaire or permittee;

i) “AGREEMENT FOR UTILIZATION OF THE DISTRIBUTION SYSTEM”: an agreement that sets forth the terms and conditions for using the distribution network from a local concessionaire or permittee by a user;

j) “AGREEMENT FOR UTILIZATION OF THE TRANSMISSION SYSTEM”: an agreement that sets forth the terms and conditions for using the BASIC NETWORK by a user, including the rendering of transmission services by the transmission concessionaires, by means of control and supervision by the ONS, and the rendering by the ONS, of the control and coordination services for the interconnected electrical systems, in accordance with a model approved by the ANEEL;

k) “POWER”: is the amount of electric power that is active during any period of time, expressed in Watt-hour (Wh) or its multiples;

l) “CONTRACTED POWER”: is the amount, in average MW, contracted by the BUYER, in the contracted period and in any commercialization period, and placed at its disposal in the CENTER OF GRAVITY in the SUBMARKET;

m) “MONTHLY CONTRACTED POWER”: is the amount of power, in MWh, resulting from the seasonalization process of the CONTRACTED POWER;

n) “IGPM”: the General Index of Market Prices, calculate by the (foundation) Fundação Getúlio Vargas – FGV);

[Note: no item “o)” in the original document]

p) “NOTIFICATION OF CONTROVERSIES”: is a formal document intended to communicate the PARTIES about controversies that deal with the provisions of this AGREEMENT and/or related to them;

q) “ONS”: it is the Operador Nacional do Sistema Elétrico [The National Electric Power System Operator], created by Law No. 9,648/98 and regulated by Decree No. 5,081, dated May 14th, 2004;

r) “GENERATION FARM”: it is the power generation farm of the SELLER, in accordance with Attachment I of this AGREEMENT;

s) “PERIOD OF SUPPLY”: it is the period in which the SELLER will make available and will sell the CONTRACTED POWER to the BUYER, in the terms of article 4 of this AGREEMENT;

t) “COMMERCIALIZATION PROCEDURES”: it is the set of operational rules approved by the ANEEL that will define the conditions, requirements, events and terms relative to the commercialization of electric power, necessary to the development of the attributions from the CCEE;

u) “NETWORK PROCEDURES”: it is the document prepared by the ONS, with the participation of the agents and approved by the ANEEL, by means of which the procedures and technical requirements are set forth for the planning, implantation, or utilization and operation of the transmission systems, the penalties for the non-compliance with the commitments undertaken by the various agents of the transmission system, as well as the responsibilities of the ONS and all its users;

v) NATIONAL INTERCONNECTED SYSTEM – SIN [Sistema Interligado Nacional]: comprises the power generation, transmission and distribution facilities connected by the BASIC NETWORK for Transmission, including their respective facilities;

y) “SUBMARKET”: the market subdivisions, corresponding to certain areas of the NATIONAL INTERCONNECTED SYSTEM, for which specific prices are established, in accordance with the RULES OF COMMERCIALIZATION; and

z) “TRIBUTES”: are all the taxes, fees, contributions and charges from the electric sector incurring on the object of this AGREEMENT, excluding any other in existence or that may come to be created on the

financial movement, the net profit or the result from either of the PARTIES, being understood that the excluded tributes, in this definition, can not be attributed from one PARTY to the other. Such exclusion comprises, not being limited to the legal entity income tax, the social contribution on the net profit and taxes or contributions on financial movements.

Sole Paragraph – All the terms defined above, when used in the singular form, in the scope of this AGREEMENT and its attachments will mean its plural form and vice versa.

TITLE II

OBJECT AND PERIOD OF VALIDITY

Chapter I – Object

ARTICLE 2 – The object of the current AGREEMENT is to establish the terms and conditions for the purchase and sale of the CONTRACTED POWER carried out between the BUYER and the SELLER, as a result from the auction that took place on 04/10/2006, in accordance with the amounts indicated in the table from ARTICLE 6, to be made available by the SELLER to the BUYER at the CENTER OF GRAVITY in the Southeast / Center-West SUBMARKET and is based on the provision in the specific legislation, in Resolutions from the ANEEL in the COMMERCIALIZATION PROCEDURES and the NETWORK PROCEDURES, by virtue of which the BUYER has its electric power supply assured by the NATIONAL INTERCONNECTED SYSTEM – SIN, through the local concessionaire.

Paragraph One – The PARTIES agree that it will be the full responsibility of the SELLER to bear all the risks, obligations, TRIBUTES, tariffs, transmission, distribution and connection charges, and transmission losses perchance due and/or verified in view of the availability of the CONTRACTED POWER up to the CENTER OF GRAVITY.

Paragraph Two – The PARTIES agree, further, that it will be the full responsibility of the BUYER to bear all the risks, obligations, TRIBUTES, tariffs, transmission, distribution and connection charges, and transmission losses perchance due and/or verified after the availability of the CONTRACTED POWER at the CENTER OF GRAVITY.

Paragraph Three – The delivery of the POWER to the BUYER at the point of delivery by the

NATIONAL INTERCONNECTED SYSTEM – SIN, will depend on the fulfillment of the following conditions:

a) the signing by the BUYER, if applicable, of the AGREEMENT FOR CONNECTION TO THE TRANSMISSION SYSTEM with the transmitter involved;

b) the signing by the BUYER, if applicable, of the AGREEMENT FOR CONNECTION TO THE TRANSMISSION SYSTEM with the distributor or permittee involved;

c) the signing by the BUYER, if applicable, of the AGREEMENT FOR UTILIZATION OF THE TRANSMISSION SYSTEM, with the ONS and transmitters; and

d) the signing by the BUYER, if applicable, of the AGREEMENT FOR UTILIZATION OF THE TRANSMISSION SYSTEM, with the distributor or permittee involved;

Paragraph Four – The BUYER acknowledges that the quality of the electric power supply is governed by the agreements mentioned in Paragraph Three of this ARTICLE, not being an object of this AGREEMENT;

Paragraph Five – The non-fulfillment of the conditions foreseen in Paragraph Three of this ARTICLE does not exempt the BUYER from fulfilling the obligations foreseen in this AGREEMENT.

Paragraph Six – The BUYER must bear all the costs resulting from the formalization of the agreements for connection and utilization of the transmission or distribution system, according to the case.

Paragraph Seven – The PARTIES acknowledge that the physical supply will be fully subordinated to the technical determination from the ONS and the ANEEL, also in the even of decreeing by the Awarding Power of an electric power rationing in the NATIONAL INTERCONNECTED SYSTEM.

Chapter II – Period of Validity

ARTICLE 3 – The current AGREEMENT comes into effect at its signing date and will be in force up to the actual fulfillment of the entire contractual obligation, including the payment of the invoice relative to the last month of delivery of the amounts of the MONTHLY CONTRACTED POWER;

ARTICLE 4 – The obligation of the SELLER as to the delivery of the MONTHLY CONTRACTED POWER will begin at 00:00 hours on the day 05/01/2006 and end at 24:00 hours of the day 12/31/2010.

ARTICLE 5 – The effectiveness and the execution of the obligations and commitments being disciplined in this AGREEMENT will depend on the registration of this purchase and sale at the CCEE, which must be carried out by the SELLER and validated by the BUYER, in agreement with the dimensions foreseen in the RULES OF COMMERCIALIZATION and in the COMMERCIALIZATION PROCEDURES.

TITLE III

AMOUNTS AND PRICES

Chapter I – Amounts

ARTICLE 6 – The amounts of CONTRACTED POWER sold on a monthly basis by the SELLER and acquired by the BUYER represent the following quantities:

PERIOD	POWER (Average MW)	ASSOCIATED POWER (MW)
05/01/2006 to 12/31/2006	8.8	10.61
01/01/2007 to 12/31/2010	9.0	10.61

Sole Paragraph – Respecting the eventual restrictions of the electric system, observing the RULES OF COMMERCIALIZATION, the COMMERCIALIZATION PROCEDURES and the NETWORK PROCEDURES, the BUYER can request an increase or reduction of the amount of CONTRACTED POWER for each year in up to 10% (ten percent), as long as the request is made 6 (six) months in advance. The altered amounts will remain unaltered until the end of said year.

ARTICLE 7 – In agreement with the RULES OF COMMERCIALIZATION and in accordance with the terms set forth in the COMMERCIALIZATION PROCEDURES, from the beginning of the PERIOD OF SUPPLY, the SELLER will record, on behalf of the BUYER, the CONTRACTED POWER in each commercialization period, and the BUYER or its representative at the CCEE will validate the respective records that were made, as long as such records are compatible with the provision in ARTICLE 6 and in ARTICLE 10.

Sole Paragraph – During the first two months of this AGREEMENT, the SELLER will represent the BUYER at the CCEE, with no burden and no change of the contracted flexibilities. [**************************************************************************************

******]] inserted in the SINERCOM. This representation can be altered at any moment at the discretion of the BUYER, by means of a previous notice 30 (thirty) days in advance.

ARTICLE 8 – If, by its action or omission, the BUYER or its representative at the CCEE refrains from validating the record of the CONTRACTED POWER as described in ARTICLE 7, it must carry out the full payment of the CONTRACTED POWER to its SELLER, in the form of ARTICLE 13 and ARTICLE 14.

ARTICLE 9 – If, by its action or omission, the BUYER refrains from carrying out the registration of the CONTRACTED POWER as described in ARTICLE 7, it is obliged to compensate the BUYER for its exposure at the CCEE, as well as penalties applicable to it insufficiency of substance and/or insufficiency of contracting, set forth in the COMMERCIALIZATION PROCEDURES.

ARTICLE 10 – The conditions for the record and accounting at the CCEE relative to the purchase and the sale object of this AGREEMENT are disciplined in the RULES OF COMMERCIALIZATION and in the COMMERCIALIZATION PROCEDURES.

Paragraph One – The monthly seasonalization of the amount of CONTRACTED POWER, for the purpose of establishing the MONTHLY CONTRACTED POWER, in MWh, will be obtained by multiplying the CONTRACTED POWER (average MW) by the number of hours of each CONTRACTUAL MONTH.

Paragraph Two – MONTHLY CONTRACTED POWER, in MWh, can be reduced in up to 10% (ten percent) or increased in up to 5% (5 percent) in each CONTRACTUAL MONTH, at the discretion of the BUYER, comprising the result of in the Billable Monthly Power (EMF) [Energia Mensal Faturável], which must be communicated by the BUYER to the SELLER, as stipulated in ARTICLE 12.

Paragraph Three – In each year of the PERIOD OF SUPPLY, the BUYER will be allowed to request reductions of the amount of contracted power due to eventual scheduled and/or unscheduled shutdowns of its production unit, which total sum of duration of both is limited to 240 (two hundred and forty). Scheduled shutdowns must be informed to the SELLER 60 (sixty) days in advance and unscheduled shutdowns must be informed in the day subsequent to its start. In the CONTRACTUAL MONTHS in which the reductions take place, the amounts of the MONTHLY CONTRACTED POWER will be obtained as follows:

EMC in the month of reduction	= (1 –	Sum of hours shutdown	) x EMC
		Total of hours in the month of reduction

Paragraph Four – Each month, the BUYER will be entitled, in agreement with the COMMERCIALIZATION PROCEDURES referent to this theme, to the modulation of the Billable Monthly Power for each load level and for each accounting period of one hour (duration presently established) or in agreement with another duration that comes to be defined, with variations limited to more or less 10% (ten percent) in relation to the monthly billable equivalent in average MW, respecting the limit of ASSOCIATED POWER.

Paragraph Five – The modulation must be informed to the SELLER until the third working day of the month subsequent to the CONTRACTUAL MONTH. If the modulation is informed out of the period or does not comply with the criteria set forth in the previous paragraph, the SELLER will make the registration at the CCEE considering in all the accounting periods a single power level, equal to the monthly equivalent in average MW.

Chapter II – Price

ARTICLE 11 – [*****************************************************************************************]

Paragraph Two – If the legislation comes to allow a readjustment with a term of less than 1 (one) year, the PARTIES will negotiate a new periodicity for readjustment, carrying out necessary changes for adequacy to the previous Paragraph, formalizing them by means of a contractual amendment.

Paragraph Three – If the IGPM is extinct, or is no longer published or its utilization is prohibited, with no designation of an index to replace it, the PARTIES will agree, within the term of 30 (thirty) days from the moment of becoming aware of any of these events, on another index or parameter that adequately reflects the inflation upon the market prices on a manner similar to said index, or a manner as close as possible to such an index. In the event the Parties can not reach an agreement in the foreseen term, the ARTICLES

present in TITLE X - RESOLUTION OF DISPUTES of this INSTRUMENT will apply.

Paragraph Four – All the obligation and liabilities relative to the existing sector charges, risks and specific costs of the electrical sector, referent to the activity of the SELLER as a Generation Public Service Concessionaire are included in the Price for Contracted Power (PEC).

Paragraph Five – The creation, change or extinction of TRIBUTES and charges for the Electrical Sector after the signing of this AGREEMENT, when its impact upon the Price for Contracted Power (PEC) is proven, will implicate in the PEC being reviewed, for more or less, by means of a formalization of a contractual amendment. In the event the Parties can not reach an agreement, the ARTICLES present in TITLE X - RESOLUTION OF DISPUTES of this INSTRUMENT will apply.

Paragraph Six – The collection of the State Goods and Services Tax (ICMS) [Imposto the Circulação de Mercadorias e Serviços] and other tributes eventually falling upon the invoice not included in the PRICE FOR POWER (PEC) and calculated in the form of the specific legislation, they must be made by the BUYER, the SELLER remaining exempt from any obligation, also for the payment of fines and other charges.

Paragraph Seven – For the compliance with the provision in the previous paragraph, the SELLER obliges itself to forward to the BUYER, beforehand, up to the 4th (fourth) working day of month following the CONTRACTUAL MONTH, considering that the collection of the tribute will be made until the 9th day of said month, in accordance with the legislation from the State of Rio de Janeiro, a copy of the invoice, observing the provision in CLAUSE 12.

TITLE IV

INVOICING, PAYMENT AND CULPABLE DELAY

Chapter I – Invoicing

ARTICLE 12 – The buyer must inform the SELLER the Billable Monthly Power (EMF), obtained in the form of ARTICLES 6 and 10, until the 3rd (third) working day of the month subsequent the CONTRACTUAL MONTH.

ARTICLE 13 – The invoicing will be the object of an Electric Power Formal Bill of Sale / Invoice, in each

CONTRACTUAL MONTH, at:

Invoicing = EMF x PEC

Where:

EMF = Billable Monthly Power, obtained in the form of ARTICLES 6 and 10.

PEC = Price of Contracted Energy, define in ARTICLE 11.

Chapter II Payment

ARTICLE 14 – The BUYER must carry out the payment of the Electric Power Formal Bill of Sale / Invoice until the 25th day of the month subsequent to the CONTRACTUAL MONTH, being that the SELLER must forward the collection document until the 15th day of said month.

Paragraph One – The SELLER will forward the BUYER, if necessary, a document attached to the Electric Power Formal Bill of Sale / Invoice containing the detailing of the calculations and the corresponding invoiced amounts, so that the BUYER can verify them.

Paragraph Two – The BUYER will accept the sending of the copy of the original collection document by means of fac-simile or any safe electronic media agreed upon between the PARTIES and, as long as it is received in a full and legible manner confirmed by the BUYER, will then serve to comply with the term foreseen in the “caput” of this ARTICLE, the SELLER having to forward the original document until the date of maturity of the invoice.

Paragraph Three – If the original collection document is presented at a date later than the one set forth in the previous Paragraph by a motive not imputable to the BUYER, the date of maturity of the installed affected by the delay, relative to this collection document, will be automatically extended by the same number of days of delay that is verified.

Paragraph Four – The payment will be made in a checking account maintained in a banking institution defined by the SELLER in the collection document.

Paragraph Five – If there is no banking business day in the municipality of the BUYER on the date of maturity, the payment can be made on the first subsequent working day.

Paragraph Six – All the payments due by the BUYER must be made free of any burdens or deductions not

expressly foreseen in this AGREEMENT, as long as not resulting from legal and/or regulatory determination.

Paragraph Seven – The SELLER must discriminate in the Electric Power Formal Bill of Sale / Invoice, in addition to the value referent to the power installment, the value of the ICMS tax, which is the responsibility of the CONTRACTOR, if due, in the form of the specific legislation.

ARTICLE 15 – The deviations eventually pointed out in the POWER purchase and sales invoice will not affect the term for paying the invoice, the difference, if any, having to be compensated in a complementary invoice, being allowed, by mutual agreement between the PARTIES, to be compensated on the following month.

Paragraph One – If, in any invoice, net and accuracy amounts and amounts exists in relation to which the BUYER has questioned the respective accuracy and liquidity, the BUYER, regardless of the questioning presented to the SELLER in writing must, on the date corresponding to the maturity of the invoice, carry the payment of the invoice in full, for which the SELLER will give an automatic settlement. The non-payment will characterize the BUYER as being in default.

Paragraph Two – On any contested amount, representing credits for the BUYER, which may later come to be agreed on or defined as being due by the SELLER, the provision in ARTICLE 17 will apply, with the exception of the fine. The interests and the monetary updating will incur from the date of maturity of the contested installment up to the date it is settled.

Paragraph Three – Existing the persistence of controversies in relation to the invoiced amounts, the PARTIES agree in proceeding in accordance with the provision in the ARTICLES from TITLE X - RESOLUTION OF DISPUTES.

Chapter III – Culpable Delay in Payment and Its Effects

ARTICLE 16 – Culpable delay is characterized when the BUYER refrains from settling any payments up to its date of maturity.

ARTICLE 17 – In the event of delay in the payment by the buyer of any Electric Power Formal Bill of Sale / Invoice issued based on the current AGREEMENT, the amounts due must be monetarily updated pro

rata die by the variation of the IGPM index from the (foundation) Fundação Getúlio Vargas, or from any other index that comes to be agreed on between the PARTIES, and the following moratory additions will incur upon the corrected amounts:

a) a fine of 2% (two percent) applied on the debt amount;

b) interests on arrears calculated on the amount of the invoice, which will be equivalent to 1% (one percent) a month calculated pro rata die, for the period comprised between the date of default and the effective payment, including.

Paragraph One – The monetary updating of the debt amount, referent to the delays that took place within the month of maturity, will be calculated by the variation accumulated pro rata die of the IGPM index, of the second month prior to the maturity up to the first month prior to the maturity, disregarding the negative variations in the period.

Paragraph Two – For the payments carried out after the month of maturity, the debt amount will be monetarily updated solely by the variation accumulated pro rata die of the IGPM index, of the month prior to the maturity, disregarding the negative variations in the period.

Paragraph Three – If the IGPM index is extinct, the provision in Paragraph Three of ARTICLE 11 will apply.

TITLE V

CONTRACTUAL GUARANTEES

ARTICLE 18 – To ensure the true compliance with the obligations foreseen in this AGREEMENT, the buyer must establish, in up to 30 (thirty) days after the date of starting the supply indicated in ARTICLE 4, a guarantee in one of the options listed next that, after analysis regarding quality, whichever is its form of constitution, will be accepted at the discretion of the SELLER.

a) Bank Letter of Guarantee, Deposit in Federal Public Bonds, Deposit in Brazilian Reais, Promissory Note (attachment II), and/or Bank Deposit Certificates, in the amount equivalent to 3 (three) months of invoicing of the electric power supply foreseen in this AGREEMENT;

b) Guaranteed Account, represented by the establishment of a guarantor bank, which commits itself to

honor the payment of the amount of the monthly invoicing for the electric power supply foreseen in this AGREEMENT in the event of default by the BUYER;

c) Guarantee Insurance, established on behalf of the SELLER; and

d) Other form of guarantee, at the convenience of the BUYER.

TITLE VI

ACT OF GOD OR FORCE MAJEURE

ARTICLE 19 – If any of the PARTIES can not fulfill any of its obligations, by motive of Act of God or Force Majeure, in the terms of the provision in Article 393 of the Brazilian Civil Code, the current AGREEMENT will remain in force, but the PARTY affected by the event will not answer for the consequences of the non-fulfillment of the obligations during the time of duration of the event and proportionally to its effects.

Paragraph One – No event of Act of God or Force Majeure will exempt the affected PARTY of any of its obligations due before the occurrence of the respective event.

Paragraph Two – The affected PARTY that whishes to invoke the occurrence of an Act of God or Force Majeure must adopt the following measures:

(i) notify the other PARTY of the occurrence of the the Act of God or Force Majeure event, as soon as possible, but in no circumstance on a term above five days counting from the date in which it became aware of its occurrence, providing a description of the nature of the event, an estimate of its duration and the impact in the performance of its contractual obligations;

(ii) adopt the suitable measures to remedy or attenuate the consequences of such event, seeking to resume its contractual obligations as briefly as possible;

(iii) inform the other PARTY on a regular basis about its actions and its plan of action to remedy and/or minimize such consequences;

(iv) promptly alert the other PARTY of the end of the Act of God or Force Majeure event and its consequences;

(v) back all the facts and actions with documentation or record available.

Paragraph Three – Without limiting the generalness of the provision in the sole paragraph of article 393 of the Civil Code, it will be considered as an Act of God or Force Majeure any event outside the control of the PARTIES, which occurrence or which consequences the PARTIES could not foresee on the date of entering into this AGREEMENT and that makes the punctual and true fulfillment of one or more of its obligations resulting from the current AGREEMENT fully or partially impossible for the affected PARTY.

Paragraph Four – Under no circumstance, for the purpose of this AGREEMENT, the occurrence of any of the situations below that affects an obligation of any of the PARTIES will be configured as an Act of God or Force Majeure:

(i) problems and/or difficulties of economic-financial order of either of the PARTIES;

(ii) insolvency, liquidation, bankruptcy, reorganization, termination or similar event, of a PARTY, its related parties or from third parties;

(iii) loss of market of the BUYER or the impossibility of the BUYER to use or resell the CONTRACTED POWER on an economic manner;

(iv) the possibility that presents itself to the SELLER or to the BUYER of, respectively, selling or buying the CONTRACTED POWER in the market at prices more favorable than the ones provided in this AGREEMENT; or

(v) any default or anticipated termination of the electric power purchase and sales agreement of the SELLER, which perchance exist.

Paragraph Five – The undue allegation, by either of the PARTIES, of the occurrence of any of the events above mentioned seeking the non-fulfillment of an obligation in the terms of this AGREEMENT, will entitle the other PARTY to promote the termination of this AGREEMENT, the PARTY that gives cause for the termination bearing the penalties foreseen in CLAUSE 14 of this AGREEMENT.

Paragraph Six – The PARTIES acknowledge and accept that his AGREEMENT can be terminated by prior written notice sent by one PARTY to the other, in the event of one PARTY refraining from fulfilling its contractual obligations for a period greater than 180 (one hundred and eighty) consecutive days due to an Act of God or Force Majeure event, exempting the PARTY in default from indemnifying the other

PARTY in the manner foreseen in this AGREEMENT.

Paragraph Seven – The occurrence of disturbances in the generation, transmission or distribution system does not configure event of Act of God or Force Majeure, for the effect of this agreement, save if expressly acknowledged as such by the ONS and/or by the ANEEL.

ARTICLE 20 – On the occurrence of a rationing being decreed, during the effectiveness of this AGREEMENT, by the Awarding Power in the Southeast / Center-West SUBMARKET, the obligations from the PARTIES in the terms of this AGREEMENT will be governed by the applicable legislation. In the omission of the Awarding Power in defining the rule to be applied, and in the inexistence of provisions on the theme in the RULES OF COMMERCIALIZATION, this AGREEMENT will undergo a reduction in the amounts of supply and payments in the exact proportion of the consumption reduction goal decree by the Awarding Power for the Southeast / Center-West SUBMARKET.

TITLE VII

IRREVOCABILITY

ARTICLE 21 – The current AGREEMENT is entered into in an irrevocable and irretractable nature for the term of its effectiveness defined in ARTICLES 3 and 4, with the exception of the events of termination held in ARTICLE 22.

TITLE VIII

TERMINATION, LIABILITY AND INDEMNIFICATION

Chapter I – Termination

ARTICLE 22 – Notwithstanding the irrevocable and irretractable nature of the AGREEMENT, it can be terminated by operation of law, by the PARTY in full compliance, in the occurrence of any of the following events:

I. In the event of full or partial non-fulfillment of any obligation in this AGREEMENT, as long as it is not remedied by the PARTY in default in a term of up to 15 (fifteen) days after notification in writing by the PARTY in full compliance;

II. In the event of bankruptcy, dissolution or judicial or non-judicial liquidation is decreed or the

extrajudicial recovery plan of the other PARTY is homologated, regardless of warning or notification;

III. In the event the other PARTY comes to have revoked its legal, governmental or regulatory authorization, indispensable to the fulfillment of the activities and obligations foreseen in this AGREEMENT, including but not limited to, the public service concession, term of permission or authorization, or has any of its rights as a member of the CCEE suspended.

First Paragraph – The occurrence of the termination must be formal and expressly communicated in writing to the CCEE to the competent regulatory entities which will leave the SELLER promptly released from any liability relative to the supply object of this AGREEMENT, with no loss of the obligations set forth previously to the above mentioned termination and communication.

Paragraph Two – Occurring the termination of this Agreement, the PARTY in default, obliges itself to maintain the PARTY in full compliance free from any obligations and liabilities in the terms of this AGREEMENT, also in the scope of the CCEE, being responsible also for the payment of any burdens resulting from such termination.

Paragraph Three – Either of the PARTIES will notify the CCEE, in the event of termination and it, in turn, will take the applicable measures for canceling the registration of this AGREEMENT;

Paragraph Four –The PARTIES agree that, in the event the current AGREEMENT can not be fulfilled by reason of some legal impediment occurring in the operationalization of the transaction, as long as such an impediment is not a consequence of an action or omission of either of the PARTIES, the AGREEMENT will be terminated and the PARTIES will not remain subject to the ascertaining of responsibilities.

Chapter II – Liability and Indemnification

ARTICLE 23 – The PARTY that, by its action or omission, gives cause to the termination of the current AGREEMENT by incurring in the events treated in the previous ARTICLE, will be obliged to pay to the other PARTY a fine for termination equivalent to 20% (twenty percent) of the result of the multiplication of the Prices for Contracted Power (PEC), stipulated in ARTICLE 11, by the respective remaining amounts, in agreement with ARTICLE 6, of the MONTHLY CONTRACTED POWER, expressed in MWh, until the end of the PERIOD OF SUPPLY, corresponding to the contracted prices and amounts in

force at the time of termination.

ARTICLE 24 – Neither of the PARTIES will undertake any obligation of indemnifying the other for any indirect damages, including loss of profits, consequential damages, moral damages or any other mode of indemnification of the same nature.

TITLE IX

OBLIGATIONS OF THE PARTIES

ARTICLE 25 – The end of the period of effectiveness of this AGREEMENT will not affect any rights or obligations prior to such an event and nor obligations or rights of either of the PARTIES, even if the exercise or fulfillment takes place after termination of the AGREEMENT.

ARTICLE 26 – With no loss of the other obligations foreseen herein, the PARTIES oblige themselves to:

a) Strictly observe and comply with all the legislation applicable to its company business and/or activities to be performed in the terms of the current AGREEMENT;

b) Obtain and maintain valid and in effect, during the entire period of effectiveness, all the licenses and authorizations referent to their operational activities and/or to the fulfillment of the obligations undertaken in the current AGREEMENT; and

c) Inform the other PARTY, in a maximum period of 48 (forty-eight) hours, counting from the date of becoming aware of the event, about any other events, of any nature, that may represent a threat to the full and punctual fulfillment of the obligations undertaken in this AGREEMENT.

Sole Paragraph – Each Party will bear its respective obligations of a tributary nature, as well as emoluments, burdens or charges, of any nature, resulting from entering into this AGREEMENT.

TITLE X

RESOLUTION OF DISPUTES

ARTICLE 27 – A dispute begins with a NOTICE OF DISPUTE from one party to the other.

ARTICLE 28 – If disputes occur stemming from this AGREEMENT, the PARTIES will seek to resolve the dispute amicably in the term of up to 15 (fifteen) counting from the NOTICE OF DISPUTE and to that purpose, each must appoint only a single representative, who must meet as often as necessary in the above

mentioned term.

ARTICLE 29 – In the event the dispute has not been resolved by any of the mechanisms foreseen in the previous ARTICLES and either of the PARTIES has delivered a notice that it intends to resolve the dispute by arbitration, as soon as the party has received said notice of arbitrage, it makes a commitment, for the purpose of the applicable legislation, to accept the arbitral decision as final and applicable to said dispute, in the form of the law, in articles 267, item VII; 301, item IX; 520, item VI and 584, item VI, of the Civil Process Code.

Paragraph One – The arbitration will be headquartered in the City and State of São Paulo-SP in agreement with the rules of the FGV Chamber of Conciliation and Arbitration in force at the signing date of this AGREEMENT.

Paragraph Two – In the event of intervention of the Judiciary Power becoming necessary for each of the measures foreseen in the applicable legislation, the PARTIES accept as the central jurisdiction of the District Court of São Paulo as the only one competent, with the express waiver of any other, no matter how privileged.

Paragraph Three – The PARTY that, for whichever reason, defeats or prevents the instauration of the arbitration court, whether by not adopting the necessary measures in the due term, or forcing the other PARTY to adopt the measures foreseen in article 7 of Law No. 9,307/96, or, further, that does not comply with all the terms of the arbitral sentence, will bear the non-compensatory fine equivalent to 0.33% of the amount corresponding to the invoicing of 1 (one) CONTRACTUAL MONTH, in force at the date of effective formalization of the NOTICE OF DISPUTE in agreement with CLAUSE 27, per day of delay in the instauration of the arbitration court or the fulfillment of the provisions of the arbitration sentence, according to the case, duly updated up to the date of its payment by the variation of the IGPM index in the period, with no loss to the determination and penalties which are present in such sentence.

TITLE XI

GENERAL PROVISIONS

ARTICLE 30 – In the event of corporate restructuring (split-up, merger, incorporation, creation of an

affiliated company, alienation, privatization) or the creation of a new company belonging to the same economic group of either of the PARTIES, as long as authorized by the COMPETENT AUTHORITY, the sub-rogation of the rights and obligations resulting from this AGREEMENT is previously and expressly authorized, by the company (or companies) resulting from the restructuring process, in the proportions of POWER to be allocated to the new company (or companies), if such is the case, respecting all the conditions agreed on in the present, notably the terms and the price of the CONTRACTED POWER.

ARTICLE 31 – The assignment of rights and obligations contained in this AGREEMENT, by one of the PARTIES, must be preceded by the express consent from the other PARTY.

ARTICLE 32 – This AGREEMENT can not be changed, nor have waivers to its provisions, except by means of written amendment signed by the PARTIES, observing the provision in the applicable legislation.

ARTICLE 33 – No delay or tolerance, by either of the PARTIES, relative to the exercise of any right, power, privilege or recourse contained in this AGREEMENT, will be held as liable to impair such a right, power, privilege or recourse, nor will be construed as a waiver of the same or renewal of the obligation(s).

ARTICLE 34 – Any notice or other communication from one PARTY to the other regarding this AGREEMENT will be made in writing, in the Portuguese language, and can be delivered or sent by registered mail, fax or electronic media formally agreed on between the PARTIES, in any event with formal evidence of its receipt, to the address and care of the representatives, namely:

To the SELLER: CESP – COMPANHIA ENERGÉTICA DE SÃO PAULO

C/O: Sérvio Ishida

Tel.: (11) 5612-4970

Fax: (11): 5613-3786

E-mail: sergio.ishida@cesp.com.br

To the BUYER: SCHWEITZER-MAUDUIT DO BRASIL S/A

C/O – Antônio Carlos Vilela

Tel.: (24) 2447-5200

Fax: (24) 2447-5235

E-mail: vilela@swmb.com.br

ARTICLE 35 – In the event that any of the provisions foreseen in this AGREEMENT comes to be declared illegal, invalid or unfeasible, the remaining provisions will not be affected will not be effected, remaining in full force and application. On the occurrence of the event foreseen herein, the PARTIES oblige themselves, from this moment on, to search for a provision that replaces it and that fulfills the objects of the provision considered illegal, invalid or unfeasible, and that maintain inasmuch as possible, in all circumstances, the balance of the commercial interests of the PARTIES.

ARTICLE 36 – This AGREEMENT contains or makes express reference to the entireness of the understanding between the PARTIES in respect to its object and comprises all the agreements and prior understandings between the PARTIES in respect to its object. Each of the PARTIES acknowledges and confirms that it does not enter into this AGREEMENT based on any statement, guarantee or other commitment from the other PARTY that is fully reflected in the provisions of this AGREEMENT.

ARTICLE 37 – This AGREEMENT is acknowledged by the PARTIES as an execution instrument, in the form of Articles 583 and 585, item II, of the Brazilian Civil Process Code, for the effect collecting due values.

ARTICLE 38 – In the event of change of ownership of the concession, authorization or permission from the SELLER, and respecting the conditions agreed on in the current AGREEMENT, the sub-rogation is previously and expressly assured of the rights and obligations resulting from this instrument.

ARTICLE 39 – With no loss to the other obligations foreseen in this AGREEMENT, the PARTIES obliges themselves to:

I. strictly observe and comply in full all the applicable legislation applicable to its corporate business and to the activities to be performed in the terms of the current AGREEMENT;

II. obtain and maintain valid and in effect, during the entire period of effectiveness of the AGREEMENT, all the licenses and authorizations referent to their corporate/activities and/or to the fulfillment of the obligations, also in respect to the concession agreement, authorization or permission, undertaken in the AGREEMENT, except if such situation is modified by a COMPETENT AUTHORITY and, in this case,

the PARTIES oblige themselves to adopt a contractual alternative that preserves the economic-financial effects of the AGREEMENT in agreement with what was originally agreed upon; and

III. inform the other PARTY, in a maximum period of 7 (seven) days, counting from the date of becoming aware of the event, about any other events, of any nature, that may represent a threat to the full and punctual fulfillment of the obligations undertaken in this AGREEMENT.

ARTICLE 40 – All the time, during the term of this AGREEMENT, and for a period of 36 (thirty-six) months and after its end or termination, for any reason, the SELLER and BUYER, are obliged for themselves, for their representatives and employees, to maintain the confidentiality and the secrecy of all the information and documents exchange or made available between themselves, relative to the other PARTY, to which they have access as a consequence of the purchase and sales object of this AGREEMENT, also as to the terms and conditions of the current AGREEMENT, not being allowed to reveal or transmit them to third parties, without the prior and express authorization in writing from the other PARTY, with the exception of:

a) the situations foreseen in the LAW, in the RULES OF COMMERCIALIZATION and in the COMMERCIALIZATION PROCEDURES;

b) the information that becomes public domain at the time it is received by the PARTY;

c) the information that becomes public domain after being received by the PARTY, except if by means of breach of this AGREEMENT or unlawful act of the PARTY, its officers or employees; or

d) the information that is lawfully obtained by one of the PARTIES in relation to the other, from third parties, with no breach of this AGREEMENT or of any other obligations of confidentiality in relation to the other PARTY.

ARTICLE 41 – The PARTIES will only use the information for the attainment of the ends and objects of this AGREEMENT, and will not use them for other ends and objects without the previous and express authorization in writing from the other PARTY. The non-observance of the provision in this ARTICLE, subjects the PARTY that gives cause to having to indemnify direct damages effective proven, including, but without being limited to lawyerly fees ad judicial costs.

ARTICLE 42 – The current agreement will be registered at ANEEL, as well as the eventual amendment or changes.

ARTICLE 43 – This agreement will be governed and construed, in all its aspects, in accordance with the laws of Brazil.

AND IN WITNESS THEREOF, THE PARTIES ENTER INTO THE CURRENT INSTRUMENT IN 03 (THREE) COUNTERPARTS, IN THE PRESENCE OF THE BELOW SIGNED WITNESSES.

[Stamp & Initial] “Juliana França Lourenço / Schweitzer-Mauduit do Brasil / Legal Supervisor”

São Paulo, 01 de May of 2006.

SELLER:

CESP – COMPANHIA ENERGÉTICA DE SÃO PAULO

[Signed] Guilherme Augusto Cirne de Toledo

President

[Signed] Silvio Roberto Areco Gomes

West Generation Director

BUYER:

SCHWEITZER-MAUDUIT DO BRASIL S/A

Witnesses

[Signed] Name: OSVALDO PENA DE MENEZES JR

ID: 7.842.225-5

ATTACHMENT I

CESP GENERATING FARM

HYDROELECTRIC POWER PLANT

POWER PLANT	RIO	POWER (MW)
UHE ILHA SOLTEIRA	Paraná	3,444.0
UHE JUPIÁ (ENG. SOUZA DIAS)	Paraná	1,551.2
UHE PORTO PRIMAVERA (ENG SÉRGIO MOTTA)	Paraná	1,540.0
UHE TRÊS IRMÃOS	Tietê	807.5
UHE JAGUARI	Jaguari	27.0
UHE PARAIBUNA	Paraibuna	85.0

[Note: UHE – Usina Hidroelétrica – Hydroelectric power plant]

MODEL

ATTACHMENT II

MODEL OF PROMISSORY NOTE

PROMISSORY NOTE                                                                                                                          Maturity: “CASH”

Promissory Note given in assurance of the true compliance of the obligations foreseen in the Electric Power Purchase and Sales Agreement, entered into between SCHWEITZER-MAUDUIT DO BRASIL S/A, a joint-stock company duly organized with head offices at Avenida Darcy Vargas No. 325, Santanésia – Piraí – RJ, ZIP CODE: 27195-000, enrolled at the National Register of Legal Persons of the Ministry of Finance [C.N.P.J./MF] under the number 33.073.008/0001-37 and State Enrollment under the number 80.446.527 and the CESP – COMPANHIA ENERGÉTICA DE SÃO PAULO [The São Paulo Power Company], on the            of                  of 2006, in agreement with Article 18 of said agreement.

AMOUNT = R$                      

We hereby state that we will pay, by this single copy of PROMISSORY NOTE to CESP – COMPANHIA ENERGÉTICA DE SÃO PAULO, with head offices in the city of São Paulo, the State of São Paulo, at Avenida Nossa Senhora do Sabará, No. 5,312, region of Pedreira, enrolled at the National Register of Legal Persons of the Ministry of Finance [C.N.P.J./MF] under the number 60.933.603/0001-78, or at its order, the above amount of R$                    (                       Brazilian reais), in the Country’s domestic currency, said Promissory Note being liable to be foreclosed by the CESP – COMPANHIA ENERGÉTICA DE SÃO PAULO only in the event of default by non-compliance with Article(s) 14 and 17 of the Electric Power Purchase and Sales Agreement entered into between the parties on the            of                  of 2006.

Payable in the market of São Paulo – SP

Drawer: SCHWEITZER-MAUDUIT  DO BRASIL S/A, Avenida Darcy Vargas No. 325, Santanésia – Piraí – The State of Rio de Janeiro, enrolled at the National Register of Legal Persons of the Ministry of Finance [C.N.P.J./MF] under the number 33.073.008/0001-37 in this act represented by its legal below signed legal representatives.

São Paulo,        of                      of             .

Acknowledgement of Signatures:

[Stamp & Initial] LEGAL DEPARTMENT – PJC / CESP

[03 Initials]

EX-10.2

EXHIBIT 10.2

CREDIT AGREEMENT

Dated as of July 31, 2006

Among

SCHWEITZER-MAUDUIT INTERNATIONAL, INC.

as Borrower and Guarantor,

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

And

SCHWEITZER-MAUDUIT ENTREPRISE S.A.S.

as Borrowers,

THE BANKS NAMED IN THIS CREDIT AGREEMENT

as Banks,

and

SOCIÉTÉ GÉNÉRALE

as Agent

SOCIÉTÉ GÉNÉRALE CORPORATE & INVESTMENT BANKING,
NATEXIS BANQUES POPULAIRES AND SUNTRUST BANK,

as Mandated Lead Arrangers

and

SOCIÉTÉ GÉNÉRALE CORPORATE & INVESTMENT BANKING,

as Sole Bookrunner

TABLE OF CONTENTS

Page
ARTICLE I DEFINITIONS AND ACCOUNTING TERMS
Section 1.01.	Certain Defined Terms	1
Section 1.02.	Computation of Time Periods	17
Section 1.03.	Accounting Terms; Changes in GAAP	18
Section 1.04.	Classes and Types of Advances	18
Section 1.05.	Miscellaneous	18
Section 1.06.	Currency Equivalents	18
ARTICLE II THE ADVANCES
Section 2.01.	The Advances	19
Section 2.02.	Method of Borrowing	19
Section 2.03.	Fees	23
Section 2.04.	Reduction of the Commitments	24
Section 2.05.	Repayment	25
Section 2.06.	Interest	25
Section 2.07.	Prepayments	26
Section 2.08.	Funding Losses	29
Section 2.09.	Increased Costs	29
Section 2.10.	Payments and Computations	31
Section 2.11.	Taxes	31
Section 2.12.	Sharing of Payments, Etc.; Pro Rata Treatment	34
Section 2.13.	Bank Replacement	35
Section 2.14.	Extension of Maturity Date	35
ARTICLE III CONDITIONS OF LENDING
Section 3.01.	Conditions Precedent to Initial Advances	37
Section 3.02.	Conditions Precedent to Advances to SME	38
Section 3.03.	Conditions Precedent to Each Borrowing	39
ARTICLE IV REPRESENTATIONS AND WARRANTIES
Section 4.01.	Corporate Existence; Subsidiaries	40
Section 4.02.	Corporate Power	40
Section 4.03.	Authorization and Approvals	40
Section 4.04.	Enforceable Obligations	40
Section 4.05.	Financial Statements	40
Section 4.06.	True and Complete Disclosure	42
Section 4.07.	Litigation	42

i

TABLE OF CONTENTS

(continued)

Page
Section 4.08.	Use of Proceeds	43
Section 4.09.	Investment Company Act	43
Section 4.10.	Taxes	43
Section 4.11.	Pension Plans	43
Section 4.12.	Condition of Property; Casualties	43
Section 4.13.	Insurance	44
Section 4.14.	No Burdensome Restrictions; No Defaults	44
Section 4.15.	Supply Agreement	44
Section 4.16.	Environmental Condition	44
Section 4.17.	Liens and Encumbrances	45
ARTICLE V AFFIRMATIVE COVENANTS
Section 5.01.	Compliance with Laws, Etc	45
Section 5.02.	Maintenance of Insurance	45
Section 5.03.	Preservation of Corporate Existence, Etc	46
Section 5.04.	Payment of Taxes, Etc	46
Section 5.05.	Reporting Requirements	46
Section 5.06.	Maintenance of Property	49
Section 5.07.	Inspection	49
Section 5.08.	Use of Proceeds	49
Section 5.09.	Status of Obligations	49
Section 5.10.	Nature of Business	49
ARTICLE VI NEGATIVE COVENANTS
Section 6.01.	Liens, Etc	49
Section 6.02.	Merger or Consolidation; Asset Sales	51
Section 6.03.	Investments	51
Section 6.04.	Transactions With Affiliates	52
Section 6.05.	Compliance with ERISA	52
Section 6.06.	Net Debt to Equity Ratio	52
Section 6.07.	Net Debt to Adjusted EBITDA Ratio	52
Section 6.08.	Debt	52
Section 6.09.	Special Provisions for Material Subsidiaries of SARL and SME	53
Section 6.10.	Stock Purchases	53
ARTICLE VII REMEDIES
Section 7.01.	Events of Default	54
Section 7.02.	Optional Acceleration of Maturity	56

ii

TABLE OF CONTENTS

(continued)

Page
Section 7.03.	Automatic Acceleration of Maturity			56
Section 7.04.	Non-exclusivity of Remedies			56
Section 7.05.	Right of Set-off			56
ARTICLE VII THE GUARANTY
Section 8.01.	Guaranty		57
Section 8.02.	Guaranty Absolute		57
Section 8.03.	Waiver		58
Section 8.04.	Subrogation		58
ARTICLE IX THE AGENT
Section 9.01.	Authorization and Action	58
Section 9.02.	Agent’s Reliance, Etc	59
Section 9.03.	The Agent and Its Affiliates	59
Section 9.04.	Bank Credit Decision	59
Section 9.05.	Indemnification	59
Section 9.06.	Successor Agent	60
Section 9.07.	“Know Your Customer” Checks	60
ARTICLE X MISCELLANEOUS
Section 10.01.	Amendments, Etc	61
Section 10.02.	Notices, Etc	62
Section 10.03.	No Waiver; Remedies	63
Section 10.04.	Costs and Expenses	63
Section 10.05.	Binding Effect	63
Section 10.06.	Bank Assignments and Participations	63
Section 10.07.	Indemnification	66
Section 10.08.	Execution in Counterparts	66
Section 10.09.	Survival of Representations, etc	66
Section 10.10.	Severability	66
Section 10.11.	Usury Not Intended	66
Section 10.12.	Global Effective Rate	67
Section 10.13.	Judgment Currency	67
Section 10.14.	Governing Law; Consent to Jurisdiction	67
Section 10.15.	Confidentiality	68

iii

TABLE OF CONTENTS

EXHIBITS:
Exhibit A	—	Form of Assignment and Acceptance
Exhibit B-1	—	Form of Tranche A Note
Exhibit B-2	—	Form of Tranche B Note
Exhibit C	—	Form of Notice of Borrowing
Exhibit D	—	Form of Notice of Continuation
Exhibit E	—	Form of Compliance Certificate
Exhibit F-1	—	Form of Company’s General Counsel Opinion
Exhibit F-2	—	Form of SARL’s and SME’s Outside Counsel Opinion
Exhibit F-3	—	Form of Agent’s Counsel Opinion
Exhibit G	—	Form of Confidentiality Agreement
SCHEDULES:
Schedule 1	—	Notice Information for Banks
Schedule 4.07	—	Litigation
Schedule 4.16	—	Environmental
Schedule 6.01	—	Existing Liens

iv

CREDIT AGREEMENT

This Credit Agreement dated as of July 31, 2006 is among (a) Schweitzer-Mauduit International, Inc., a Delaware corporation (“Company”); (b) Schweitzer-Mauduit France S.A.R.L., a French corporation (“SARL”); (c) Schweitzer-Mauduit Entreprise S.A.S., a French corporation (“SME”), (d) the Banks (as defined below); and (e) Société Générale, a French banking corporation, as Agent for the Banks (each as defined below).

The Company, SARL, SME, the Banks, and the Agent agree as follows:

DEFINITIONS AND ACCOUNTING TERMS

Section .01.            Certain Defined Terms.  As used in this Agreement, the terms defined above shall have the meanings set forth therein and the following terms shall have the following meanings (unless otherwise indicated, such meanings to be equally applicable to both the singular and plural forms of the terms defined):

“Additional Cost Rate” means (a) for any Bank lending from an Applicable Lending Office in a Participating Member State the percentage notified by that Bank to the Agent as the cost of complying with the minimum reserve requirements of the European Central Bank, or (b) for any Bank lending from an Applicable Lending Office in the United Kingdom will be calculated by the Agent as follows:

A x 0.01	per cent. per annum
300

Where:

“A” is the rate of charge payable by such Bank to the Financial Services Authority pursuant to the Fees Regulations (but, for this purpose, ignoring any minimum fee required pursuant to the Fees Regulations) and expressed in pounds per £1,000,000 of the Fee Base of such Bank.

“Adjusted EBITDA” means, for any period, (a) Adjusted Net Income for such period plus (b) to the extent deducted in determining net income, minority interest in earnings of subsidiaries, interest expenses, income taxes, and depreciation and amortization less (c) amortization of the deferred revenue, not including any increase in deferred revenues for such period, all as defined in the consolidated Financial Statements of the Company in accordance with GAAP.  For the avoidance of doubt, when calculated as of the end of any fiscal quarter of the Company, Adjusted EBITDA will be calculated for the four-fiscal quarter period then ending.

“Adjusted Net Income” means, for any period, the Company’s consolidated net income for such period after taxes, as determined in accordance with GAAP, excluding, however, extraordinary or one-time items, including (a) any net gain or loss during such period arising

from the sale, exchange, or other disposition of capital assets (such term to include all fixed assets and all securities) other than in the ordinary course of business and (b) any write-up or write-down of assets.

“Adjusted U.S. Base Rate” means, for any day, the fluctuating rate per annum of interest equal to the greater of (a) the U.S. Base Rate in effect on such day and (b) the Federal Funds Rate in effect on such day plus ¼ %.

“Advance” means a Tranche A Advance or a Tranche B Advance, as the case may be.

“Affected Bank” has the meanings set forth in Section 2.02(c)(iii) and 2.07(e), as applicable.

“Affiliate” means, as to any Person, any other Person that, directly or indirectly, through one or more intermediaries, controls, is controlled by, or is under common control with, such Person or any Subsidiary of such Person.  The term “control” (including the terms “controlled by” or “under common control with”) means the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of a Person, whether through ownership of a Control Percentage, by contract or otherwise.

“Agent” means Société Générale in its capacity as an agent pursuant to Article IX and any successor agent pursuant to Section 9.06.

“Agreement” means this Credit Agreement dated as of July 31, 2006 among the Company, SARL, SME, the Banks, and the Agent, as it may be amended or supplemented from time-to-time.

“Applicable Accounting Rules” means, in respect of a particular Person, the body of generally accepted accounting principles which are applicable to the preparation and presentation of such Person’s financial statements.

“Applicable Lending Office” means, with respect to each Bank, such Bank’s U.S. Lending Office in the case of a U.S. Base Rate Advance, such Bank’s Eurodollar Lending Office in the case of a Eurodollar Rate Advance, and such Bank’s Eurocurrency Lending Office in the case of a Eurocurrency Rate Advance or EONIA Rate Advance.

“Applicable Mandatory Cost” of any Bank for the Interest Period for any Fixed Rate Advance, an addition to the Eurodollar Rate or Eurocurrency Rate to compensate such Bank for the cost of compliance with (a) the requirements of the Bank of England and/or the Financial Services Authority (or, in either case, any other Governmental Authority which replaces all or any of its functions) or (b) the requirements of the European Central Bank, each in an amount equal to the Additional Cost Rate.  On the first day of each Interest Period (or as soon as possible thereafter) the Agent shall calculate, the Additional Cost Rate for each Bank.  The Applicable Mandatory Cost will be calculated by the Agent as a weighted average of the Banks’ Additional Cost Rates (weighted in proportion to the percentage participation of each Bank in the relevant Borrowing) and will be expressed as a percentage rate per annum.

2

“Applicable Margin” means, at any time with respect to any Fixed Rate Advance, the following percentages determined as a function of the Net Debt to Adjusted EBITDA Ratio as of the end of the immediately preceding fiscal quarter:

Net Debt to Adjusted EBITDA Ratio	Applicable Margin (per annum)
< 1.5	0.35%
> 1.5 and < 2.0	0.45%
> 2.0 and < 2.5	0.60%
> 2.5	0.75%

For purposes of calculating the Applicable Margin, the Net Debt to Adjusted EBITDA Ratio shall be determined from the consolidated financial statements of the Company and its Subsidiaries most recently delivered pursuant to Section 5.05 and certified to the Agent and the Banks in the Compliance Certificate required to be delivered by the Company in connection with such financial statements pursuant to Section 5.05(e).  If, at any time, an Event of Default has occurred and is continuing or the Company fails to deliver such financial statements and Compliance Certificate within the times specified in Section 5.05, the Applicable Margin shall be 0.75% per annum until such Event of Default has been cured or waived in accordance with the terms of this Agreement or the Company delivers such financial statements and Compliance Certificate (or certified calculation, as applicable) to the Agent and the Banks, respectively.  Notwithstanding the foregoing, from the date hereof through but excluding the date of delivery to the Agent of the financial statements and certificates required by Sections 5.05, respectively, for the period ended June 30, 2006, the Applicable Margin shall be deemed to be 0.45% per annum.

“Assignment and Acceptance” means an assignment and acceptance entered into by a Bank and an Eligible Assignee, and executed by the Agent and the Company, in substantially the form of the attached Exhibit A.

“Banks” means the lenders listed on the signature pages of this Agreement and each Eligible Assignee that shall become a party to this Agreement pursuant to Section 10.06.

“Borrower” means (a) with respect to all Advances, the Company, and (b) with respect to the Tranche B Advances, SARL and SME, and “Borrowers” shall refer to all such Persons collectively.  Notwithstanding anything to the contrary herein, all of the references herein to “Borrower” (including, without limitation, those references in Section 3.03 and Articles IV, V, VI and VII) shall not include SME until SME has satisfied the conditions precedent set forth in Section 3.02.

“Borrowing” means a Tranche A Borrowing or a Tranche B Borrowing.

3

“Business Day” means, (a) with respect to U.S. Base Rate Advances, a day of the year on which banks are not required or authorized to close in Atlanta, Georgia or New York, New York, and (b) with respect to Eurodollar Rate Advances, a day of the year on which banks are not required or authorized to close in Atlanta, Georgia, New York, New York, or London, England, and (c) with respect to Eurocurrency Rate Advances and EONIA Rate Advances, a day of the year on which banks are not required or authorized to close in Paris, France and which is also a TARGET Day.

“Capital Leases” means, as applied to any Person, any lease of any Property by such Person as lessee which would, in accordance with Applicable Accounting Rules, be required to be classified and accounted for as a capital lease on the balance sheet of such Person.

“CERCLA” means the Comprehensive Environmental Response, Compensation, and Liability Act of 1980, as amended, and all rules and regulations and requirements thereunder in each case as now or hereafter in effect.

“Change of Control” means

(a)           the acquisition by any Person, or two or more Persons acting in concert, of beneficial ownership (within the meaning of Rule 13d-3 of the Securities and Exchange Commission under the Securities Exchange Act of 1934) of a Control Percentage with respect to the Company;  or

(b)           during any period of 12 consecutive months, a majority of the members of the board of directors or other equivalent governing body of the Company cease to be composed of individuals (i) who were members of that board or equivalent governing body on the first day of such period, (ii) whose election or nomination to that board or equivalent governing body was approved by individuals referred to in clause (i) above constituting at the time of such election or nomination at least a majority of that board or equivalent governing body or (iii) whose election or nomination to that board or other equivalent governing body was approved by individuals referred to in clauses (i) and (ii) above constituting at the time of such election or nomination at least a majority of that board or equivalent governing body (excluding, in the case of both clause (ii) and clause (iii), any individual whose initial nomination for, or assumption of office as, a member of that board or equivalent governing body occurs as a result of an actual or threatened solicitation of proxies or consents for the election or removal of one or more directors by any person or group other than a solicitation for the election of one or more directors by or on behalf of the board of directors).

“Class” has the meaning set forth in Section 1.04.

“Closing Date” means the date on which all conditions precedent set forth in Section 3.01 hereof have been satisfied or waived by the party entitled to performance thereof.

“Code” means the Internal Revenue Code of 1986, as amended, and any successor statute.

4

“Commitment Fee Rate” means, at any time with respect to the commitment fees payable pursuant to Sections 2.03(a) and (b), the following percentages determined as a function of the Net Debt to Adjusted EBITDA Ratio as of the end of the immediately preceding fiscal quarter:

Net Debt to Adjusted EBITDA Ratio	Commitment Fee Rate
< 2.0	30% of the then applicable Applicable Margin
> 2.0	35% of the then applicable Applicable Margin

For purposes of calculating the Commitment Fee Rate, the Net Debt to Adjusted EBITDA Ratio shall be determined from the consolidated financial statements of the Company and its Subsidiaries most recently delivered pursuant to Section 5.05 and certified to the Agent and the Banks in the Compliance Certificate required to be delivered by the Company in connection with such financial statements pursuant to Section 5.05(e).

“Commitments” means, as to any Bank, its Tranche A Commitment and its Tranche B Commitment.

“Compliance Certificate” means a Compliance Certificate signed by a Responsible Officer of the Company in substantially the form of the attached Exhibit E.

“Control Percentage” means, with respect to any Person, the percentage of the outstanding capital stock of such Person having ordinary voting power which gives the direct or indirect holder of such stock the power to elect a majority of the Board of Directors of such Person.

“Controlled Group” means all members of a controlled group of corporations and all trades (whether or not incorporated) under common control which, together with any Borrower, are treated as a single employer under Section 414 of the Code.

“Continue”, “Continuation”, and “Continued” each refers to a continuation of Advances for an additional Interest Period upon the expiration of the Interest Period then in effect for such Advances.

“Convert”, “Conversion”, and “Converted” each refers to a conversion of Advances of one Type into Advances of another Type as may be required or permitted from time to time under the terms of Sections 2.02(c) and 2.07(e) of this Agreement.

“Credit Documents” means this Agreement, the Notes, and each other agreement, instrument or document executed by the Borrowers, any of their Subsidiaries or any of their officers at any time in connection with this Agreement.

“Currency” means Dollars or Euros, as applicable.

“Debt” for any Person, means without duplication:

5

(a)           indebtedness of such Person for borrowed money;

(b)           obligations of such Person evidenced by bonds, debentures, notes or other similar instruments;

(c)           obligations of such Person to pay the deferred purchase price of property or services (other than trade accounts payable);

(d)           obligations of such Person as lessee under Capital Leases;

(e)           all reimbursement obligations of such Person arising under letters of credit (including standby and commercial), bankers’ acceptances, bank guaranties, surety bonds and similar instruments;

(f)            obligations of such Person under direct or indirect guaranties in respect of, and obligations (contingent or otherwise) of such Person to purchase or otherwise acquire, or otherwise to assure a creditor against loss in respect of, indebtedness or obligations of others of the kinds referred to in clauses (a) through (e) above;

(g)           all obligations of such Person under any Interest Hedge Agreement or Financial Contract (excluding foreign exchange transactions not entered into for speculative purposes); and

(h)           indebtedness or obligations of others of the kinds referred to in clauses (a) through (g) secured by any Lien on or in respect of any Property of such Person.

“Default” means (a) an Event of Default or (b) any event or condition which with notice or lapse of time or both would, unless cured or waived, become an Event of Default.

“Dollar Equivalent” means (a) with respect to any amount denominated in Dollars, such amount, and (b) with respect to any amount denominated in Euros, the equivalent amount thereof in Dollars as determined by the Agent by reference to the Spot Rate (determined in respect of the most recent Revaluation Date), for the spot purchase in the foreign exchange market of such amount of Dollars with such other currency.

“Dollars” and “$” means lawful money of the United States of America.

“Eligible Assignee” means (a) a commercial bank organized under the laws of the United States, or any State thereof, and having primary capital (Tier I) of not less than $500,000,000 and approved by the Agent and the Company, which approval will not be unreasonably withheld, (b) a commercial bank organized under the laws of any other country which is a member of the Organization for Economic Cooperation and Development and having primary capital (or its equivalent) of not less than $500,000,000 (or its Dollar Equivalent) and approved by the Agent and the Company, which approval by the Agent and the Company will not be unreasonably withheld, or (c) any other Person that has been approved by the Company in its sole discretion and the Agent, which approval by the Agent will not be unreasonably withheld.  Without limiting any other basis upon which the Company may reasonably withhold its consent to a proposed assignee, the Company’s consent shall not be deemed to have been unreasonably withheld if such assignment would be reasonably likely to result in (i) any Borrower becoming

6

liable for any payment pursuant to Sections 2.09, 2.11(a) or 2.11(c) or (ii) such assignee asserting any rights under Sections 2.02(c)(iii) or 2.07(e).

“Environment” or “Environmental” shall have the meanings set forth in 43 U.S.C. §  9601(8) (1988).

“Environmental Claim” means any third party (including governmental agencies and employees) action, lawsuit, claim, regulatory action or proceeding, order, decree, consent agreement or notice of potential or actual responsibility or violation which seeks to impose liability under any Environmental Law.

“Environmental Law” means, as to a particular Borrower or its Subsidiaries, all Legal Requirements applicable to such Borrower or its Subsidiaries arising from, relating to, or in connection with the Environment, including without limitation CERCLA, relating to (a) pollution, contamination, injury, destruction, loss, protection, cleanup, reclamation or restoration of the air, surface water, groundwater, land surface or subsurface strata, or other natural resources; (b) solid, gaseous or liquid waste generation, treatment, processing, recycling, reclamation, cleanup, storage, disposal or transportation; (c) exposure to pollutants, contaminants, hazardous, medical, infectious, or toxic substances, materials or wastes; or (d) the manufacture, processing, handling, transportation, distribution in commerce, use, storage or disposal of hazardous, medical, infectious, or toxic substances, materials or wastes.

“Environmental Permit” means any permit, license, order, approval or other authorization under Environmental Law.

“EONIA Rate” means, for each EONIA Rate Advance comprising part of the same Borrowing, the interest rate per annum set forth on Telerate Page 247 (or any replacement page on such service) as the Euro Overnight Index Average at or about 7:00 a.m. (Brussels time) on the next Business Day after the date of determination.

“EONIA Rate Advance” means an Advance which bears interest based on the EONIA Rate.

“Equity” means, for any period (a) Total Stockholders’ Equity (as defined in the Financial Statements of the Company) plus (b) Minority Interests (as defined in the Financial Statements of the Company).

“ERISA” means the Employee Retirement Income Security Act of 1974, as amended from time-to-time.

“Euro” and/or “€” denote the lawful currency of Participating Member States.

“Eurocurrency Lending Office” means, with respect to any Bank, the office of such Bank specified as its “Eurocurrency Lending Office” opposite its name on Schedule 1 (or, if no such office is specified, its U.S. Lending Office) or such other office of such Bank as such Bank may from time-to-time specify to the Borrowers and the Agent.

7

“Eurocurrency Liabilities” has the meaning assigned to that term in Regulation D of the Federal Reserve Board (or any successor), as in effect from time-to-time.

“Eurocurrency Rate” means, for the Interest Period for each Eurocurrency Rate Advance comprising part of the same Borrowing, the interest rate per annum set forth on Telerate Page 248 as the Euro Interbank Offered Rate at or about 11:00 a.m. (Brussels time) two Business Days before the first day of such Interest Period and for a period equal to such Interest Period; provided that, if no such quotation appears on Telerate Page 248, the Eurocurrency Rate shall be an interest rate per annum (rounded upward to the nearest whole multiple of 1/16 of 1% per annum) equal to the average rate per annum at which deposits in Euros are offered by the Eurocurrency Reference Banks to prime banks in the European interbank market at 11:00 a.m. (Brussels time) two Business Days before the first day of such Interest Period in an amount substantially equal to Société Générale’s Eurocurrency Rate Advance comprising part of such Borrowing and for a period equal to such Interest Period.

“Eurocurrency Rate Advance” means an Advance which bears interest based on the Eurocurrency Rate.

“Eurocurrency Reference Banks” means Société Générale, Natexis Banques Populaires, and LCL.

“Eurodollar Lending Office” means, with respect to any Bank, the office of such Bank specified as its “Eurodollar Lending Office” opposite its name on Schedule 1 (or, if no such office is specified, its U.S. Lending Office) or such other office of such Bank as such Bank may from time-to-time specify to the Borrowers and the Agent.

“Eurodollar Rate” means, for the Interest Period for each Eurodollar Rate Advance comprising part of the same Borrowing, the interest rate per annum set forth on Telerate Page 3750 as the London Interbank Offered Rate at or about 11:00 a.m. (London time) two Business Days before the first day of such Interest Period and for a period equal to such Interest Period; provided that, if no such quotation appears on Telerate Page 3750, the Eurodollar Rate shall be an interest rate per annum (rounded upward to the nearest whole multiple of 1/16 of 1% per annum) equal to the average rate per annum at which deposits in Dollars are offered by the Eurodollar Reference Banks to prime banks in the London interbank market at 11:00 a.m. (London time) two Business Days before the first day of such Interest Period in an amount substantially equal to Société Générale’s Eurodollar Rate Advance comprising part of such Borrowing and for a period equal to such Interest Period.

“Eurodollar Rate Advance” means an Advance which bears interest based on the Eurodollar Rate.

“Eurodollar Reference Banks” means Société Générale, Natexis Banques Populaires, and SunTrust.

“Events of Default” has the meaning set forth in Section 7.01.

“Existing Credit Agreement” means the Agreement dated as of January 31, 2002 among the Company, SARL, the banks named therein and Société Générale, as Agent, as amended.

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“Federal Funds Rate” means, for any period, a fluctuating interest rate per annum equal for each day during such period to the weighted average of the rates on overnight Federal funds transactions with members of the Federal Reserve System arranged by Federal funds brokers, as published for such day (or, if such day is not a Business Day, for the next preceding Business Day) by the Federal Reserve Bank of New York, or, if such rate is not so published for any day which is a Business Day, the average of the quotations for any such day on such transactions received by the Agent from three Federal funds brokers of recognized standing selected by it.

“Federal Reserve Board” means the Board of Governors of the Federal Reserve System or any of its successors.

“Fees Regulations” means the Banking Supervision (Fees) Regulations 1999 or such other law or regulation as may be in force from time to time in respect of the payment of fees for banking supervision.

“Fee Base” has the meaning given to it in, and will be calculated in accordance with, the Fees Regulations.

“Financial Contract” of a Person means (a) any exchange-traded or over-the-counter futures, forward, swap or option contract or other financial instrument with similar characteristics, or (b) any Rate Management Transaction.

“Financial Statements” means (a) the audited consolidated balance sheet of the Company as at December 31, 2005 and the related audited consolidated statements of income, changes in stockholders’ equity and cash flows of the Company and (b) the audited or unaudited, as applicable, combined or consolidated, as applicable, balance sheets and income, changes in owners’ equity and cash flow statements of each of the other entities referred to in Section 4.05, each dated as of December 31, 2005.

“Fixed Rate Advance” means any Eurodollar Rate Advance or Eurocurrency Rate Advance.

“Fixed Rate Reserve Percentage” of any Bank for the Interest Period for any Fixed Rate Advance means the reserve percentage applicable during such Interest Period (or if more than one such percentage shall be so applicable, the daily average of such percentages for those days in such Interest Period during which any such percentage shall be so applicable) under regulations issued from time-to-time by the Federal Reserve Board for determining the maximum reserve requirement (including, without limitation, any emergency, supplemental or other marginal reserve requirement) for such Bank with respect to liabilities or assets consisting of or including Eurocurrency Liabilities having a term equal to such Interest Period.

“Fund,” “Trust Fund,” or “Superfund” means the Hazardous Substance Response Trust Fund, established pursuant to 42 U.S.C. § 9631 (1988) and the Post-closure Liability Trust Fund, established pursuant to 42 U.S.C. § 9641 (1988), which statutory provisions have been amended or repealed by the Superfunds Amendments and Reauthorization Act of 1986, and the “Fund,” “Trust Fund,” or “Superfund” that are now maintained pursuant to § 9507 of the Code.

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“GAAP” means United States generally accepted accounting principles as in effect from time-to-time, applied on a basis consistent with the requirements of Section 1.03.

“Governmental Authority” means, as to any Person in connection with any subject, any foreign, national, state or provincial governmental authority, or any political subdivision of any state thereof, or any agency, department, commission, board, authority or instrumentality, bureau or court, in each case having jurisdiction over such Person or such Person’s Property in connection with such subject.

“Governmental Proceedings” means any action or proceedings by or before any Governmental Authority, including, without limitation, the promulgation, enactment or entry of any Legal Requirement.

“Guaranteed Obligations” means all Advances and other amounts payable by SARL and SME to the Agent or the Banks under the Credit Documents.

“Hazardous Substance” means the substances identified as such pursuant to CERCLA and those regulated under any other Environmental Law, including without limitation pollutants, contaminants, petroleum, petroleum products, radionuclides, radioactive materials, and medical and infectious waste.

“Hazardous Waste” means the substances regulated as such pursuant to any Environmental Law.

“Interest Hedge Agreement” means an interest hedge, rate swap, or cap, or similar arrangement between a Borrower and a financial institution providing for the exchange of nominal interest obligations or the cap of the interest rate on the Advances made under this Agreement.

“Interest Period” means, for each Fixed Rate Advance comprising part of the same Borrowing, the period commencing on the date of such Advance and ending on the last day of the period selected by a Borrower pursuant to the provisions below and Section 2.02 and, thereafter, each subsequent period commencing on the last day of the immediately preceding Interest Period and ending on the last day of the period selected by such Borrower pursuant to the provisions below and Section 2.02.  The duration of each such Interest Period shall be one, two, three, or six months, in each case as the applicable Borrower may, upon notice received by the Agent at the Applicable Lending Office on the day and at the time required by Section 2.02 (and copies of which shall in any event be sent simultaneously to the Agent’s U.S. Lending Office), select; provided, however, that:

(a)           Interest Periods commencing on the same date for Advances by each Bank comprising part of the same Borrowing shall be of the same duration;

(b)           whenever the last day of any Interest Period would otherwise occur on a day other than a Business Day, the last day of such Interest Period shall be extended to occur on the next succeeding Business Day, provided that if such extension would cause the last day of such Interest Period to occur in the next following calendar month, the last day of such Interest Period shall occur on the next preceding Business Day;

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(c)           any Interest Period which begins on the last Business Day of a calendar month (or on a day for which there is no numerically corresponding day in the calendar month at the end of such Interest Period) shall end on the last Business Day of the calendar month in which it would have ended if there were a numerically corresponding day in such calendar month; and

(d)           no Borrower may select any Interest Period for any Advance which ends after the Maturity Date.

“Interim Financial Statements” means (a) the unaudited consolidated balance sheet of the Company as at March 31, 2006 and the related unaudited consolidated statements of income, changes in stockholders’ equity and cash flows of the Company and (b) the unaudited, combined or consolidated, as applicable, balance sheets and income, changes in owners’ equity and cash flow statements of each of the other entities referred to in Section 4.05, each dated as of March 31, 2006.

“Legal Requirement” means, as to any Person, any law, statute, ordinance, decree, requirement, order, judgment, rule, regulation (or official interpretation of any of the foregoing) of, and the terms of any license or permit issued by, any Governmental Authority which is applicable to such Person.

“Lien” means any mortgage, lien, pledge, assignment, charge, deed of trust, security interest, hypothecation, preference, deposit arrangement or encumbrance (or any other arrangement having the practical effect of the foregoing) to secure or provide for the payment of any obligation of any Person, whether arising by contract, operation of law or otherwise (including, without limitation, the interest of a vendor or lessor under any conditional sale agreement, Capital Lease or other title retention agreement).

“Liquid Investments” means:

(a)           direct obligations of, or obligations the principal of and interest on which are unconditionally guaranteed by (i) the government of Brazil, with respect to investments of amounts arising from or used in the conduct of such Person’s business in Brazil, (ii) the United States, (iii) the Republic of France, (iv) the Kingdom of Spain, (v) the Republic of Indonesia, with respect to investments of amounts arising from or used in the conduct of such Person’s business in Indonesia, or (vi) the Republic of The Philippines, with respect to investments of amounts arising from or used in the conduct of such Person’s business in the Philippines;

(b)           (i) negotiable or nonnegotiable certificates of deposit, time deposits, or other similar banking arrangements maturing within 180 days from the date of acquisition thereof (“bank debt securities”), issued by (A) any Bank that is a commercial bank or commercial financial institution or (B) any other bank or trust company which has a combined capital surplus and undivided profit of not less than $500,000,000 or the Dollar Equivalent thereof, if at the time of deposit or purchase, such bank debt securities are rated not less than “A” (or the then equivalent) by the rating service of

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Standard & Poor’s Ratings Group or of Moody’s Investors Service, and (ii) commercial paper issued by (A) any Bank that is a commercial bank or commercial financial institution or (B) any other Person if at the time of purchase such commercial paper is rated not less than “A-2” (or the then equivalent) by the rating service of Standard & Poor’s Ratings Group or not less than “P-2” (or the then equivalent) by the rating service of Moody’s Investors Service, or upon the discontinuance of both of such services, such other nationally recognized rating service or services, as the case may be, as shall be selected by the Borrower with the consent of the Majority Banks;

(c)           repurchase agreements relating to investments described in clauses (a) and (b) above with a market value at least equal to the consideration paid in connection therewith, with any Person who regularly engages in the business of entering into repurchase agreements and has a combined capital surplus and undivided profit of not less than $500,000,000 or the Dollar Equivalent thereof, if at the time of entering into such agreement the debt securities of such Person are rated not less than “A” (or the then equivalent) by the rating service of Standard & Poor’s Ratings Group or of Moody’s Investors Service;

(d)           such other instruments (within the meaning of Article 9 of the Uniform Commercial Code as adopted in the State of New York) or money market funds as the Borrower may request and the Agent may approve in writing, which approval will not be unreasonably withheld; and

(e)           with respect to investments of amounts arising from or used in the conduct of such Person’s business in Brazil, Indonesia and the Philippines, bank debt securities issued by the following banks:  Banco ABN AMRO Real S.A., Banco do Brasil S.A., Banco Itau S.A., Banco Safra S.A., HSBC Bank Brasil S.A. Banco Multiplo, Standard Chartered Bank, Pan Indonesia Bank, Bank of the Philippine Islands or Equitable PCI Bank; provided that (i) such bank receives a long-term foreign currency senior debt rating from either Standard & Poor’s Ratings Group or Moody’s Investors Service and such rating is equal to or higher than B- (or the then equivalent) (provided that (A) if the ratings established or deemed to have been established by Standard & Poor’s Ratings Group and Moody’s Investors Service for such bank shall differ, the lower of the two ratings shall apply and (B) if neither Standard & Poor’s Ratings Group nor Moody’s Investors Service shall have in effect a long-term foreign currency senior debt rating for such bank, then Moody’s Investor Services’ long-term foreign currency deposit rating, if any, shall be substituted therefor); (ii) the aggregate of such investments may not exceed $10,000,000 (or the Dollar Equivalent thereof); provided that the aggregate of such investments may not exceed $5,000,000 (or the Dollar Equivalent thereof) in either Indonesia or the Philippines; and (iii) such investments may be terminated without premium or penalty within three Business Days.

“Majority Banks” means, at any time, Banks holding at least 66-2/3% of the Dollar Equivalent of the then aggregate unpaid principal amount of the Notes held by the Banks at such time, or, if no such principal amount is then outstanding, Banks having at least 66-2/3% of the aggregate amount of Dollar Equivalents of the Commitments at such time.

“Majority Tranche A Banks” means, at any time, Banks having Tranche A Commitments holding at least 66-2/3% of the then aggregate unpaid principal amount of the Tranche A Notes held by such Banks at such time, or, if no such principal amount is then outstanding, Banks having at least 66-2/3% of the aggregate amount of the Tranche A Commitments at such time.

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“Majority Tranche B Banks” means, at any time, Banks having Tranche B Commitments holding at least 66-2/3% of the then aggregate unpaid principal amount of the Tranche B Notes held by such Banks at such time, or, if no such principal amount is then outstanding, Banks having at least 66-2/3% of the aggregate amount of the Tranche B Commitments at such time.

“Mandated Lead Arrangers” means each of Société Générale, Natexis Banques Populaires and SunTrust Bank.

“Material Adverse Change” shall mean (a) a material adverse change in the business, financial condition, or results of operations of the Company and its Subsidiaries, taken as a whole, since the date of the Financial Statements, or (b) a material adverse effect on any Borrower’s ability to perform its obligations under this Agreement, any Note or any other Credit Document.

“Material Subsidiaries” means any consolidated Subsidiary of any Borrower, which Subsidiary holds or constitutes 5% or more of the consolidated assets of the Company.

“Maturity Date” means the earlier of (a) the later of (i) the fifth anniversary of the Closing Date and (ii) if maturity is extended pursuant to Section 2.14, such extended maturity date as determined pursuant to such Section and (b) the earlier termination in whole of the Commitments pursuant to Section 2.04 or Article VII.

“Maximum Rate” means the maximum nonusurious interest rate under applicable law (determined under such laws after giving effect to any items which are required by such laws to be construed as interest in making such determination, including without limitation if required by such laws, certain fees and other costs).

“Multiemployer Plan” means a “multiemployer plan” as defined in Section 4001(a)(3) of ERISA to which any Borrower or any member of the Controlled Group is making or accruing an obligation to make contributions.

“Net Debt” means, for any period, the Company’s consolidated (a) current portion of long term Debt plus (b) other short term Debt plus (c) long term Debt less (d) cash and cash equivalents (all as defined in the Financial Statements of the Company), each as determined in accordance with GAAP; provided, however that clause (e) of the definition of “Debt” and those agreements or contracts under clause (g) of the definition of “Debt” which qualify as effective hedges as defined in Financial Accounting Standards No. 133, as amended, shall be excluded for purposes of determining Net Debt.

“Net Debt to Adjusted EBITDA Ratio” means, at any time, the ratio of the Company’s (a) Net Debt as of the end of any fiscal quarter to (b) Adjusted EBITDA as of the end of any fiscal quarter for the four-fiscal quarter period then ending.

“Net Debt to Equity Ratio” means, at any time, the ratio of the Company’s (a) Net Debt to (b) Equity at such time.

“Net Income” means, for any period, the Company’s consolidated net income for such period after taxes, as determined in accordance with GAAP.

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“Note” means a Tranche A Note or a Tranche B Note.

“Notice of Borrowing” means a notice of borrowing in the form of the attached Exhibit C signed by a Responsible Officer of the applicable Borrower.

“Notice of Continuation” means a notice of continuation in the form of the attached Exhibit D signed by a Responsible Officer of the applicable Borrower.

“Obligations” means all Advances and other amounts payable by the Borrowers to the Agent or the Banks under the Credit Documents, including without limitation, the Company’s obligations under Article VIII.

“Participating Member State” means any member state of the European Communities that adopts or has adopted the euro as its lawful currency in accordance with legislation of the European Union relating to Economic and Monetary Union.

“PBGC” means the Pension Benefit Guaranty Corporation or any entity succeeding to any or all of its functions under ERISA.

“Permitted Liens” means the Liens permitted to exist pursuant to Section 6.01.

“Person” means an individual, partnership, corporation (including a business trust), joint stock company, trust, unincorporated association, joint venture or other entity, or a government or any political subdivision or agency thereof or any trustee, receiver, custodian or similar official.

“Philip Morris” means Altria Group, Incorporated, a Virginia corporation.

“Plan” means an employee benefit plan (other than a Multiemployer Plan) sponsored by the Company or any member of the Controlled Group and covered by Title IV of ERISA or subject to the minimum funding standards under Section 412 of the Code.

“Property” of any Person means any property or assets (whether real, personal, or mixed, tangible or intangible) of such Person.

“Pro Rata Share” means, at any time with respect to any Bank, either (a) if the Commitments have not been canceled, the ratio (expressed as a percentage) of the Dollar Equivalent of such Bank’s uncancelled Commitments at such time to the Dollar Equivalent of the aggregate uncancelled Commitments at such time, (b) if the Commitments have been terminated but no Advances are outstanding, the ratio (expressed as a percentage) of the Dollar Equivalent of such Bank’s Commitment immediately prior to such termination to the Dollar Equivalent of the aggregate amount of the Commitments immediately prior to such termination or (c) if the aggregate Commitments have been terminated and there are outstanding Advances, the ratio (expressed as a percentage) of the Dollar Equivalent of such Bank’s aggregate outstanding Advances at such time to the Dollar Equivalent of the aggregate outstanding Advances of all the Banks at such time.

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“Rate Management Transactions” means any transaction (including an agreement with respect thereto) which is a rate swap, basis swap, forward rate transaction, commodity swap, commodity option, equity or equity index swap, equity or equity index option, bond option, interest rate option, foreign exchange transaction, cap transaction, floor transaction, collar transaction, forward transaction, currency swap transaction, cross-currency rate swap transaction, currency option or any other similar transaction (including any option with respect to any of these transactions) or any combination thereof, whether linked to one or more interest rates, foreign currencies, commodity prices, equity prices or other financial measures.

“Register” has the meaning set forth in paragraph (c) of Section 10.06.

“Regulations T, U, X and D” means Regulations T, U, X, and D of the Federal Reserve Board, as the same is from time-to-time in effect, and all official rulings and interpretations thereunder or thereof.

“Release” shall have the meaning set forth in CERCLA or under any other Environmental Law.

“Reportable Event” means any of the events set forth in Section 4043(b) of ERISA.

“Response” shall have the meaning set forth in CERCLA or under any other Environmental Law.

“Responsible Officer” means, of any Person, the Chief Executive Officer, President, Chief Financial Officer, any Executive or Senior Vice President, Secretary (or the French equivalent of any of the foregoing) of such Person or any other member of senior management of such Person.

“Revaluation Date” means (a) the last Business Day of each fiscal quarter and (b) such additional dates as the Agent shall determine or the Majority Lenders shall require.

“SEC” means the Securities and Exchange Commission, and any successor entity.

“Spot Rate” for a currency means the rate determined by the Agent to be the rate of exchange quoted by Société Générale, New York Branch at 10:00 a.m. (New York City time) on the date of determination.

“Subsidiary” of a Person means any corporation, association, partnership or other business entity of which 50% or more of the outstanding shares of capital stock (or other equivalent interests) having by the terms thereof ordinary voting power under ordinary circumstances to elect a majority of the board of directors or Persons performing similar functions (or, if there are no such directors or Persons, having general voting power) of such entity (irrespective of whether at the time capital stock (or other equivalent interests) of any other class or classes of such entity shall or might have voting power upon the occurrence of any contingency) is at the time directly or indirectly owned or controlled by such Person, by such Person and one or more Subsidiaries of such Person or by one or more Subsidiaries of such Person.

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“Supply Agreement” means (a) the Second Amended and Restated Agreement for Fine Paper Supply dated as of July 1, 2000 between Philip Morris and the Company, and (b) the Amended and Restated Addendum to Fine Papers Supply Agreement dated as of July 1, 2000, as such Agreements may be further amended or modified from time-to-time.

“Tangible Net Worth” means, as of any date for the Company on a consolidated basis, the sum of (a) the par value (or value stated on the books of the Company) of the capital stock of all classes of the Company, plus (b) the additional paid-in capital of the Company, plus (c) the amount of the surplus and retained earnings, whether capital or earned, of the Company, all determined on a consolidated basis in accordance with GAAP, excluding, however, (i) the value of any redeemable preferred stock or similar capital stock of the Company, and (ii) accumulated other comprehensive income, minus (d) the absolute value of treasury stocks, minus (e) the sum of the value indicated on the Company’s balance sheet of the following items: patents, trademarks, copyrights, deferred charges (excluding deferred taxes), deferred credits (excluding deferred revenues), and other intangible assets.

“TARGET” means Trans-European Automated Real-time Gross settlement Express Transfer system.

“TARGET Day” means a day on which payments in Euros are settled in the TARGET system.

“Tax Group” has the meaning set forth in Section 4.10.

“Termination Event” means (a) the occurrence of a Reportable Event with respect to a Plan, as described in Section 4043 of ERISA and the regulations issued thereunder (other than a Reportable Event not subject to the provision for 30-day notice to the PBGC under such regulations), (b) the withdrawal of any Borrower or any of its Affiliates from a Plan during a plan year in which it was a “substantial employer” as defined in Section 4001(a)(2) of ERISA, (c) the giving of a notice of intent to terminate a Plan under Section 4041(c) of ERISA, (d) the institution of proceedings to terminate a Plan by the PBGC, or (e) any other event or condition which constitutes grounds under Section 4042 of ERISA for the termination of, or the appointment of a trustee to administer, any Plan.

“Tranche A Advance” means any advance by a Bank to a Borrower as part of a Tranche A Borrowing and refers to a U.S. Base Rate Advance or a Eurodollar Rate Advance.

“Tranche A Borrowing” means a borrowing consisting of simultaneous Tranche A Advances of the same Type and to the same Borrower made by each Bank pursuant to Section 2.01(a).

“Tranche A Commitment” means, for each Bank, the amount in Dollars set opposite such Bank’s name on the signature pages hereof as its Tranche A Commitment or, if such Bank has entered into any Assignment and Acceptance after the date hereof, set forth for such Bank as its Tranche A Commitment in the Register maintained by the Agent pursuant to Section 10.06(c).  The aggregate amount of the Tranche A Commitments on the Closing Date is $95,000,000.

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“Tranche A Note” means the promissory note of the Company payable to the order of any Bank, in substantially the form of the attached Exhibit B-1, evidencing indebtedness of such Borrower to such Bank resulting from Tranche A Advances owing to such Bank from such Borrower.

“Tranche A Share” means, at any time with respect to any Bank with a Tranche A Commitment, the ratio (expressed as a percentage) of such Bank’s Tranche A Commitment at such time to the aggregate Tranche A Commitments at such time.

“Tranche B Advance” means any advance by a Bank to a Borrower as part of a Tranche B Borrowing and refers to an EONIA Rate Advance or a Eurocurrency Rate Advance.

“Tranche B Borrowing” means a borrowing consisting of simultaneous Tranche B Advances of the same Type and to the same Borrower made by each Bank pursuant to Section 2.01(b).

“Tranche B Commitment” means, for each Bank, the amount in Euros set opposite such Bank’s name on the signature pages hereof as its Tranche B Commitment or, if such Bank has entered into any Assignment and Acceptance after the date hereof, set forth for such Bank as its Tranche B Commitment in the Register maintained by the Agent pursuant to Section 10.06(c).  The aggregate amount of the Tranche B Commitments on the Closing Date is €80,000,000.

“Tranche B Note” means the promissory note of a Borrower payable to the order of any Bank, in substantially the form of the attached Exhibit B-2, evidencing indebtedness of such Borrower to such Bank resulting from Tranche B Advances owing to such Bank from such Borrower.

“Tranche B Share” means, at any time with respect to any Bank with a Tranche B Commitment, the ratio (expressed as a percentage) of such Bank’s Tranche B Commitment at such time to the aggregate Tranche B Commitments at such time.

“Type” has the meaning set forth in Section 1.04.

“U.S. Base Rate” means a fluctuating interest rate per annum as shall be in effect from time-to-time equal to the rate of interest publicly announced by Société Générale, New York Branch as its prime rate, whether or not the applicable Borrower has notice thereof.

“U.S. Base Rate Advance” means an Advance which bears interest as provided in Section 2.06(a).

“U.S. Lending Office” means, with respect to any Bank, the office of such Bank specified as its “U.S. Lending Office” opposite its name on Schedule 1 or such other office of such Bank as such Bank may from time-to-time specify to the Borrowers and the Agent.

Section .02.            Computation of Time Periods.  In this Agreement in the computation of periods of time from a specified date to a later specified date, the word “from” means “from and including” and the words “to” and “until” each means “to but excluding”.

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Section .03.            Accounting Terms; Changes in GAAP.

(a)           Except as otherwise expressly provided herein, all accounting terms used herein shall be interpreted, and all financial statements and certificates and reports as to financial matters required to be delivered to the Banks hereunder shall (unless otherwise disclosed to the Banks in writing at the time of delivery thereof in the manner described in subsection (b) below) be prepared, in accordance with GAAP applied on a basis consistent with those used in the preparation of the latest financial statements furnished to the Banks hereunder (which prior to the delivery of the first financial statements under Section 5.05 hereof, shall mean the Financial Statements).  All calculations made for the purposes of determining compliance with this Agreement shall (except as otherwise expressly provided herein) be made by application of GAAP applied on a basis consistent with those used in the preparation of the annual or quarterly financial statements furnished to the Banks pursuant to Section 5.05 hereof most recently delivered prior to or concurrently with such calculations (or, prior to the delivery of the first financial statements under Section 5.05 hereof, used in the preparation of the Financial Statements) unless (i) either (A) the Company shall have objected to determining such compliance on such basis at the time of delivery of such financial statements or (B) the Majority Banks shall so object in writing within 30 days after the delivery of such financial statements and (ii) the Company and the Majority Banks have not agreed upon amendments to the financial covenants contained herein to reflect any change in such basis, in which event such calculations shall be made on a basis consistent with those used in the preparation of the latest financial statements as to which such objection shall not have been made (which, if objection is made in respect of the first financial statements delivered under Section 5.05 hereof, shall mean the Financial Statements).

(b)           The Company shall deliver to the Banks at the same time as the delivery of any annual or quarterly financial statement under Section 5.05 hereof (i) a description in reasonable detail of any material variation between the application of accounting principles employed in the preparation of such statement and the application of accounting principles employed in the preparation of the most recent preceding annual or quarterly financial statements as to which no objection has been made in accordance with the last sentence of clause (a) of this Section 1.03 and (ii) reasonable estimates of the difference between such statements arising as a consequence thereof.

Section .04.            Classes and Types of Advances.  Advances are distinguished by “Class” and “Type”.  The “Class” of an Advance refers to the determination of whether such Advance is a Tranche A Advance or a Tranche B Advance, each of which constitutes a Class.  The “Type” of an Advance refers to the determination whether such Advance is a Eurodollar Rate Advance, a Eurocurrency Rate Advance, a U.S. Base Rate Advance, or a EONIA Rate Advance, each of which constitutes a Type.

Section .05.            Miscellaneous.  Article, Section, Schedule and Exhibit references are to Articles and Sections of and Schedules and Exhibits to this Agreement, unless otherwise specified.

Section .06.            Currency Equivalents.  The Agent shall determine the Spot Rates as of each Revaluation Date to be used for calculating Dollar Equivalent amounts of Tranche B

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Advances.  Such Spot Rates shall become effective as of such Revaluation Date and shall be the Spot Rates employed in converting any amounts between the applicable currencies until the next Revaluation Date to occur.  Except for purposes of financial statements delivered by any Person hereunder or calculating financial covenants hereunder or except as otherwise provided herein, the applicable amount of any currency (other than Dollars) for purposes of the Credit Documents shall be such Dollar Equivalent amount as so determined by the Agent.

THE ADVANCES

Section .01.            The Advances.

(a)           Tranche A Advances.  Each Bank with a Tranche A Commitment severally agrees, on the terms and conditions set forth in this Agreement, to make Tranche A Advances in Dollars to the Company from time-to-time on any Business Day during the period from the date of this Agreement until the Maturity Date in an aggregate principal amount not to exceed at any time outstanding such Bank’s Tranche A Commitment; provided that the sum of the aggregate outstanding principal amounts of all Tranche A Advances made by each Bank shall not exceed such Bank’s Tranche A Commitment and the sum of the aggregate outstanding principal amounts of all Tranche A Advances made by all Banks with a Tranche A Commitment shall not exceed $95,000,000.  Each Tranche A Borrowing shall be in an aggregate amount not less than $3,000,000 and in integral multiples of $1,000,000 in excess thereof and shall consist of Tranche A Advances of the same Type made on the same day to the Company by the Banks ratably according to their respective Tranche A Commitments.  Within the limits of each Bank’s Tranche A Commitment, the Company may from time-to-time borrow, prepay pursuant to Section 2.07 and reborrow under this Section 2.01(a).

(b)           Tranche B Advances.  Each Bank severally agrees, on the terms and conditions set forth in this Agreement, to make Tranche B Advances in Euros to each Borrower from time-to-time on any Business Day during the period from the date of this Agreement until the Maturity Date in an aggregate principal amount not to exceed at any time outstanding such Bank’s Tranche B Commitment; provided that the sum of the aggregate outstanding principal amounts of all Tranche B Advances made by each Bank (whether to the Company, SARL or SME) shall not exceed such Bank’s Tranche B Commitment and the sum of the aggregate outstanding principal amounts of all Tranche B Advances made by all Banks with a Tranche B Commitment shall not exceed €80,000,000.  Each Tranche B Borrowing shall be in an aggregate amount not less than €3,000,000 and in integral multiples of €1,000,000 in excess thereof and shall consist of Tranche B Advances of the same Type made on the same day to the same Borrower by the Banks ratably according to their respective Tranche B Commitments.  Within the limits of each Bank’s Tranche B Commitment, the Borrowers may from time-to-time borrow, prepay pursuant to Section 2.07 and reborrow under this Section 2.01(b).

Section .02.            Method of Borrowing.

(a)           Notice.  Each Borrowing shall be made pursuant to a Notice of Borrowing, given not later than (i) 10:00 a.m. (New York time) at least three Business Days before the date of a

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requested Tranche A Borrowing consisting of Eurodollar Advances, (ii) 10:00 a.m. (Paris, France time) at least three Business Days before the date of a requested Tranche B Borrowing, or (iii) 10:00 a.m. (New York time) on the day preceding the day of a requested Tranche A Borrowing consisting of U.S. Base Rate Advances, by the applicable Borrower to the Agent’s Applicable Lending Office.  The Agent shall give to each Bank prompt notice on the day of receipt of a timely Notice of Borrowing of such requested Borrowing by telecopier or telex.  Each Notice of a Borrowing shall be by telecopier, telex or telephone, confirmed promptly the same day in writing specifying (A) the requested date of such Borrowing (which shall be a Business Day), (B) the requested Type and Class of Advances comprising such Borrowing, (C) the requested aggregate amount of such Borrowing, (D) the applicable Borrower, and (E) with respect to any Borrowing consisting of Fixed Rate Advances, the requested Interest Period therefor.  The Agent shall promptly notify each Bank of the applicable interest rate under Sections 2.06(b) or 2.06(c), as applicable.  Each Bank shall (I) in the case of all Borrowings which are comprised of Tranche A Advances before 12:00 p.m. (New York time) on the date of such Borrowing, and (II) in the case of all Borrowings which are comprised of Tranche B Advances, before 12:00 p.m. (Paris, France time) on the date of such Borrowing, make available through its Applicable Lending Office to the Agent at the Agent’s Applicable Lending Office, or such other location as the Agent may specify by notice to the Banks, in same day funds, such Bank’s Tranche A Share or Tranche B Share of such Borrowing.  After the Agent’s receipt of such funds and upon fulfillment of the applicable conditions set forth in Article III, the Agent will promptly make such funds available to the applicable Borrower at such account as the applicable Borrower shall specify in writing to Agent.

(b)           Continuations; Repayment of U.S. Base Rate Advances.  In order to elect to Continue a Fixed Rate Advance under this Section, the Borrower desiring a Continuation shall deliver an irrevocable Notice of Continuation to the Agent at the Agent’s office no later than (i) 10:00 a.m. (New York time) at least three Business Days in advance of such requested Continuation date in the case of a Continuation of a Tranche A Advance consisting of Eurodollar Advances, or (ii) 10:00 a.m. (Paris, France time) at least three Business Days in advance of such requested Continuation date in the case of a Continuation of a Tranche B Advance.  Each such Notice of Continuation shall be in writing or by telex, telecopier or telephone, confirmed promptly the same day in writing specifying (A) the requested Continuation date (which shall be a Business Day), (B) the amount, Type, and Class of the Advance to be Continued, and (C) the requested Interest Period.  Promptly after receipt of a Notice of Continuation under this paragraph, the Agent shall provide each Bank with a copy thereof and notify each Bank of the applicable interest rate under Sections 2.06(b) or 2.06(c), as applicable.  Notwithstanding anything in this Agreement to the contrary, Continuations of Advances may only be made at the end of the applicable Interest Period for such Advances.  The applicable Borrower shall pay in full each Borrowing consisting of U.S. Base Rate Advances made pursuant to Section 2.02(a)(iii) above (but excluding Borrowings or Advances Converted to bear interest at the U.S. Base Rate pursuant to Section 2.02(c) or 2.07(e)) on or before the 10th day following the date of such Borrowing.

(c)           Certain Limitations.  Notwithstanding anything in paragraphs (a) and (b) above:

(i)            at no time shall there be more than five Interest Periods for each Tranche applicable to outstanding Fixed Rate Advances;

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(ii)           except as otherwise specifically provided in Sections 2.02(c) and 2.07(e) herein, each Borrowing shall be comprised entirely of Fixed Rate Advances;

(iii)          (A) if any Bank shall, at least two Business Days before the date of any requested Borrowing, notify the Agent that the introduction of or any change in or in the interpretation of any law or regulation makes it unlawful, or that any central bank or other Governmental Authority asserts that it is unlawful, for such Bank or any of its Applicable Lending Offices to perform its obligations under this Agreement to make Fixed Rate Advances of a certain Type, or to fund or maintain Fixed Rate Advances of a certain Type (each such Bank an “Affected Bank”), the obligation of the Affected Bank to make or maintain Fixed Rate Advances of the Type affected for such Borrowing or for any subsequent Borrowing shall be suspended until the Affected Bank shall notify the Agent that the circumstances causing such suspension no longer exist, and the Advance of the Affected Bank comprising such Borrowing shall be in the case of a Eurodollar Rate Advance, a U.S. Base Rate Advance and in the case of a Eurocurrency Rate Advance, a EONIA Rate Advance, (B) each Bank that becomes an Affected Bank agrees to use commercially reasonable efforts (consistent with its internal policies and legal and regulatory restrictions) to designate a different Applicable Lending Office if the making of such designation would avoid the effect of this paragraph and would not, in the reasonable judgment of the Affected Bank, be otherwise economically disadvantageous to the Affected Bank; and (C) if such condition shall continue for such Bank for 30 days, the Affected Bank may be replaced in accordance with the procedures in Section 2.13; provided that, if the Affected Bank is not replaced within 60 days after such initial 30-day period, the right of the Borrowers to select the affected Type of Fixed Rate Advances for any subsequent Borrowing and the obligation of the Banks to make or maintain the affected Type of Fixed Rate Advances shall be suspended until (I) the Affected Bank shall notify the Agent that the circumstances causing such suspension no longer exist or (II) the Affected Bank is replaced pursuant to Section 2.13;

(iv)          if the Agent is unable to determine the Eurodollar Rate for Eurodollar Rate Advances comprising any requested Borrowing, the right of the Company to select Eurodollar Rate Advances for such Borrowing or for any subsequent Borrowing and the obligation of the Banks to make such Eurodollar Rate Advances shall be suspended until the Agent shall notify the Company and the Banks that the circumstances causing such suspension no longer exist, and each Advance comprising such Borrowing shall be a U.S. Base Rate Advance until receipt of such notification, whereupon the Company may again select Eurodollar Rate Advances for Borrowings;

(v)           if the Agent is unable to determine the Eurocurrency Rate for Eurocurrency Rate Advances comprising any requested Borrowing, the right of the Borrowers to select Eurocurrency Rate Advances for such Borrowing or for any subsequent Borrowing and the obligation of the Banks to make such Eurocurrency Rate Advances shall be suspended until the Agent shall notify the Borrowers and the Banks that the circumstances causing such suspension no longer exist, and each Advance comprising such Borrowing shall be an Advance which bears interest at a rate determined by the Agent to reflect the cost to each Bank of funding in Euros for the applicable Interest Period plus the Applicable Margin plus the Additional Cost Rate;

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(vi)          (A) if the Majority Tranche A Banks shall in the case of all Borrowings which are comprised of Tranche A Advances consisting of Eurodollar Advances, before 12:00 p.m. (New York time) at least two Business Days before the date of any requested Borrowing, or (B) if the Majority Tranche B Banks shall in the case of all Borrowings which are comprised of Tranche B Advances, before 12:00 p.m. (Paris, France time) at least two Business Days before the date of any requested Borrowing, notify the Agent that the Eurodollar Rate or Eurocurrency Rate, as the case may be, for Fixed Rate Advances comprising such Borrowing will not adequately reflect the cost to such Banks of making or funding their respective Fixed Rate Advances for such Borrowing, the right of the Borrowers to select Eurodollar Rate Advances or Eurocurrency Rate Advances, as the case may be, for such Borrowing or for any subsequent Borrowing and the obligation of the Banks to make Eurodollar Rate Advances or Eurocurrency Rate Advances, as the case may be, shall be suspended until the Agent shall notify the Borrowers and the Banks that the circumstances causing such suspension no longer exist, and each Advance comprising such Borrowing shall be a U.S. Base Rate Advance or an Advance which bears interest at a rate determined by the Agent to reflect the cost to each Bank of funding in Euros for the applicable Interest Period plus the Applicable Margin plus the Additional Cost Rate, respectively; and

(vii)         if any Borrower shall fail to select the duration or Continuation of any Interest Period for any Fixed Rate Advances in accordance with the provisions contained in the definition of “Interest Period” in Section 1.01 and paragraphs (a) and (b) above, the Agent will forthwith so notify such Borrower and the Banks and such Advances will be made available to such Borrower on the date of such Borrowing of the class and type designated for a one month Interest Period.

Notwithstanding the foregoing, if either U.S. Base Rate Advances or EONIA Rate Advances are not available because of circumstances substantially similar to those set forth in subsections (iii), (iv), (v) or (vi) with respect to Fixed Rate Advances, then the Borrowers shall either (y) Convert the then outstanding principal amount of the affected Advances to bear interest at a rate determined by the Agent from time to time to reflect the cost to each Bank of funding such Advances in Dollars or Euros, as applicable, and pay all interest accrued on the amount so Converted or (z) repay in full the then outstanding principal amount of the affected Advances, together with accrued interest thereon.  Except as otherwise provided in (y) above, the right of the Borrowers to select such affected Advances for such Borrowing or for any subsequent Borrowing and the obligation of the Banks to make such Advances shall be suspended until the Agent shall notify the Borrowers and the Banks that the circumstances causing such suspension no longer exist.

(d)           Notices Irrevocable.  Each Notice of Borrowing and Notice of Continuation shall be irrevocable and binding on the Borrower delivering such notice.  Each Borrower shall indemnify each Bank against any loss, out-of-pocket cost or expense actually incurred by such Bank as a result of any failure to fulfill on or before the date specified in such Notice of Borrowing or such Notice of Continuation for such Borrowing the applicable conditions set forth in Article III, including, without limitation, any loss, cost or expense actually incurred by reason of the liquidation or reemployment of deposits or other funds acquired by such Bank to fund the

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Advance to be made by such Bank as part of such Borrowing when such Advance, as a result of such failure, is not made on such date.

(e)           Agent Reliance.  Unless the Agent shall have received notice from a Bank before the date of any Borrowing that such Bank will not make available to the Agent such Bank’s Tranche A Share of any Tranche A Borrowing, or Tranche B Share of any Tranche B Borrowing, the Agent may assume that such Bank has made its Tranche A Share or Tranche B Share, as the case may be, of such Borrowing available to the Agent on the date of such Borrowing in accordance with paragraph (a) of this Section 2.02 and the Agent may, in reliance upon such assumption, make available to the applicable Borrower on such date a corresponding amount.  If and to the extent that such Bank shall not have so made its Tranche A Share or Tranche B Share, as the case may be, of such Borrowing available to the Agent, such Bank and the applicable Borrower severally agree to immediately repay to the Agent on demand such corresponding amount, together with interest on such amount, for each day from the date such amount is made available to the applicable Borrower until the date such amount is repaid to the Agent, at (i) in the case of the Borrower, the interest rate applicable on such day to Advances comprising such Borrowing and (ii) in the case of such Bank (A) for all Borrowings which are comprised of Tranche A Advances, the Federal Funds Rate for such day, and (II) for all Borrowings which are comprised of Tranche B Advances, the EONIA Rate for such day.  If such Bank shall repay to the Agent such corresponding amount and interest as provided above, such corresponding amount so repaid shall constitute such Bank’s Advance as part of such Borrowing for purposes of this Agreement even though not made on the same day as the other Advances comprising such Borrowing.

(f)            Bank Obligations Several.  The failure of any Bank to make the Advance to be made by it as part of any Borrowing shall not relieve any other Bank of its obligation, if any, to make its Advance on the date of such Borrowing.  No Bank shall be responsible for the failure of any other Bank to make the Advance to be made by such other Bank on the date of any Borrowing.

(g)           Notes.  The indebtedness of the Company to each Bank resulting from Tranche A Advances owing to such Bank shall be evidenced by the Tranche A Note of the Company payable to the order of such Bank.  The indebtedness of each Borrower to each Bank resulting from the Tranche B Advances of such Borrower owing to such Bank shall be evidenced by the Tranche B Note of each Borrower payable to the order of such Bank.

Section .03.            Fees.

(a)           Tranche A Commitment Fees.  The Company agrees to pay to the Agent for the account of each Bank having a Tranche A Commitment a commitment fee payable in Dollars on the average daily amount by which such Bank’s Tranche A Commitment exceeds such Bank’s outstanding Tranche A Advances from the Closing Date until the Maturity Date at the Commitment Fee Rate.  The fees payable pursuant to this clause (a) are due quarterly in arrears on the last Business Day of each March, June, September and December commencing September 29, 2006 and on the Maturity Date.

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(b)           Tranche B Commitment Fees.  SARL agrees to pay to the Agent for the account of each Bank having a Tranche B Commitment a commitment fee payable in Euros on the average daily amount by which such Bank’s Tranche B Commitment exceeds such Bank’s outstanding Tranche B Advances from the Closing Date until the Maturity Date at the Commitment Fee Rate.  The fees payable pursuant to this clause (b) are due quarterly in arrears on the last Business Day of each March, June, September and December commencing September 29, 2006 and on the Maturity Date.

(c)           Utilization Fee.

(i)            Tranche A.  The Company agrees to pay to the Agent for the account of each Bank having a Tranche A Commitment a utilization fee payable in Dollars computed at the rate of 0.025% per annum on the average daily amount of the aggregate amount of such Bank’s outstanding Tranche A Advances for each day during the period from the Closing Date until the Maturity Date on which (A) the sum of the aggregate outstanding Tranche A Advances and the Dollar Equivalent of the aggregate outstanding Tranche B Advances exceeds (B) 50% of the sum of the aggregate Tranche A Commitments and the Dollar Equivalent of the aggregate outstanding Tranche B Commitments.

(ii)           Tranche B.  Each of the Borrowers agrees to pay to the Agent for the account of each Bank having a Tranche B Commitment a utilization fee payable in Euros computed at the rate of 0.025% per annum on the average daily amount of the aggregate amount of such Bank’s outstanding Tranche B Advances made to such Borrower for each day during the period from the Closing Date until the Maturity Date on which (A) the sum of the aggregate outstanding Tranche A Advances and the Dollar Equivalent of the aggregate outstanding Tranche B Advances exceeds (B) 50% of the sum of the aggregate Tranche A Commitments and the Dollar Equivalent of the aggregate outstanding Tranche B Commitments.

(iii)          The fees payable pursuant to this clause (c) are due quarterly in arrears on the last Business Day of each March, June, September and December commencing September 29, 2006 and on the Maturity Date.

(d)           Arrangement and Participation Fees.  The Company agrees to pay to the Agent the arrangement and participation fees referenced in the Mandate Letter dated June 9, 2006 from the Mandated Lead Arrangers to the Borrowers.  Such fees shall be fully earned and due upon execution of this Agreement, but shall not be payable until the Closing Date.  Any fee referred to in the Mandate Letter and required to be paid under this clause (d) shall be paid exclusive of any value added tax or any other tax which might be chargeable in connection with that fee.  If any value added tax or other tax is so chargeable with respect to such fee, it shall be paid by the relevant Borrower at the same time that it pays the relevant fee.

Section .04.            Reduction of the Commitments.  The Borrowers shall have the right, upon at least fifteen Business Days’ irrevocable written notice to the Agent, to terminate in whole or reduce ratably in part the unused portion of either the Tranche A Commitments or the Tranche B Commitments without penalty or payment of any  premium; provided that each partial reduction

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of the Commitments shall be in the minimum aggregate amount of €3,000,000 or an integral multiple of €1,000,000 in excess thereof or $3,000,000 or an integral multiple of $1,000,000 in excess thereof, as the case may be.  Any reduction or termination of the Commitments pursuant to this Section 2.04 shall be permanent, with no obligation of the Banks to reinstate such Commitments and the commitment fees provided for in Section 2.03 shall thereafter be computed on the basis of the Commitments, as so reduced.

Section .05.            Repayment.  The Borrowers obligated thereon shall repay the outstanding principal amount of the Advances on the Maturity Date.

Section .06.            Interest.  Each of the Borrowers shall pay interest on the unpaid principal amount of each Advance made by each Bank to such Borrower from the date of such Advance until such principal amount shall be paid in full, at the following rates per annum and in the Currency in which such Advance is made:

(a)           U.S. Base Rate Advances.  If such Advance is a U.S. Base Rate Advance, a rate per annum equal at all times to the lesser of (i) the Adjusted U.S. Base Rate in effect from time-to-time and (ii) the Maximum Rate, payable in arrears on the last Business Day of each calendar quarter and on the date such U.S. Base Rate Advance shall be paid in full, provided that any amount of principal which is not paid within five Business Days of when due (whether at stated maturity, by acceleration or otherwise) shall bear interest from the date on which such amount is due until such amount is paid in full, payable on demand, at a rate per annum equal at all times to the lesser of (i) the Adjusted U.S. Base Rate in effect from time-to-time plus 2% and (ii) the Maximum Rate.

(b)           Eurodollar Rate Advances.  If such Advance is a Eurodollar Rate Advance, a rate per annum equal at all times during the Interest Period for such Advance to the lesser of (i) the Eurodollar Rate for such Interest Period plus the Applicable Margin and (ii) the Maximum Rate, payable on the last day of such Interest Period, and, in the case of six-month Interest Periods, on the day which occurs during such Interest Period three months from the first day of such Interest Period; provided that any amount of principal which is not paid within five Business Days of when due (whether at stated maturity, by acceleration or otherwise) shall bear interest from the date on which such amount is due until such amount is paid in full, payable on demand, at a rate per annum equal at all times to the lesser of (i) the greater of (A) the Adjusted U.S. Base Rate in effect from time-to-time plus 2% and (B) the rate required to be paid on such Advance immediately prior to the date on which such amount became due plus 2% and (ii) the Maximum Rate.

(c)           Eurocurrency Rate Advances.  If such Advance is a Eurocurrency Rate Advance, a rate per annum equal at all times during the Interest Period for such Advance to the lesser of (i) the Eurocurrency Rate for such Interest Period plus the Applicable Margin and (ii) the Maximum Rate, payable on the last day of such Interest Period, and, in the case of six-month Interest Periods, on the day which occurs during such Interest Period three months from the first day of such Interest Period; provided that any amount of principal which is not paid within five Business Days of when due (whether at stated maturity, by acceleration or otherwise) shall bear interest from the date on which such amount is due until such amount is paid in full, payable on demand, at a rate per annum equal at all times to the lesser of (i) the greater of (A) the EONIA

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Rate in effect from time-to-time plus 2% and (B) the rate required to be paid on such Advance immediately prior to the date on which such amount became due plus 2% and (ii) the Maximum Rate.

(d)           EONIA Rate Advances.  If such Advance is a EONIA Rate Advance, a rate per annum equal at all times to the lesser of (i) the EONIA Rate in effect from time-to-time and (ii) the Maximum Rate, payable in arrears on the last Business Day of each calendar quarter and on the date such EONIA Rate Advance shall be paid in full, provided that any amount of principal which is not paid within five Business Days of when due (whether at stated maturity, by acceleration or otherwise) shall bear interest from the date on which such amount is due until such amount is paid in full, payable on demand, at a rate per annum equal at all times to the lesser of (i) the EONIA Rate in effect from time-to-time plus 2% and (ii) the Maximum Rate.

(e)           Usury Recapture.  In the event the rate of interest chargeable under this Agreement or the Notes at any time (calculated after giving affect to all items charged which constitute “interest” under applicable laws, including fees and margin amounts, if applicable) is greater than the Maximum Rate, the unpaid principal amount of the Notes shall bear interest at the Maximum Rate until the total amount of interest paid or accrued on the Notes equals the amount of interest which would have been paid or accrued on the Notes if the stated rates of interest set forth in this Agreement had at all times been in effect.

In the event, upon payment in full of the Notes, the total amount of interest paid or accrued under the terms of this Agreement and the Notes is less than the total amount of interest which would have been paid or accrued if the rates of interest set forth in this Agreement had, at all times, been in effect, then the Borrowers shall, to the extent permitted by applicable law, pay the Agent for the account of the Banks an amount equal to the difference between (i) the lesser of (A) the amount of interest which would have been charged on the Notes if the Maximum Rate had, at all times, been in effect and (B) the amount of interest which would have accrued on the Notes if the rates of interest set forth in this Agreement had at all times been in effect and (ii) the amount of interest actually paid under this Agreement on the Notes.

In the event the Banks ever receive, collect or apply as interest any sum in excess of the Maximum Rate, such excess amount shall, to the extent permitted by law, be applied to the reduction of the principal balance of the Notes, and if no such principal is then outstanding, such excess or part thereof remaining shall be paid to the Borrowers.

Section .07.            Prepayments.

(a)           Right to Prepay.  The Borrowers shall have no right to prepay any principal amount of any Advance except as provided in this Section 2.07.

(b)           Optional.  Any Borrower may elect to prepay any of the Advances owing by it to the Banks, after giving prior written notice of such election by (i) in the case of Tranche A Advances, before 12:00 p.m. (New York time), and (ii) in the case of Tranche B Advances, before 12:00 p.m. (Paris, France time), fifteen Business Days before such prepayment date to the Agent stating the proposed date and aggregate principal amount of such prepayment.  If any such notice is given, the Borrower giving such notice shall prepay such Advances comprising part of

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the same Borrowing in whole or ratably in part in an aggregate principal amount equal to the amount specified in such notice, together with accrued interest to the date of such prepayment on the principal amount prepaid and amounts, if any, required to be paid pursuant to Section 2.08 as a result of such prepayment being made on such date; provided, however, that each partial prepayment shall be in an aggregate principal amount not less than (i) in the case of Tranche A Advances,  $3,000,000 and (ii) in the case of Tranche B Advances, €3,000,000.

(c)           Mandatory.

(i)            On the date of any reduction of the Commitments pursuant to Section 2.04, the applicable Borrower agrees to make a prepayment in respect of the outstanding amount of the applicable Advances to the extent, if any, that the aggregate unpaid principal amount of all such Advances exceeds the applicable aggregate Commitment, as so reduced.

(ii)           Each prepayment pursuant to this Section 2.07(c) shall be accompanied by accrued interest on the amount prepaid to the date of such prepayment and amounts, if any, required to be paid pursuant to Section 2.08 as a result of such prepayment being made on such date.

(d)           Illegality.  If any Bank shall notify the Agent and the Borrowers that the introduction of or any change in or in the interpretation of any law or regulation makes it unlawful, or that any central bank or other Governmental Authority asserts that it is unlawful for such Bank, its Eurodollar Lending Office or its Eurocurrency Lending Office to perform its obligations under this Agreement to make or maintain a Type of Fixed Rate Advances of such Bank then outstanding hereunder (each such Bank being an “Affected Bank”), (i) the Borrowers shall, (A) in the case of all Borrowings which are comprised of Tranche A Advances, no later than 12:00 p.m. (New York time), and (B) in the case of all Borrowings which are comprised of Tranche B Advances, no later than 12:00 p.m. (Paris, France time), (I) if not prohibited by law or regulation to maintain such Type of Fixed Rate Advances for the duration of the Interest Period, on the last day of the Interest Period for each outstanding Fixed Rate Advance or (II) if prohibited by law or regulation to maintain such Type of Fixed Rate Advances for the duration of the Interest Period, on the second Business Day following its receipt of such notice, Convert the Fixed Rate Advances of that Type of the Affected Bank to either (1) in the case of Eurodollar Rate Advances, a single U.S. Base Rate Advance or (2) in the case of Eurocurrency Rate Advances, a single EONIA Rate Advance, each in an amount equal to the aggregate principal amount of the affected Fixed Rate Advances of such Borrowers, and (ii) the obligation of the Affected Bank to make or maintain the affected Type of Fixed Rate Advances shall be suspended until the Affected Bank shall notify the Agent that the circumstances causing such suspension no longer exist.  Each Bank which becomes an Affected Bank agrees to use commercially reasonable efforts (consistent with its internal policies and subject to legal and regulatory restrictions) to designate a different Applicable Lending Office if the making of such designation would avoid the effect of this paragraph and would not, in the reasonable judgment of such Bank, be otherwise economically disadvantageous to such Bank.  If the condition requiring the Conversion under this paragraph shall continue for the Affected Bank for 30 days, the Affected Bank may be replaced in accordance with the procedures in Section 2.13; provided that, if the Affected Bank is not replaced within 60 days after such initial 30-day period, (A) all

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Fixed Rate Advances of the affected Type shall be Converted in accordance with the procedures described above, and (B) the right of the Borrowers to select the affected Type of Fixed Rate Advances for any subsequent Borrowing and the obligation of the Banks to make or maintain the affected Type of Fixed Rate Advances shall be suspended until (I) the Affected Bank shall notify the Agent that the circumstances causing such suspension no longer exist or (II) the Affected Bank is replaced pursuant to Section 2.13.  Notwithstanding the foregoing, if either U.S. Base Rate Advances or EONIA Rate Advances are not available because of the introduction of or any change in or in the interpretation of any law or regulation makes it unlawful, or that any central bank or other Governmental Authority asserts that it is unlawful for such Bank and its Applicable Lending Office to perform its obligations under this Agreement to make or maintain such Advances, then the Borrowers shall repay in full the then outstanding principal amount of the affected Advances, together with accrued interest thereon, and the right of the Borrowers to select such affected Advances for such Borrowing or for any subsequent Borrowing and the obligation of the Banks to make such Advances shall be suspended until the Agent shall notify the Borrowers and the Banks that the circumstances causing such suspension no longer exist.

(e)           Change of Control.  Upon receipt of the notice required by Section 5.05(l), then during the following 30-day period (the “Interim Period”) the Agent shall (on behalf of and in consultation with all of the Banks) negotiate with the Company in good faith to amend this Agreement in light of such Change of Control.  During the Interim Period and the Termination Notice Period (as defined below), the right of the Borrowers to request Advances and the obligation of the Banks to make additional Advances shall be suspended and the Borrowers may only elect to Continue Fixed Rate Advances for Interest Periods of one month or less.  At the end of the Interim Period, any terms and conditions agreed in writing by all of the Banks and the Borrowers shall take effect in accordance with their terms.  If the Banks and the Borrowers are unable to reach agreement during the Interim Period, then each Bank may, by notice to the Agent (a “Termination Notice”), cancel its Commitments hereunder (such Bank being a “Terminating Bank”).  Within 14 days after the end of the Interim Period (the “Termination Notice Period”), each Bank shall advise the Agent whether or not such Bank is a Terminating Bank; provided, however, the failure of any Bank to give such notice within such period of time shall be deemed to constitute an election to continue its Commitments hereunder. The Borrowers obligated thereon shall repay the outstanding principal amount of Advances owing to each Terminating Bank 30 days after the end of the Termination Notice Period (the “Change of Control Prepayment Date”).  The Borrower shall have the right on or before the Change of Control Prepayment Date to replace each Terminating Bank with, and add as “Banks” under this Agreement in place thereof, one or more Eligible Assignees (each, an “Additional Bank”) as provided in Section 10.06, each of which Additional Banks shall have entered into an Assignment and Acceptance pursuant to which such Additional Bank shall undertake a Commitment (and, if any such Additional Bank is already a Bank, its Commitment shall be in addition to such Bank’s Commitment hereunder on such date).  Each prepayment pursuant to this Section 2.07(e) shall be accompanied by accrued interest on the amount prepaid to the date of such prepayment and, only if such Terminating Bank is terminating its Commitment under this Agreement due to applicable government regulations, amounts, if any, required to be paid pursuant to Section 2.08 as a result of such prepayment being made on such date.

(f)            Ratable Payments; Effect of Notice.  Except as otherwise provided in clause (e) of this Section, each payment of any Advance pursuant to this Section 2.07 or any other provision

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of this Agreement shall be made in a manner such that all Advances comprising part of the same Borrowing are paid in whole or ratably in part.  All notices given pursuant to this Section 2.07 shall be irrevocable and binding upon the Borrowers.

Section .08.            Funding Losses.  If any payment of principal of any Fixed Rate Advance is made other than on the last day of the Interest Period for such Advance as a result of any payment pursuant to Section 2.07 (subject to the limitations set forth therein) or the acceleration of the maturity of the Notes pursuant to Article VII, such Borrower shall, within 10 days of any written demand sent by any Bank to such Borrower through the Agent, pay to the Agent for the account of such Bank any amounts (without duplication of any other amounts payable in respect of breakage costs) required to compensate such Bank for any additional losses, out-of-pocket costs or expenses which it may actually incur as a result of such payment or nonpayment, including, without limitation, any loss, cost or expense actually incurred by reason of the liquidation or reemployment of deposits or other funds acquired by any Bank to fund or maintain such Advance (but excluding loss of profits).

Section .09.            Increased Costs.

(a)           Fixed Rate Advances.  If, due to either (i) the introduction of or any change in or in the interpretation of any law or regulation or (ii) the compliance with any guideline or request from any central bank or other Governmental Authority (whether or not having the force of law), there shall be any increase in the cost to any Bank of agreeing to make or making, funding or maintaining Eurodollar Rate Advances or Eurocurrency Rate Advances (including, without limitation, (A) additional interest to compensate such Bank for reserve costs actually incurred by such Bank associated with Eurocurrency Liabilities, such additional interest to be calculated by subtracting (1) the Eurodollar Rate or Eurocurrency Rate, as applicable, for the relevant Advance from (2) the rate obtained by dividing such applicable interest rate for such Advance (excluding the Applicable Margin) by a percentage equal to one minus the applicable Fixed Rate Reserve Percentage of such Bank for such Interest Period and (B) any Applicable Mandatory Costs), then the applicable Borrowers shall from time-to-time, upon demand by such Bank (with a copy of such demand to the Agent), immediately pay to the Agent for the account of such Bank additional amounts (without duplication of other amounts payable in respect of increased costs) sufficient to compensate such Bank for such increased cost; provided, however, that, before making any such demand, each Bank agrees to use commercially reasonable efforts (consistent with its internal policy and subject to legal and regulatory restrictions) to designate a different Applicable Lending Office if the making of such a designation would avoid the need for, or reduce the amount of, such increased cost and would not, in the reasonable judgment of such Bank, be otherwise economically disadvantageous to such Bank (except that no Bank shall be required to redesignate its Applicable Lending Office to avoid the incurrence of increased costs associated with additional interest required to be paid by the Borrowers to any Bank in connection with reserve costs attributable to Eurocurrency Liabilities).  A certificate shall be submitted to the Borrowers and the Agent by such Bank (a) indicating the amount of such increased cost and detailing the calculation of such cost, (b) stating that such Bank is generally charging such amounts to other customers similarly situated with the Borrowers, and (c) that all such costs are being charged within 90 days of the date the Bank learned of such costs, such certificate to be conclusive and binding for all purposes, absent manifest error.

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(b)           Capital Adequacy.  If any Bank determines in good faith that compliance with any generally applicable law or regulation or any guideline or request from any central bank or other Governmental Authority (whether or not having the force of law) implemented or effective after the date of this Agreement increases or would increase the amount of capital required or expected to be maintained by such Bank or any corporation controlling such Bank and that the amount of such capital is increased by or based upon the existence of such Bank’s commitment to lend and other commitments of this type, then, upon 30 days prior written notice by such Bank (with a copy of any such demand to the Agent), the Borrowers shall immediately pay to the Agent for the account of such Bank as the case may be, from time-to-time as specified by such Bank, additional amounts (without duplication of any other amounts payable in respect of increased costs) sufficient to compensate such Bank, in light of such circumstances, with respect to such Bank, to the extent that such Bank reasonably determines such increase in capital to be allocable to the existence of such Bank’s commitment to lend under this Agreement.  A certificate shall be submitted to the Borrowers and the Agent by such Bank (a) indicating the amount of such capital adequacy costs and detailing the calculation of such costs, (b) stating that such Bank is generally charging such amounts to other customers similarly situated with the Borrowers, and (c) certifying that all such costs are being charged within 90 days of the date the Bank learned of such costs, such certificate to be conclusive and binding for all purposes, absent manifest error.

(c)           Special Provisions Regarding Applicable Mandatory Costs.  Each Bank shall supply any information required by the Agent for the purpose of calculating its Additional Cost Rate.  In particular, but without limitation, each Bank shall supply the following information in writing on or prior to the date on which it becomes a Bank: (a) its jurisdiction of incorporation and the jurisdiction of its Applicable Lending Offices; and (b) any other information that the Agent may reasonably require for such purpose.  Each Bank shall promptly notify the Agent in writing of any change to the information provided by it pursuant to this paragraph.  The percentages or rates of charge of each Bank for the purpose of determining “A” in the definition of “Additional Cost Rate” shall be determined by the Agent based upon the information supplied to it pursuant hereto and on the assumption that, unless a Bank notifies the Agent to the contrary, each Bank’s obligations in relation to the Fees Regulations are the same as those of a typical bank from its jurisdiction of incorporation with an Applicable Lending Office in the same jurisdiction as its Applicable Lending Office.  The Agent shall have no liability to any person if such determination results in an Additional Cost Rate which over or under compensates any Bank and shall be entitled to assume that the information provided by any Bank pursuant hereto is true and correct in all respects.  The Agent shall distribute the additional amounts received as a result of the Applicable Mandatory Cost to the Banks on the basis of the Additional Cost Rate for each Bank based on the information provided by each Bank pursuant hereto.  Any determination by the Agent pursuant to this Agreement in relation to a formula, the Applicable Mandatory Cost, an Additional Cost Rate or any amount payable to a Bank shall, in the absence of manifest error, be conclusive and binding.  The Agent may from time to time, after consultation with the Borrower and the Banks, determine and notify to all parties hereto any amendments which are required to be made to this Agreement in order to comply with  any change in law, regulation or any requirements from time to time imposed by the Bank of England, the Financial Services Authority or the European Central Bank (or, in any case, any other Governmental Authority which replaces all or any of its functions) and any such determination shall, in the absence of manifest error, be conclusive and binding on all parties.

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Section .10.            Payments and Computations.

(a)           Payment Procedures.  (i) The Company shall make each payment under this Agreement and under its Notes not later than 12:00 p.m. (New York time) on the day when due in Dollars with respect to Tranche A Advances, and (ii) the Borrowers shall make each payment under this Agreement and their respective Notes not later than 12:00 p.m. (Paris, France time) on the day when due in Euros with respect to Tranche B Advances, and in each case to the Agent at the location referred to in the Notes (or such other location as the Agent shall designate in writing to the Borrowers) in same day funds.  The Agent will promptly thereafter, and in any event prior to the close of business on the day any timely payment is made, cause to be distributed like funds relating to the payment of principal, interest or fees ratably (other than amounts payable solely to the Agent, or a specific Bank pursuant to Section 2.03(d), 2.08, 2.09, or 2.11, but after taking into account payments effected pursuant to Section 10.04) (i) before the acceleration of the Advances pursuant to Section 7.02 or 7.03, (A) in the case of payments in respect of Tranche A Advances and Tranche B Advances, in accordance with each Bank’s Tranche A Share and Tranche B Share, as applicable and (ii) after the acceleration of the Advances pursuant to Section 7.02 or 7.03, in accordance with each Bank’s Pro Rata Share to the Banks for the account of their respective Applicable Lending Offices, and like funds relating to the payment of any other amount payable to any Bank to such Bank for the account of its Applicable Lending Office, in each case to be applied in accordance with the terms of this Agreement.

(b)           Computations.  All computations of interest based on the U.S. Base Rate or the EONIA Rate shall be made by the Agent on the basis of a year of 365 or 366 days, as the case may be, and all computations of interest based on the Eurodollar Rate, the Eurocurrency Rate, the Federal Funds Rate, and of fees shall be made by the Agent, on the basis of a year of 360 days, in each case for the actual number of days (including the first day, but excluding the last day) occurring in the period for which such interest or fees are payable.  Each determination by the Agent of an interest rate shall be conclusive and binding for all purposes, absent manifest error.

(c)           Non-Business Day Payments.  Whenever any payment shall be stated to be due on a day other than a Business Day, such payment shall be made on the next succeeding Business Day, and such extension of time shall in such case be included in the computation of payment of interest or fees, as the case may be.

(d)           Agent Reliance.  Unless the Agent shall have received written notice from a Borrower prior to the date on which any payment is due to the Banks that such Borrower will not make such payment in full, the Agent may assume that such Borrower has made such payment in full to the Agent on such date and the Agent may, in reliance upon such assumption, cause to be distributed to each Bank on such date an amount equal to the amount then due to such Bank.  If and to the extent such Borrower shall not have so made such payment in full to the Agent, each Bank shall repay to the Agent forthwith on demand such amount distributed to such Bank, together with interest, for each day from the date such amount is distributed to such Bank until the date such Bank repays such amount to the Agent, at the Federal Funds Rate for such day.

Section .11.            Taxes.

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(a)           No Deduction for Certain Taxes.  Any and all payments by the Borrowers shall be made, in accordance with Section 2.10, free and clear of and without deduction for any and all present or future taxes, levies, imposts, deductions, charges or withholdings and all liabilities with respect thereto, excluding (i) in the case of each Bank and the Agent, taxes imposed on its income, and franchise taxes imposed on it by the United States or any political subdivision thereof, the jurisdiction under the laws of which such Bank or the Agent (as the case may be) is organized or any political subdivision of the jurisdiction and (ii) in the case of each Bank, taxes imposed by the jurisdiction of such Bank’s Applicable Lending Office or any political subdivision of such jurisdiction (all such nonexcluded taxes, levies, imposts, deductions, charges, withholdings and liabilities being hereinafter referred to as “Taxes”).  If any Borrower shall be required by law to deduct any Taxes from or in respect of any sum payable to any Bank or the Agent, (A) the sum payable shall be increased as may be necessary so that, after making all required deductions, such Bank or the Agent (as the case may be) receives an amount equal to the sum it would have received had no such deductions been made; provided, however, that if such Borrower’s obligation to deduct or withhold Taxes is caused solely by such Bank’s or the Agent’s failure to provide the forms described in paragraph (e) of this Section 2.11 and such Bank or the Agent could have provided such forms, no such increase shall be required; (B) such Borrower shall make such deductions; and (C) such Borrower shall pay the full amount deducted to the relevant taxation authority or other authority in accordance with applicable law.

(b)           Other Taxes.  In addition, the Borrowers agree to pay any present or future stamp or documentary taxes or any other excise or property taxes, charges or similar levies which arise from any payment made or from the execution, delivery or registration of, or otherwise with respect to, this Agreement, the Notes, or the other Credit Documents (hereinafter referred to as “Other Taxes”).

(c)           Indemnification.  Each of the Borrowers indemnifies each Bank and the Agent for the full amount of Taxes or Other Taxes paid by such Bank or the Agent (as the case may be) and any liability (including interest and expenses) arising therefrom or with respect thereto, in either case, attributable to such Borrower.  Each payment required to be made by the Borrowers in respect of this indemnification shall be made to the Agent for the benefit of any party claiming such indemnification within 30 days from the date the Borrowers receive written demand detailing the calculation of such amounts therefor from the Agent on behalf of itself as Agent or any such Bank.  If any Bank or the Agent receives a refund or credit in respect of any taxes paid by any Borrower under this paragraph (c), such Bank or the Agent, as the case may be, shall promptly pay to such Borrower such Borrower’s share of such refund or credit.

(d)           Evidence of Tax Payments.  Each of the Borrowers will pay prior to delinquency all Taxes payable in respect of any payment.  Upon the request of the applicable Bank, the Borrower making such payment will furnish to the Agent, at its address referred to in Section 10.02, the original or a certified copy of a receipt evidencing payment of such Taxes.

(e)           Foreign Bank Withholding Exemption.

(i)            Each Bank having a Tranche A Commitment that is not incorporated under the laws of the United States of America or a state thereof agrees that it will deliver to the Borrowers and the Agent on the date of this Agreement or upon, and as a condition

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to, the effectiveness of any Assignment and Acceptance (i) two duly completed copies of United States Internal Revenue Service Form W-8ECI, W-8BEN, W-8EXP or W-8IMY or successor applicable form, as the case may be, certifying in each case that such Bank is entitled to receive payments under this Agreement and the Notes payable to it, without deduction or withholding of any United States federal income taxes, (ii) if applicable, an Internal Revenue Service Form W-8ECI, W-8BEN, W-8EXP or W-9 or successor applicable form, as the case may be, to establish an exemption from United States backup withholding tax, and (iii) any other governmental forms which are necessary or required under an applicable tax treaty or otherwise by law to reduce or eliminate any withholding tax, which have been reasonably requested by the Borrower.  Each Bank which delivers to the Borrowers and the Agent a Form W-8ECI, W-8BEN, W-8EXP, W-8IMY or W-9 pursuant to the next preceding sentence further undertakes to deliver to the Borrowers and the Agent two further copies of Form W-8ECI, W-8BEN, W-8EXP, W-8IMY or W-9, or successor applicable forms, or other manner of certification, as the case may be, on or before the date that any such form expires or becomes obsolete or after the occurrence of any event requiring a change in the most recent form previously delivered by it to the Borrowers and the Agent, and such extensions or renewals thereof as may reasonably be requested by the Borrowers and the Agent certifying in the case of a Form W-8ECI, W-8BEN, W-8EXP, or W-8IMY that such Bank is entitled to receive payments under this Agreement without deduction or withholding of any United States federal income taxes.  If an event (including without limitation any change in treaty, law or regulation) has occurred prior to the date on which any delivery required by the preceding sentence would otherwise be required which renders all such forms inapplicable or which would prevent any Bank from duly completing and delivering any such form with respect to it and such Bank advises the Borrowers and the Agent that it is not capable of receiving payments without any deduction or withholding of United States federal income tax, and in the case of a Form W-8 or W-9, establishing an exemption from United States backup withholding tax, such Bank shall not be required to deliver such forms.  The Borrowers may withhold tax at the rate and in the manner required by the laws of the United States with respect to payments made to a Bank failing to timely provide the requisite Internal Revenue Service forms.

(ii)           Each Bank having a Tranche B Commitment that is not incorporated under the laws of the Republic of France or any province thereof agrees that it will deliver to the Borrowers and the Agent on the date of this Agreement or upon, and as a condition to, the effectiveness of any Assignment and Acceptance such governmental forms which may be necessary, appropriate or required under the applicable tax treaty or otherwise by law to reduce or eliminate any withholding tax imposed by the Republic of France or any political subdivision thereof (“French Withholding Taxes”).  Each Bank which delivers to the Borrowers and the Agent any such governmental form pursuant to the next preceding sentence further undertakes to deliver to the Borrowers and the Agent two (2) further copies of said governmental forms or successor forms, or other manner of certification as the case may be, on or before the date that any such form expires or becomes obsolete or after the occurrence of any event requiring a change in the most recent form previously delivered by it to the Borrowers and the Agent, and such extensions or renewals thereof as may be reasonably requested by the Borrowers or the Agent certifying that such Bank is entitled to receive payments under this agreement

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without deduction or withholding of any French Withholding Taxes.  If an event (including, without limitation, any change in treaty, law, or regulation) has occurred prior to the date on which any delivery is required by the preceding sentence and would otherwise be required which render any such forms inapplicable or which would prevent any Bank from duly completing and delivering any such form with respect to it and such Bank advises the Borrowers and the Agent that it is not capable of receiving payments without any deduction or withholding of French Withholding Taxes, such Bank shall not be required to deliver such forms.  The Borrowers may withhold tax at the rate and in the matter required by the laws of the Republic of France with respect to payments made to a Bank failing to timely provide the requisite governmental forms.  The Borrowers agree to use reasonable efforts to notify any Bank upon any such Borrower becoming aware of any change in the laws of the Republic of France or any tax treaty which would cause such Bank to not be capable of receiving payments of interest without French Withholding Taxes.

(f)            Repayment under Certain Circumstances.  If any Borrower is required by any law or regulation to make any deduction or withholding from any sum payable by it under this Agreement and is prevented by law from fulfilling the related gross-up obligation, upon written notice to the relevant Borrower from the Agent (which shall give such notice if, and only if, so requested by any Bank) the relevant Advances shall be repaid within 180 days of the date such notice is received by the relevant Borrower together with accrued interest and any amounts owing under Section 2.08.

Section .12.            Sharing of Payments, Etc.; Pro Rata Treatment.

(a)           If any Bank shall obtain any payment (whether voluntary, involuntary, through the exercise of any right of set-off or otherwise) on account of the Advances made by it in excess of its Pro Rata Share, Tranche A Share or Tranche B Share, as applicable, of payments on account of the Advances obtained by all the Banks, such Bank shall notify the Agent and forthwith purchase from the other Banks such participations in the Advances made or held by them as shall be necessary to cause such purchasing Bank to share the excess payment ratably in accordance with the requirements of this Agreement with each of them; provided, however, that if all or any portion of such excess payment is thereafter recovered from such purchasing Bank, such purchase from each Bank shall be rescinded and such Bank shall repay to the purchasing Bank the purchase price to the extent of such Bank’s ratable share (according to the proportion of (a) the amount of the participation sold by such Bank to the purchasing Bank as a result of such excess payment to (b) the total amount of such excess payment) of such recovery, together with an amount equal to such Bank’s ratable share (according to the proportion of (a) the amount of such Bank’s required repayment to the purchasing Bank to (b) the total amount of all such required repayments to the purchasing Bank) of any interest or other amount paid or payable by the purchasing Bank in respect of the total amount so recovered.  Each Borrower agrees that any Bank so purchasing a participation from another Bank pursuant to this Section 2.12 may, to the fullest extent permitted by law, unless and until rescinded as provided above, exercise all its rights of payment (including the right of set-off) with respect to such participation as fully as if such Bank were the direct creditor of such Borrower in the amount of such participation.

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(b)           Notwithstanding any other provision of this Agreement, it is the intent of the Banks that after the acceleration of the Advances pursuant to Section 7.02 or 7.03, each of the Banks shall share any payment (whether voluntary, involuntary, through the exercise of any right of set-off or otherwise) on account of the Advances on a pro rata basis as provided in paragraph (a) above.  Accordingly, if the recovery in respect of one Class of Advances is insufficient to repay such Obligations on a pro rata basis with the other Class of Advances, the Agent shall, to the extent it deems necessary, allocate and reallocate any payment on account of the Advances to ensure that each Bank receives its Pro Rata Share of any payment on account of the Advances.  If, after giving effect to the allocations described in the preceding sentence any Bank shall have received less than its Pro Rata Share of the aggregate payments with respect to the Advances, each Bank that received more than its Pro Rata Share of the aggregate payments on account of the Advances agrees to deliver to the Agent, for reallocation to the Banks that received less than their Pro Rata Share, the excess of the aggregate amount received by such Bank over the amount that would have been such Bank’s Pro Rata Share of the aggregate payments on account of the Advances.

Section .13.            Bank Replacement.  The Borrowers shall be permitted to replace with an Eligible Assignee any Bank which (a) makes an assertion of the type described in Section 2.02(c)(iii) or requests reimbursement for amounts owing pursuant to Section 2.09 (either for its own account or for the account of any of its participants), (b) is affected in the manner described in Section 2.07(e), (c) requires any Borrower to pay Taxes in respect of such Bank or (d) fails to make any Advance requested by it if the Majority Tranche A Banks or the Majority Tranche B Banks, as applicable, have made the Advances requested of them pursuant to the same Notice of Borrowing; provided that (i) such replacement does not conflict with any Legal Requirement, (ii) no Default or Event of Default shall have occurred and be continuing at the time of such replacement, (iii) prior to any such replacement, such Bank being replaced shall not have eliminated the continued need for repayment of amounts owing pursuant to Section 2.02(c)(iii); and (iv) the Company shall repay (or cause to be repaid) or the Eligible Assignee shall pay to the Bank being replaced, the amount of the Obligations owing to such Bank on the date of replacement (including any amounts owing under Section 2.02(c)(iii)).

Section .14.            Extension of Maturity Date.

(a)           Requests for Extension.

(i)            At any time not earlier than 90 days and not later than 45 days prior to the first anniversary of the Closing Date, the Company may, by notice to the Agent (who shall promptly notify the Banks thereof), request that each Bank extend such Bank’s Maturity Date then in effect hereunder (the “Existing Maturity Date”) for an additional 365 days from the Existing Maturity Date (the “First Extension Request”).

(ii)           Notwithstanding clause (i) above, at any time not earlier than 90 days and not later than 45 days prior to the second anniversary of the Closing Date, the Company may, by notice to the Agent (who shall promptly notify the Banks thereof), request that each Bank extend such Bank’s Maturity Date then in effect hereunder (the “Existing Maturity Date”) (A) for each Extending Bank (as defined below), an additional 365 days from the Existing Maturity Date or (B) for each Non-Extending Bank or if the Company

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has not made the First Extension Request, for all Banks, (1) an additional 365 days from the Existing Maturity Date or (2) an additional 730 days  from the Existing Maturity Date (the “Second Extension Request”).

(iii)          The date on which the Agent provides to the Banks the notice referenced above is hereinafter referred to as the “Notice Date.”

(iv)          The procedure set forth below shall apply to each of the First Extension Request and the Second Extension Request.

(b)           Elections to Extend.  Each Bank, acting in its sole and individual discretion, shall, by notice to the Agent given not later than 30 days after the Notice Date, advise the Agent whether or not such Bank agrees to such extension (each Bank that determines not to so extend its Maturity Date (a “Non-Extending Bank”) and each Bank that determines to extend its Maturity Date (an “Extending Bank”)) shall notify the Agent of such fact promptly after such determination and any Bank that does not so advise the Agent on or before the date that is 30 days after the Notice Date shall be deemed to be a Non-Extending Bank.  The election of any Bank to agree to such extension shall not obligate any other Bank to so agree.

(c)           Extension of Maturity Date.  Effective as of the Existing Maturity Date, the Maturity Date of each Extending Bank shall be extended to the date falling 365 days or 730 days, as applicable, after the Existing Maturity Date (except that, if such date is not a Business Day, such Maturity Date as so extended shall be the next preceding Business Day).

(d)           Conditions to Effectiveness of Extensions.  Notwithstanding the foregoing, the extension of the Maturity Date pursuant to this Section shall not be effective with respect to any Bank unless:

(i)            no Default or Event of Default shall have occurred and be continuing on the date of such extension and after giving effect thereto;

(ii)           the representations and warranties contained in this Agreement are true and correct on and as of the date of such extension and after giving effect thereto, as though made on and as of such date (or, if any such representation or warranty is expressly stated to have been made as of a specific date, as of such specific date);

(iii)          on the Maturity Date of each Non-Extending Bank, the applicable Borrower shall repay any Advances outstanding on such date to each such Non-Extending Bank (and pay all accrued interest and any additional amounts required pursuant to this Agreement, including pursuant to Section 2.08) and the Commitments of such Non-Extending Bank shall be terminated; and

(iv)          the Company can, at its election, withdraw the request for extension if less than 100% of the Banks do not elect to extend at any given time, on or before the then applicable anniversary of the Closing Date.

(e)           Conflicting Provisions.  This Section shall supersede any provisions in Section 2.10 or 10.01 to the contrary.

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CONDITIONS OF LENDING

Section .01.            Conditions Precedent to Initial Advances.  The obligation of each Bank to make its initial Advances to each of the Company and SARL as part of the initial Borrowings is subject to the conditions precedent that:

(a)           Documentation.  On or before the day on which the initial Borrowing is made, the Agent and the Banks shall have received the following, each dated on or before such day, duly executed by all the parties thereto (except SME), in form and substance satisfactory to the Agent and the Banks:

(i)            this Agreement and the other Credit Documents and all attached Exhibits and Schedules and the Notes payable to the order of the Banks, respectively;

(ii)           certificates from the appropriate Governmental Authority certifying as to the good standing, existence and authority of the Company in all jurisdictions where the Company is organized or does business;

(iii)          certificates from a Responsible Officer of the Company and SARL stating that (A) all representations and warranties of such Borrower set forth in this Agreement are true and correct in all material respects; (B) no Default has occurred and is continuing; and (C) the conditions in this Section 3.01 have been met;

(iv)          copies, certified as of the date of this Agreement by a Responsible Officer of the appropriate Person of (A) the resolutions of the Board of Directors of the Company approving this Agreement, the Notes, and the other Credit Documents, (B) the articles or certificate (as applicable) of incorporation and bylaws of the Company, (C) the extrait K-bis and the statuts for SARL and any other documents authorizing the transactions contemplated by the Credit Documents, and (D) all other documents evidencing other necessary corporate action and governmental approvals, if any, with respect to this Agreement, the Notes, and the other Credit Documents;

(v)           certificates of a Responsible Officer of the Company and SARL  certifying the names and true signatures of officers of such Borrower authorized to sign this Agreement, the Notes, Notices of Borrowing and the other Credit Documents;

(vi)          a favorable opinion of John W. Rumely, General Counsel to the Company, substantially in the form of the attached Exhibit F-1;

(vii)         a favorable opinion of UGGC & Associés, counsel to SARL, substantially in the form of the attached Exhibit F-2;

(viii)        a favorable opinion of Bracewell & Giuliani LLP, counsel to the Agent, substantially in the form of the attached Exhibit F-3; and

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(ix)           such other documents, governmental certificates, agreements, or lien searches as the Agent and the Banks may reasonably request.

(b)           Payment of Fees.  On the Closing Date, the Borrowers shall have paid the fees required to be paid to the Agent and the Banks and all costs and expenses which have been invoiced and are payable pursuant to Section 10.04.

(c)           Delivery of Financial Statements.  The Agent and the Banks shall have received true and correct copies of (i) the Financial Statements, (ii) the Interim Financial Statements, (iii) the other financial statements referred to in Section 4.05 and (iv) the Consolidated annual business and financial plan, including without limitation, financial projections, of the Company and its Subsidiaries for fiscal years 2006, 2007, and 2008, all in reasonable detail.

(d)           No Default.  No Default or Event of Default shall have occurred and be continuing or would result from such Advance or from the application of the proceeds therefrom.

(e)           Representations and Warranties.  The representations and warranties contained in Article IV hereof and in each other Credit Document shall be true and correct in all material respects on and as of the Closing Date before and after giving effect to the initial Advances and to the application of the proceeds from such Advances as though made on and as of such date.

(f)            No Material Adverse Change.  No event or events which, individually or in the aggregate, has had or is reasonably likely to cause a Material Adverse Change shall have occurred.

(g)           Termination of Existing Credit Agreement.  The Agent and the Banks shall have received sufficient evidence indicating that contemporaneously with the making of the initial Advances, the obligations of the Borrowers under the Existing Credit Agreement will be repaid with the proceeds of such Advances and thereafter all obligations of the Borrowers and the lenders under the Existing Credit Agreement shall be terminated (including, without limitation, any obligations of any Subsidiary of the Borrower in respect of guaranties, security agreements executed in connection with such Existing Credit Agreement but excluding any obligations which expressly survive the repayment of the amounts owing under the Existing Credit Agreement).

Section .02.            Conditions Precedent to Advances to SME.  The obligation of each Bank with a Tranche B Commitment to make its initial Advances as part of the initial Borrowing to SME is subject to the conditions precedent that:

(a)           Documentation.  On or before the day on which the initial Borrowing by SME is made, the Agent and the Banks shall have received the following, each dated on or before such day, duly executed by SME, in form and substance satisfactory to the Agent and the Banks:

(i)            this Agreement and the other Credit Documents and the Notes payable to the order of such Banks;

(ii)           certificates from a Responsible Officer of SME stating that (A) all representations and warranties of such Borrower set forth in this Agreement are true and

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correct in all material respects; (B) no Default has occurred and is continuing; and (C) the conditions in this Section 3.02 have been met;

(iii)          copies, certified as of the date of SME’s accession to this Agreement by a Responsible Officer of the appropriate Person of (A) the extrait K-bis and the statuts for SME and any other documents authorizing the transactions contemplated by the Credit Documents, and (B) all other documents evidencing other necessary corporate action and governmental approvals, if any, with respect to this Agreement, the Notes, and the other Credit Documents;

(iv)          certificates of a Responsible Officer of SME certifying the names and true signatures of officers of SME authorized to sign this Agreement, the Notes, Notices of Borrowing and the other Credit Documents;

(v)           a favorable opinion of UGGC & Associés, counsel to SME, substantially in the form of the attached Exhibit F-2;

(vi)          a favorable opinion of Bracewell & Giuliani LLP, counsel to the Agent, substantially in the form of the attached Exhibit F-3;

(vii)         a true and correct copy of the unaudited balance sheet and income, changes in owners’ equity and cash flow statements of SME; and

(viii)        such other documents, governmental certificates, agreements, lien searches as the Agent and the Banks may reasonably request.

Section .03.            Conditions Precedent to Each Borrowing.  The obligation of each Bank to make an Advance on the occasion of each Borrowing (including the initial Borrowing) shall be subject to the further conditions precedent that on the date of such Borrowing, the following statements shall be true (and each of the giving of the applicable Notice of Borrowing or Notice of Continuation and the acceptance by the Borrowers of the proceeds of such Advance shall constitute a representation and warranty by the Borrowers that on the date of such Advance such statements are true):

(a)           the representations and warranties contained in Article IV (except for the representations and warranties set forth in clauses (a) through (f) of Section 4.05, Section 4.07, and Section 4.15, which representations and warranties shall only apply to the initial Advance and the representation and warranty contained in Section 4.05(g) which shall apply to all Advances except for Advances which are made as part of a Continuation of any existing Advance) and in each other Credit Document are correct in all material respects on and as of the date of such Advance before and after giving effect to such Advance and to the application of the proceeds from such Advance as though made on and as of such date; and

(b)           no Default or Event of Default has occurred and is continuing or would result from such Advance or from the application of the proceeds therefrom.

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REPRESENTATIONS AND WARRANTIES

The Borrowers represent and warrant, as of the Closing Date and as of each other date as expressly provided herein or in any other Loan Document, as follows:

Section .01.            Corporate Existence; Subsidiaries.  Each of the Borrowers is a corporation duly organized, validly existing, and in good standing under the laws of the jurisdiction of its incorporation and in good standing and qualified to do business in each jurisdiction where its ownership or lease of property or conduct of its business requires such qualification and where a failure to be qualified could reasonably be expected to cause a Material Adverse Change.

Section .02.            Corporate Power.  The execution, delivery, and performance by the Borrowers of this Agreement, the Notes, and the other Credit Documents to which each is a party and the consummation of the transactions contemplated hereby and thereby (a) are within such Borrower’s corporate powers, (b) have been duly authorized by all necessary corporate action, (c) do not contravene (i) such Borrower’s articles or certificate of incorporation or statuts (as applicable) or bylaws or (ii) any law or any contractual restriction binding on or affecting such Borrower, and (d) will not result in or require the creation or imposition of any Lien prohibited by this Agreement.  At the time of each Advance, such Advance and the use of the proceeds of such Advance will be within such Borrower’s corporate powers, will have been duly authorized by all necessary corporate action, will not contravene (i) such Borrower’s articles or certificate of incorporation or statuts (as applicable) or bylaws or (ii) any law or any contractual restriction binding on or affecting such Borrower and will not result in or require the creation or imposition of any Lien prohibited by this Agreement.

Section .03.            Authorization and Approvals.  No authorization or approval or other action by, and no notice to or filing with, any Governmental Authority is required for the due execution, delivery and performance by the Borrowers of this Agreement, the Notes, or the other Credit Documents to which the Borrowers are a party or the consummation of the transactions contemplated thereby, other than those that have been duly obtained.  At the time of each Advance, no authorization or approval or other action by, and no notice to or filing with, any Governmental Authority will be required for such Advance or the use of the proceeds of such Advance.

Section .04.            Enforceable Obligations.  This Agreement, the Notes, and the other Credit Documents to which the Borrowers are a party have been duly executed and delivered by the Borrowers.  Each Credit Document to which the Borrowers are a party is the legal, valid, and binding obligation of the Borrowers and is enforceable against the Borrowers in accordance with its terms, except as such enforceability may be limited by any applicable bankruptcy, insolvency, reorganization, moratorium, or similar law affecting creditors’ rights generally.

Section .05.            Financial Statements.

(a)           The audited consolidated balance sheet of the Company as at December 31, 2005, and the related audited consolidated statements of income, changes in owners’ equity and cash

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flows of the Company for the fiscal year then ended, copies of which have been furnished to the Banks, and the unaudited consolidated balance sheet of the Company as at March 31, 2006, and the related unaudited consolidated statements of income, changes in owners’ equity and cash flows of the Company for the three months then ended, duly certified by an authorized financial officer of the Company, copies of which have been furnished to the Banks, fairly present, subject to the assumptions set forth therein and, in the case of said balance sheet as at March 31, 2006 and said statements of income, changes in owners’ equity and cash flows for the three months then ended, subject to year-end audit adjustments, the consolidated financial condition of the Company as at such dates and the consolidated result of the operations of the Company for the periods ended on such dates, and such balance sheet and statements of income, changes in owners’ equity and cash flows were prepared in accordance with GAAP.

(b)           The unaudited, unconsolidated balance sheet of SARL as at December 31, 2005, and the related unaudited, unconsolidated statement of income for SARL for the fiscal year then ended, copies of which have been furnished to the Banks, and the unaudited, unconsolidated balance sheet of SARL as at March 31, 2006, and the related unaudited, unconsolidated statement of income of SARL for the three months then ended, duly certified by an authorized financial officer of the Company, copies of which have been furnished to the Banks, fairly present, subject to the assumptions set forth therein, the financial condition of SARL as at such dates and the results of the operations of SARL for the periods ended on such dates, and such balance sheet and statements of income were prepared in accordance with GAAP.

(c)           The unaudited, consolidated balance sheet of Papeteries de Mauduit S.A.S. as at December 31, 2005, and the related unaudited, consolidated statement of income for Papeteries de Mauduit S.A.S. for the fiscal year then ended, copies of which have been furnished to the Banks, and the unaudited, consolidated balance sheet of Papeteries de Mauduit S.A.S. as at March 31, 2006, and the related unaudited, consolidated statement of income of Papeteries de Mauduit S.A.S. for the three months then ended, duly certified by an authorized financial officer of the Company, copies of which have been furnished to the Banks, fairly present, subject to the assumptions set forth therein, the financial condition of Papeteries de Mauduit S.A.S. as at such dates and the results of the operations of Papeteries de Mauduit S.A.S. for the periods ended on such dates, and such balance sheet and statements of income were prepared in accordance with GAAP.

(d)           The unaudited, unconsolidated balance sheet of LTR Industries S.A. as at December 31, 2005, and the related unaudited, unconsolidated statement of income for LTR Industries S.A. for the fiscal year then ended, copies of which have been furnished to the Banks, and the unaudited, unconsolidated balance sheet of LTR Industries S.A. as at March 31, 2006, and the related unaudited, unconsolidated statement of income of LTR Industries S.A. for the three months then ended, duly certified by an authorized financial officer of the Company, copies of which have been furnished to the Banks, fairly present, subject to the assumptions set forth therein, the financial condition of LTR Industries S.A. as at such dates and the results of the operations of LTR Industries S.A. for the periods ended on such dates, and such balance sheet and statements of income were prepared in accordance with GAAP.

(e)           The unaudited, unconsolidated balance sheet of Schweitzer-Mauduit do Brasil S.A. as at December 31, 2005, and the related unaudited, unconsolidated statement of income for

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Schweitzer-Mauduit do Brasil S.A. for the fiscal year then ended, copies of which have been furnished to the Banks, and the unaudited, unconsolidated balance sheet of Schweitzer-Mauduit do Brasil S.A. as at March 31, 2006, and the related unaudited, unconsolidated statement of income of Schweitzer-Mauduit do Brasil S.A. for the three months then ended, duly certified by an authorized financial officer of the Company, copies of which have been furnished to the Banks, fairly present, subject to the assumptions set forth therein, the financial condition of Schweitzer-Mauduit do Brasil S.A. as at such dates and the results of the operations of Schweitzer-Mauduit do Brasil S.A. for the periods ended on such dates, and such balance sheet and statements of income were prepared in accordance with GAAP.

(f)            The unaudited, consolidated balance sheet of Papeteries de Saint-Girons S.A.S. as at December 31, 2005, and the related unaudited, consolidated statement of income for Papeteries de Saint-Girons S.A.S. for the fiscal year then ended, copies of which have been furnished to the Banks, and the unaudited, consolidated balance sheet of Papeteries de Saint-Girons S.A.S. as at March 31, 2006, and the related unaudited, consolidated statement of income of Papeteries de Saint-Girons S.A.S. for the three months then ended, duly certified by an authorized financial officer of the Company, copies of which have been furnished to the Banks, fairly present, subject to the assumptions set forth therein, the financial condition of Papeteries de Saint-Girons S.A.S. as at such dates and the results of the operations of Papeteries de Saint-Girons S.A.S. for the periods ended on such dates, and such balance sheet and statements of income were prepared in accordance with GAAP.

(g)           Since December 31, 2005, no Material Adverse Change has occurred.

Section .06.            True and Complete Disclosure.  (a) The Company’s annual report on Form 10-K most recently filed with the  SEC and the Company’s quarterly report on Form 10-Q most recently filed with the SEC, did not, as of the respective dates such Form 10-K and Form 10-Q were filed with the SEC, contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements therein, in light of the circumstances under which they were made, not misleading and (b) from the date of filing of the Company’s most recent quarterly or annual report on Form 10-Q or Form 10-K, no event or condition exists or has occurred which has required or would require the Company to file a current report on Form 8-K pursuant to the Securities Exchange Act of 1934, as amended.

Section .07.            Litigation.  Except as set forth in the attached Schedule 4.07, there is no pending by the express terms of pleadings duly served on a Borrower or any Material Subsidiary, or, to the best of the knowledge of the Borrowers, threatened, action or proceeding affecting any of the Borrowers or any Material Subsidiary before any court, Governmental Authority or arbitrator, which could reasonably be expected to cause a Material Adverse Change or which purports to affect the legality, validity, binding effect or enforceability of this Agreement, any Note, or any other Credit Document.  Additionally, to the best knowledge of the Borrowers, there is no pending or threatened action or proceeding instituted against any of the Borrowers or the Material Subsidiaries which seeks to adjudicate any of the Borrowers or the Material Subsidiaries as bankrupt or insolvent, or seeking liquidation, winding up, reorganization, arrangement, adjustment, protection, relief, or composition of it or its debts under any law relating to bankruptcy, insolvency or reorganization or relief of debtors, or seeking the entry of

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an order for relief or the appointment of a receiver, trustee or other similar official for it or for any substantial part of its property.

Section .08.            Use of Proceeds.  The proceeds of the Advances will be used by the Borrowers for the purposes described in Section 5.08.  None of the Borrowers is engaged in the business of extending credit for the purpose of purchasing or carrying margin stock (within the meaning of Regulation U).  No proceeds of any Advance will be used to purchase or carry any margin stock in violation of Regulation T, U or X.

Section .09.            Investment Company Act.  None of the Borrowers is an “investment company” or a company “controlled” by an “investment company” within the meaning of the Investment Company Act of 1940, as amended.

Section .10.            Taxes.  All federal and all material state, local and foreign tax returns, reports and statements required to be filed (after giving effect to any extension granted in the time for filing) by the Borrowers or any member of the Controlled Group (hereafter collectively called the “Tax Group”) have been filed with the appropriate governmental agencies in all jurisdictions in which such returns, reports and statements are required to be filed, and all taxes (which are material in amount) and other impositions due and payable have been timely paid prior to the date on which any fine, penalty, interest, late charge or loss may be added thereto for non-payment thereof except where contested in good faith and by appropriate proceedings and after providing adequate reserves therefor in accordance with GAAP.

Section .11.            Pension Plans.  No Termination Event has occurred with respect to any Plan, and each Plan has complied with and been administered in all material respects in accordance with applicable provisions of ERISA and the Code.  No material “accumulated funding deficiency” (as defined in Section 302 of ERISA) has occurred and there has been no excise tax imposed under Section 4971 of the Code.  To the knowledge of any Responsible Officer of each Borrower, no Reportable Event has occurred with respect to any Multiemployer Plan, and each Multiemployer Plan has complied with and been administered in all material respects with applicable provisions of ERISA and the Code.  The present value of all benefits vested under each Plan (based on the assumptions used to fund such Plan) did not, as of the last annual valuation date applicable thereto, exceed the value of the assets of such Plan allocable to such vested benefits in any amount that would reasonably be expected to cause a Material Adverse Change.  None of the Borrowers nor any member of the Controlled Group has had a complete or partial withdrawal from any Multiemployer Plan for which there is any material withdrawal liability.  As of the most recent valuation date applicable thereto, none of the Borrowers nor any member of the Controlled Group has received notice that any Multiemployer Plan is insolvent or in reorganization.  Based upon GAAP existing as of the date of this Agreement and current factual circumstances, none of the Borrowers has any reason to believe that the annual cost during the term of this Agreement to such Borrower or any of its Subsidiaries for post-retirement benefits to be provided to the current and former employees of the Borrower or any of its Subsidiaries under welfare benefit plans (as defined in Section 3(1) of ERISA) could, in the aggregate, reasonably be expected to cause a Material Adverse Change.

Section .12.            Condition of Property; Casualties.  The material Properties used or to be used in the continuing operations of the Borrowers and each of their Subsidiaries, taken as a

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whole, are (a) in substantially the same or better repair, working order, and condition as such Properties were as of December 31, 2005, normal wear and tear excepted and (b) in such repair, working order and condition to permit the Borrowers and their Subsidiaries to operate such Properties in substantially the same or better manner as operated as of December 31, 2005.  Neither the business nor the material properties of the Borrowers and each of their Subsidiaries, taken as a whole, has been affected as a result of any fire, explosion, earthquake, flood, drought, windstorm, accident, strike or other labor disturbance, embargo, requisition or taking of property or cancellation of contracts, permits or concessions by a Governmental Authority, riot, activities of armed forces or acts of God or of any public enemy, which affect would reasonably be expected to cause a Material Adverse Change.

Section .13.            Insurance.  Each of the Borrowers and their Subsidiaries carry insurance with reputable insurers in respect of such of their respective Properties, in such amounts and against such risks as is customarily maintained by other Persons of similar size engaged in similar businesses or, self-insure to the extent that is customary for Persons of similar size engaged in similar businesses.

Section .14.            No Burdensome Restrictions; No Defaults.

(a)           None of the Borrowers nor any of their Subsidiaries is a party to any indenture, loan or credit agreement or any lease or other agreement or instrument or subject to any charter or corporate restriction or provision of applicable law or governmental regulation which would reasonably be expected to cause a Material Adverse Change.  None of the Borrowers or their Subsidiaries is in default under or with respect to any contract, agreement, lease or other instrument to which such Borrower or Subsidiary is a party and which would reasonably be expected to cause a Material Adverse Change.  To the knowledge of a Responsible Officer of the Borrowers, none of the Borrowers nor any of their Subsidiaries has received any notice of default under any contract, agreement, lease or other instrument to which any Borrower or its Subsidiaries is a party which is continuing or which, if not cured, would reasonably be expected to cause a Material Adverse Change.

(b)           No Default has occurred and is continuing.  Additionally, no event of default under any financing agreement, material contract or instrument to which any Borrower is a party has occurred and is continuing which could reasonably be expected to result in a Material Adverse Change.

Section .15.            Supply Agreement.  Except as disclosed to the Agent, the Supply Agreement has not been amended, modified, supplemented or terminated, and the Supply Agreement is in full force and effect and no notice of termination or cancellation has either been given by or delivered to either the Company or Philip Morris thereunder.

Section .16.            Environmental Condition.

(a)           Except as set forth on Schedule 4.16, each of the Borrowers and its Subsidiaries, taken as a whole, (i) have been and are in compliance with all material requirements of applicable Environmental Laws of which the failure to comply would reasonably be expected to cause a Material Adverse Change; (ii) have not received notice of any violation or alleged

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violation of any Environmental Law the violation of which would reasonably be expected to cause a Material Adverse Change; and (iii) are not subject to any actual or contingent Environmental Claim, which Environmental Claim would reasonably be expected to cause a Material Adverse Change.

(b)           Except as set forth on Schedule 4.16, to the best of the Borrowers’ knowledge (i) none of the Borrowers has ever caused the release of any Hazardous Substances into the Environment in violation of applicable Environmental Laws which would reasonably be expected to result in a Material Adverse Change, (ii) none of the Borrowers’ currently or previously owned Property has been subjected to the release of or is contaminated by any Hazardous Substances which would reasonably be expected to result in a Material Adverse Change, and (iii) none of the Borrowers has ever received notice of and have ever been investigated for any violation or alleged violation of any Environmental Law which has not been remedied in accordance with applicable Environmental Laws and which is reasonably likely to cause a Material Adverse Change.

Section .17.            Liens and Encumbrances.  None of the Property of the Borrowers or any of the Material Subsidiaries is subject to any Lien other than Liens permitted by Section 6.01.

AFFIRMATIVE COVENANTS

So long as the Notes or any amount under any Credit Document shall remain unpaid, or any Bank shall have any Commitment hereunder, the Borrowers agree, unless the Majority Banks otherwise consent in writing, to comply with the following covenants.

Section .01.            Compliance with Laws, Etc.  Each of the Borrowers will comply in all material respects with all Legal Requirements except where the failure to so comply could not reasonably be expected to cause a Material Adverse Change.  Without limiting the generality and coverage of the foregoing, the Borrowers shall comply in all material respects with all applicable Environmental Laws, and all laws, regulations, or directives with respect to equal employment opportunity and employee safety in all jurisdictions in which the Borrowers do business except where the failure to so comply could not reasonably be expected to cause a Material Adverse Change; provided, however, that this Section 5.01 shall not prevent the Borrowers from, in good faith and with reasonable diligence, contesting the validity or application of any such laws or regulations by appropriate legal proceedings.

Section .02.            Maintenance of Insurance.  Each of the Borrowers will maintain insurance with responsible and reputable insurance companies or associations in such amounts and covering such risks as are usually carried by companies engaged in similar businesses and owning similar properties in the same general areas in which the Borrowers operate; provided that, the Borrowers may self-insure to the extent and in the manner normal for similarly situated companies of like size, type and financial condition that are part of a group of companies under common control.

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Section .03.            Preservation of Corporate Existence, Etc.  Each of the Borrowers will preserve and maintain its corporate existence, rights, franchises and privileges in the jurisdiction of its incorporation, and qualify and remain qualified as a foreign corporation in each jurisdiction in which qualification is necessary or desirable in view of its business and operations or the ownership of its Properties and where failure to qualify could reasonably be expected to cause a Material Adverse Change; provided, however, that nothing herein contained shall prevent any transaction permitted by Section 6.02.

Section .04.            Payment of Taxes, Etc.  Each of the Borrowers will pay and discharge before the same shall become delinquent, (a) all taxes, assessments and governmental charges or levies imposed upon it or upon its income or profits or Property that are material in amount, prior to the date on which penalties attach thereto and (b) all lawful claims that are material in amount which, if unpaid, might by law become a Lien upon its Property; provided, however, that the Borrowers shall not be required to pay or discharge any such tax, assessment, charge, levy, or claim which is being contested in good faith and by appropriate proceedings, and with respect to which reserves in conformity with Applicable Accounting Rules have been provided.

Section .05.            Reporting Requirements.  The Borrowers will furnish to the Agent and the Banks:

(a)           Defaults.  (i) As soon as possible and in any event within three Business Days after a Responsible Officer of a Borrower becomes aware of the occurrence of a Default known to any of the Borrowers which is continuing on the date of such statement, a statement of an authorized officer of the Company setting forth the details of such Default and (ii) within ten Business Days after a Responsible Officer of a Borrower becomes aware of the occurrence of such Default, a statement of an authorized officer of the Company setting forth the actions which the Borrowers have taken and propose to take with respect thereto;

(b)           Quarterly Financials.  As soon as available and in any event not later than 50 days after the end of each of the first three fiscal quarters of each fiscal year of the Company, SARL, SME, LTR Industries S.A., Papeteries de Mauduit S.A.S., Schweitzer-Mauduit do Brasil S.A., and Papeteries de Saint-Girons S.A.S., the consolidated and, with respect to the Company only, consolidating, balance sheets of such entities as of the end of such quarter and the consolidated and, with respect to the Company only, consolidating, statements of income and changes in owners’ equity of such entities and the Company’s statement of cash flows for the fiscal quarter then ended and for the period commencing at the end of the previous year and ending with the end of such fiscal quarter, all in reasonable detail and duly certified with respect to such statements (subject to year-end audit adjustments) by an authorized financial officer of the Company as having been prepared in accordance with GAAP;

(c)           Audited Annual Financials of the Company.  As soon as available and in any event not later than 105 days after the end of each fiscal year of the Company, copies of the annual audit report for such year for the Company, including therein a consolidated balance sheet of the Company and consolidated statements of income, changes in owners’ equity and cash flows for such fiscal year, in each case certified by Deloitte & Touche L.L.P. or other independent certified public accountants of nationally recognized standing or otherwise reasonably acceptable to the Agent and the Majority Banks and including any management

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letters delivered by such accountants to the Company in connection with such audit together with a certificate of such accounting firm to the Agent and the Banks stating that, in the course of the regular audit of the business of the Company, which audit was conducted by such accounting firm in accordance with generally accepted auditing standards, such accounting firm has obtained no knowledge that a Default has occurred and is continuing, or if, in the opinion of such accounting firm, a Default has occurred and is continuing, a statement as to the nature thereof;

(d)           Unaudited Annual Financials of Certain Entities.  As soon as available and in any event not later than 105 days after the end of each fiscal year of the Company, SARL, SME, LTR Industries S.A., Papeteries de Mauduit S.A.S., Schweitzer-Mauduit do Brasil S.A., and Papeteries de Saint-Girons S.A.S., copies of the unaudited, consolidated and, with respect to the Company only, consolidating,  balance sheets of such entities and unaudited, consolidated, with respect to the Company only, consolidating, statements of income and changes in owners’ equity and the Company’s statement of cash flows for such fiscal year, together with a certificate of an authorized financial officer of each such entity certifying that such consolidated statements having been prepared in accordance with GAAP;

(e)           Compliance Certificates.  (i) Within 45 days of each fiscal quarter end for the first three fiscal quarters of each fiscal year and (ii) within 90 days of each fiscal year end, a Compliance Certificate in the form of the attached Exhibit E for such fiscal quarter or fiscal year then ended indicating compliance with Sections 6.06 through 6.08;

(f)            Termination Events.  As soon as possible and in any event (i) within 30 days after any Responsible Officer of any Borrower knows or has reason to know that any Termination Event described in clause (a) of the definition of Termination Event with respect to any Plan has occurred, and (ii) within 10 days after any Responsible Officer of any Borrower knows or has reason to know that any other Termination Event with respect to any Plan has occurred, a statement of the chief financial officer of such Borrower describing such Termination Event and the action, if any, which such Borrower or such Affiliate proposes to take with respect thereto;

(g)           Termination of Plans.  Promptly and in any event within ten Business Days after the knowledge of any Responsible Officer of any Borrower of receipt thereof by such Borrower or any member of the Controlled Group from the PBGC, copies of each notice received by such Borrower or any such member of the Controlled Group of the PBGC’s intention to terminate any Plan or to have a trustee appointed to administer any Plan;

(h)           Other ERISA Notices.  Promptly and in any event within ten Business Days after the knowledge of any Responsible Officer of any Borrower of receipt thereof by any Borrower or any member of the Controlled Group from a Multiemployer Plan sponsor, a copy of each notice received by any Borrower or any member of the Controlled Group concerning the imposition of withdrawal liability pursuant to Section 4202 of ERISA in an amount that could reasonably be expected to cause a Material Adverse Change;

(i)            Disputes, etc.  Prompt written notice of any claims, proceedings, or disputes, or to the knowledge of any Responsible Officer of any Borrower threatened, or affecting such Borrower, or any of its Subsidiaries in which there is a reasonable possibility of an adverse result which could reasonably be expected to cause a Material Adverse Change;

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(j)            Material Changes.  Prompt written notice of any condition or event of which a Responsible Officer of any of the Borrowers has knowledge, which condition or event has resulted or may reasonably be expected to result in a Material Adverse Change;

(k)           Supply Agreement.  Prompt written notice of (i) any nonrenewal of the initial term or any renewal term under the Supply Agreement, (ii) any event or condition which results in, or could be expected to result in, an early termination or cancellation of the Supply Agreement, (iii) any material amendment to the Supply Agreement, and (iv) any default by the Company or, to the knowledge of the Company, Philip Morris under the Supply Agreement;

(l)            Change of Control.  As soon as any of the Chief Executive Officer, the Chief Financial Officer, the Chief Operating Officer or the General Counsel of the Company becomes aware of the occurrence of a Change of Control pursuant to filings made with the SEC, a statement of an authorized officer of the Company setting forth the details of such Change of Control, together with any other information regarding such Change of Control as the Agent may reasonably request; and

(m)          “Know Your Customer” Checks.

(i)            If:

(A)          the introduction of or any change in (or in the interpretation, administration or application of) any law or regulation made after the date of this Agreement;

(B)           any change in the status of any Borrower after the date of this Agreement; or

(C)           a proposed assignment or transfer by a Bank of any of its rights and obligations under this Agreement to a party that is not a Bank prior to such assignment or transfer,

obliges the Agent or any Bank (or, in the case of paragraph (C) above, any prospective new Bank) to comply with “know your customer” or similar identification procedures as required by any law or regulation in circumstances where the necessary information is not already available to it, then promptly upon reasonable request of the Agent or any Bank supply, or procure the supply of, such documentation and other evidence as is reasonably requested by the Agent (for itself or on behalf of any Bank) or any Bank (for itself or, in the case of the event described in paragraph (C) above, on behalf of any prospective new Bank) in order for the Agent, such Bank or, in the case of the event described in paragraph (C) above, any prospective new Bank to carry out and be reasonably satisfied with the results (provided that the Agent or the relevant Bank shall be so satisfied if the documentation or evidence provided allows it to comply with any applicable regulations) of all necessary “know your customer” or other similar checks under all applicable laws and regulations pursuant to the transactions contemplated in the Credit Documents.

(n)           Other Information.  Such other information respecting the business or Properties, or the condition or operations, financial or otherwise, of the Borrowers as the Agent may from time-to-time reasonably request.

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Section .06.            Maintenance of Property.  Each of the Borrowers and their Subsidiaries shall (a) maintain their material owned, leased, or operated property, equipment, buildings and fixtures in substantially the same or better condition and repair as the condition and repair as of December 31, 2005, normal wear and tear excepted and (b) not knowingly or willfully permit the commission of waste or other injury, or the release of Hazardous Substances on or about the owned or operated property in violation of applicable Environmental Laws that would reasonably be expected to cause a Material Adverse Change.

Section .07.            Inspection.  From time-to-time upon reasonable notice, the Borrowers shall (i) permit the Agent (at the request of any Bank) or after an Event of Default has occurred, the Banks, to examine and copy their books and records, (ii) permit the Agent and the Banks to visit and inspect their Properties, and (iii) permit the Agent and Banks to discuss the business operations and Properties of the Borrowers with their officers and directors.

Section .08.            Use of Proceeds.  The Borrowers shall use the proceeds of Advances to refinance existing Indebtedness under the Existing Credit Agreement and for general corporate purposes.  The Borrowers will not engage in the business of extending credit for the purpose of purchasing or carrying margin stock (within the meaning of Regulation U).  No proceeds of any Advance will be used to purchase or carry any margin stock in violation of Regulation T, U, or X.

Section .09.            Status of Obligations.  The Company shall cause all of its obligations under this Agreement, the Notes and the other Credit Documents to rank at least pari passu in right of payment with all other unsecured Debt of the Company.  SARL shall cause all of its obligations under this Agreement, the Notes and the other Credit Documents to rank at least pari passu in right of payment with all other unsecured Debt of SARL.  SME shall cause all of its obligations under this Agreement, the Notes and the other Credit Documents to rank at least pari passu in right of payment with all other unsecured Debt of SME.

Section .10.            Nature of Business.  None of the Borrowers nor any of the Subsidiaries shall engage in any business if, as a result, the general nature of the business, taken on a consolidated basis, which would then be engaged in by the Company and its Subsidiaries would be substantially changed from the general nature of the business engaged in by the Company and its Subsidiaries on the date of this Agreement.

NEGATIVE COVENANTS

So long as the Notes or any amount under any Credit Document shall remain unpaid, or any Bank shall have any Commitment, the Borrowers agree, unless the Majority Banks otherwise consent in writing, to comply with the following covenants.

Section .01.            Liens, Etc.  None of the Borrowers nor any Material Subsidiary will create, assume, incur or suffer to exist, any Lien on or in respect of any of its Property whether now owned or hereafter acquired, or assign any right to receive income, except that the Borrowers and the Material Subsidiaries may create, incur, assume or suffer to exist:

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(a)           Liens securing the Obligations;

(b)           Liens for taxes, assessments or governmental charges or levies on Property of the Borrowers to the extent not required to be paid pursuant to Sections 5.01 and 5.04;

(c)           Liens securing Debt set forth in Schedule 6.01 attached hereto and refinancings of such Debt; provided that, the aggregate principal amount of such Debt shall not be increased;

(d)           carrier’s, warehousemen’s, mechanic’s, materialmen’s, repairmen’s or other like Liens arising in the ordinary course of business (whether or not statutory) which are not overdue for a period of more than 30 days or which are being contested in good faith and by appropriate proceedings, for which a reserve or other appropriate provision, if any, as shall be required by Applicable Accounting Rules shall have been made;

(e)           Liens arising in the ordinary course of business in favor of customs and revenue authorities arising as a matter of law to secure payment of customs duties in connection with the importation of goods;

(f)            easements, rights-of-way, restrictions and other similar encumbrances incurred in the ordinary course of business and encumbrances consisting of zoning restrictions, easements, leases, subleases, licenses, sublicenses, restrictions on the use of Property or minor imperfections in title thereto which, in the aggregate, are not material in amount, and which do not in any case materially detract from the value of the Property subject thereto or interfere with the ordinary conduct of the business of the Company or any of its Subsidiaries;

(g)           Liens on Property of Persons which become Subsidiaries of the Company after the date of this Agreement securing Debt permitted hereby; provided that, such Liens are in existence at the time the respective Persons become Subsidiaries of the Company and were not created in anticipation thereof;

(h)           Liens resulting from progress payments or partial payments under United States government contracts or subcontracts;

(i)            Liens arising from legal proceedings, so long as such proceedings are being contested in good faith by appropriate proceedings diligently conducted and so long as execution is stayed on all judgments resulting from any such proceedings;

(j)            Liens arising in the ordinary course of business out of pledges or deposits under workers’ compensation laws, unemployment insurance, old age pensions or other social security or retirement benefits, or similar legislation or to secure public or statutory obligations of the Borrowers;

(k)           Liens existing on Property acquired by the Borrowers in the ordinary course of business prior to the Borrowers’ acquisition of such Property; and

(l)            purchase money Liens or purchase money security interests upon or in any fixed assets acquired or held by the Borrowers in the ordinary course of business to secure the purchase price of such fixed assets or to secure indebtedness incurred solely for the purpose of

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financing the acquisition of such Property; provided that the aggregate principal amount of the Debt secured by the Liens permitted by this paragraph (l) shall not, on the date such Lien is granted and after giving effect thereto, exceed an aggregate amount equal to 30% of the Company’s Tangible Net Worth at any time.

Section .02.            Merger or Consolidation; Asset Sales.  None of the Borrowers nor any of the Material Subsidiaries will (a) merge or consolidate with or into any other Person or (b) sell, lease, transfer, or otherwise dispose of any of its Property (other than the sale of inventory in the ordinary course of business) except that so long as after giving effect thereto no Default or Event of Default shall exist:

(i)            Any corporation may merge or consolidate with any of the Borrowers or the Material Subsidiaries provided that such Borrower or Material Subsidiary shall be the continuing or surviving corporation; and provided further that if the Company is a party to any such merger or consolidation, then either (A) the Company shall be the continuing or surviving corporation or (B) the continuing or surviving corporation shall be a wholly-owned Subsidiary of the Company organized under the laws of any political subdivision of the United States that expressly assumes the obligations of the Company hereunder;

(ii)           Any Material Subsidiary (other than a Borrower) may merge with any other Subsidiary of the Company;

(iii)          Any Borrower or Material Subsidiary may sell, lease, transfer or otherwise dispose of any of its assets to (A)(I) in the case of any Borrower, any other Borrower and in the case of a Material Subsidiary, any Borrower or any other Material Subsidiary or (II) any other Person who guarantees the obligations hereunder of the Borrower or Material Subsidiary making such sale, lease, transfer or disposition or (B) with the consent of the Agent (not to be unreasonably withheld), any other Person if such sale or disposition is in the ordinary course of such Borrower’s or Material Subsidiary’s business and the net proceeds received from such sale or other disposition equal or exceed (in the reasonable opinion of the Board of Directors of the Company) the fair market value of the Property transferred to such Person; and

(iv)          Any Borrower or Material Subsidiary may sell, lease, transfer or otherwise dispose of any assets which constitute fixed assets if the net book value of the asset being sold does not exceed $20,000,000 (or the Dollar Equivalent thereof); provided that, all such asset sales permitted by this clause (iii) shall not exceed $45,000,000 (or the Dollar Equivalent thereof) in the aggregate; provided further that the assets which Philip Morris has the right to recover under the terms of the Amended and Restated Addendum to Fine Papers Supply Agreement and the Coated Tobacco Paper Development Agreement are excluded from the limitations set forth in this Article 6.02.

Section .03.            Investments.  None of the Borrowers will make or permit to exist any loans, advances or capital contributions to, or make any investment in, or purchase or commit to purchase any stock or other securities or evidences of indebtedness of or interests in any Person, except for (a) loans, advances, capital contributions or investments in any other Borrower or any other Subsidiary thereof, (b) Liquid Investments, (c) cash investments in joint ventures and,

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subject to the terms of Section 6.02 hereof, non-cash investments in joint ventures, and (d) the acquisition by the Company or any of its Subsidiaries, in a single transaction or any series of related transactions, of any Person or the business or all or substantially all of the assets of any Person, or any division of any Person, whether through investment, purchase of assets, merger or otherwise, including, but not limited to, in any transaction pursuant to which any Person that was not theretofore a Subsidiary of the Company, becomes a Subsidiary of the Company and is consolidated with the Company for financial reporting purposes; provided however, in the case of any transaction subject to this clause (d), that, giving effect to such transaction on a pro forma basis, there exists no Default or Event of Default.

Section .04.            Transactions With Affiliates.  None of the Borrowers shall, directly or indirectly, enter into or permit to exist any transaction or series of transactions (including, but not limited to, the purchase, sale, lease or exchange of Property, the making of any investment, the giving of any guaranty or the rendering of any service) with any of their Affiliates other than the Company, a wholly-owned Subsidiary of the Company or any other Subsidiary of the Company in which a de minimis ownership is held by local residents or is mandated by local law unless either (a) such transaction or series of transactions is on terms no less favorable to such Borrower than those that could be obtained in a comparable arm’s length transaction with a Person that is not such an affiliate, or (b) such transaction has been approved by a majority of the disinterested members of the Company’s Board of Directors.

Section .05.            Compliance with ERISA.  None of the Borrowers or any Material Subsidiary will (a) terminate, or permit any Affiliate to terminate, any Plan so as to result in any material (in the reasonable opinion of the Majority Banks) liability of such Borrower or Material Subsidiary or (b) permit to exist any occurrence of any Reportable Event (as defined in Title IV of ERISA), or any other event or condition, which presents a material (in the reasonable opinion of the Majority Banks) risk of such a termination by the PBGC of any Plan.

Section .06.            Net Debt to Equity Ratio.  The Company will not permit its Net Debt to Equity Ratio as of the end of any fiscal quarter to be greater than 1.0 to 1.0.

Section .07.            Net Debt to Adjusted EBITDA Ratio.  The Company will not permit the ratio of the Company’s (a) Net Debt as of the end of any fiscal quarter to (b) Adjusted EBITDA as of the end of any fiscal quarter for the four-fiscal quarter period then ending to be greater than 3.0 to 1.0.

Section .08.            Debt.  The Company will not permit (a) LTR Industries S.A., (b) PDM Industries S.N.C., (c) Malaucene Industries S.N.C., (d) PT PDM Indonesia, (e) PDM Philippines Industries, Inc., (f) Papeteries de Mauduit S.A.S., (g) Papeteries de Malaucene S.A.S., (h) Schweitzer-Mauduit Spain, S.L., (i) Schweitzer-Mauduit do Brasil S.A., (j) Papeteries de Saint-Girons S.A.S., (k) Saint-Girons Industries S.N.C. or (l) any of their Subsidiaries (other than SARL or SME) to incur any Debt except for:

(i)            intercompany Debt permitted pursuant to Section 6.03;

(ii)           Debt arising under any employee benefit plan sponsored by LTR Industries S.A., PDM Industries S.N.C., Papeteries de Mauduit S.A.S., Malaucene

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Industries S.N.C., Papeteries de Mauduit S.A.S., Papeteries de Saint-Girons S.A.S., Saint-Girons Industries S.N.C., or any of their Subsidiaries;

(iii)          Debt of LTR Industries S.A. in an aggregate principal amount not to exceed €5,000,000.00;

(iv)          Debt of PDM Industries S.N.C., Papeteries de Mauduit S.A.S., Papeteries de Saint-Girons S.A.S, Saint-Girons Industries S.N.C., Papeteries de Malaucene S.A.S., Malaucene Industries S.N.C., and their Subsidiaries in an aggregate principal amount not to exceed €6,000,000.00; provided, that the aggregate principal amount of Debt under clauses (iii) and (iv) of this Section 6.08 may not exceed €11,000,000 at any time;

(v)           Debt of Schweitzer-Mauduit Spain S.L. and Schweitzer-Mauduit do Brasil S.A.S. in an aggregate principal amount not to exceed $10,000,000;

(vi)          Debt of any Subsidiaries of the Company located in Southeast Asia (including, without limitation, PT PDM Indonesia and PDM Philippines Industries Inc.) in an aggregate principal amount not to exceed $10,000,000;

(vii)         Debt of any Subsidiaries of the Company acquired, created or established after the Closing Date in an aggregate principal amount not to exceed $5,000,000; provided, that the aggregate principal amount of Debt under clauses (v), (vi) and (vii) of this Section 6.08 may not exceed $15,000,000 at any time;

(viii)        other Debt of any such Person of the type permitted to be secured by Section 6.01(l); and

(ix)           all reimbursement obligations arising under letters of credit (including standby and commercial), bankers’ acceptances, bank guaranties, surety bonds and similar instruments arising in the ordinary course of business.

Section .09.            Special Provisions for Material Subsidiaries of SARL and SME.  Notwithstanding any of the provisions of this Article VI, none of the Material Subsidiaries of SARL or SME shall be under any obligation pursuant thereto.  However, each of SARL and SME shall procure that any and all of its Material Subsidiaries shall comply with Sections 6.01, 6.02, 6.05 and 6.08; provided, that (i) such commitment of SARL and SME shall have the same legal effect as a “promesse de porte-fort” as provided for under Article 1120 of the French Civil Code and (ii) the “promesse de porte-fort” shall be deemed to have been breached upon the occurrence of any act or omission of any of the Material Subsidiaries of SARL or SME or any situation relating to such Material Subsidiaries which does not comply with any of the provisions of this Article VI.

Section .10.            Stock Purchases.  The Company will not purchase, redeem or otherwise acquire any shares of its capital stock except that the Company may purchase (a) up to $20,000,000 of its capital stock in any fiscal year, (b) its capital stock in connection with its employee 401(k) retirement plan, and (c) its capital stock sold in connection with a cashless exercise of stock options granted under the Company’s equity participation plan.

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REMEDIES

Section .01.            Events of Default.  The occurrence of any of the following events shall constitute an “Event of Default” under any Credit Document:

(a)           Payment.  Any of the Borrowers shall fail to pay (i) any principal of any Note when the same becomes due and payable, or (ii) any interest on the Notes or any fee or other amount payable hereunder or under any other Credit Document within five Business Days after the same becomes due and payable;

(b)           Representation and Warranties.  Any representation or warranty made or deemed to be made by any of the Borrowers (or any of their officers) in this Agreement or in any other Credit Document shall prove to have been incorrect in any material respect when made or deemed to be made;

(c)           Covenant Breaches.  Any of the Borrowers shall (i) fail to perform or observe any covenant contained in Sections 5.05(a), 5.08 and Article VI (other than Section 6.01) of this Agreement, (ii) fail to perform or observe the covenant contained in Section 5.05(k) if such failure shall remain unremedied for 30 days after written notice of such default shall have been given to any of the Borrowers by the Agent or any Bank, or (iii) fail to perform or observe any other term or covenant set forth in this Agreement or in any other Credit Document which is not covered by clauses (i) or (ii) above or any other provision of this Section 7.01 if such failure shall remain unremedied for 10 Business Days after written notice of such default shall have been given to any of the Borrowers by the Agent or any Bank;

(d)           Cross-Default.  (i) Any Borrower or any Material Subsidiary shall fail to pay any principal of or premium or interest on its Debt which is outstanding in a principal amount of at least $5,000,000 (or the Dollar Equivalent thereof) individually or when aggregated with all such Debt of the Borrower and its Material Subsidiaries so in default (but excluding Debt evidenced by the Notes) when the same becomes due and payable (whether by scheduled maturity, required prepayment, acceleration, demand or otherwise), (ii) any other event shall occur or condition shall exist under any agreement or instrument relating to Debt which is outstanding in a principal amount of at least $5,000,000 (or the Dollar Equivalent thereof) individually or when aggregated with all such Debt of the Borrower and its Material Subsidiaries so in default (but excluding Debt evidenced by the Notes), and shall continue after the applicable grace period, if any, specified in such agreement or instrument, if the effect of such event or condition is to accelerate, or to permit the acceleration of, the maturity of such Debt; or (iii) any such Debt (but excluding Debt evidenced by the Notes) shall be declared to be due and payable, or required to be prepaid (other than by a regularly scheduled required prepayment), prior to the stated maturity thereof;

(e)           Insolvency.  Any Borrower or Material Subsidiary shall generally not pay its debts as such debts become due, or shall admit in writing its inability to pay its debts generally, or shall make a general assignment for the benefit of creditors; or any proceeding shall be instituted by or against any Borrower or Material Subsidiary seeking to adjudicate it a bankrupt or insolvent, or seeking liquidation, winding up, reorganization, arrangement, adjustment,

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protection, relief, or composition of it or its debts under any law relating to bankruptcy, insolvency or reorganization or relief of debtors, or seeking the entry of an order for relief or the appointment of a receiver, trustee or other similar official for it or for any substantial part of its property and, in the case of any such proceeding instituted against a Borrower or Material Subsidiary, either such proceeding shall remain undismissed for a period of 60 days or any of the actions sought in such proceeding shall occur; or any Borrower or Material Subsidiary shall take any corporate action to authorize any of the actions set forth above in this paragraph (e);

(f)            Judgments.  Any judgment, decree or order for the payment of money shall be rendered against any Borrower or any Material Subsidiary in an amount in excess of $10,000,000 (or the Dollar Equivalent thereof) if rendered solely against the Borrowers and/or their Subsidiaries, or for which such Borrower’s or Material Subsidiary’s allocated portion of which (net of any amounts (i) as to which the applicable insurance company has acknowledged coverage or (ii) covered by a third party indemnity from an indemnitor with a net worth, income, or other financial means reasonably acceptable to the Agent under which such indemnitor has acknowledged responsibility) exceeds $10,000,000 (or the Dollar Equivalent thereof) and either (i) such judgment, decree or order remains unsatisfied and in effect for a period of 60 consecutive days or more without being vacated, discharged, satisfied or stayed or bonded pending appeal or (ii) enforcement proceedings shall have been commenced by any creditor upon such judgment, decree or order;

(g)           Maintenance of Ownership.  The Company shall cease to own, either directly or indirectly, all of the shares of common stock in SARL and SME and the other Material Subsidiaries necessary to maintain the ownership percentages held by the Company in SARL and SME and the Material Subsidiaries on the date of this Agreement;

(h)           Termination Events.  Any Termination Event with respect to a Plan shall have occurred, and, 30 days after notice thereof shall have been given to any Borrower by the Agent, (i) such Termination Event shall not have been corrected and (ii) the then present value of such Plan’s vested benefits exceeds the then current value of assets accumulated in such Plan by an amount that would reasonably be expected to cause or to have a Material Adverse Change (or in the case of a Termination Event involving the withdrawal of a “substantial employer” (as defined in Section 4001(a)(2) of ERISA), the withdrawing employer’s proportionate share of such excess shall exceed such amount);

(i)            Plan Withdrawals.  Any Borrower or any member of the Controlled Group as employer under a Multiemployer Plan shall have made a complete or partial withdrawal from such Multiemployer Plan and the plan sponsor of such Multiemployer Plan shall have notified such withdrawing employer that such employer has incurred a withdrawal liability in an annual amount that could reasonably be expected to cause or to have a Material Adverse Change;

(j)            Guaranty.  Any of the guaranty provisions in this Agreement shall for any reason cease to be valid and binding on the Company or the Company shall so state in writing; or

(k)           Philip Morris.  During any fiscal year of the Company (i) the total net sales recorded by the Borrowers and their Subsidiaries during such year to Philip Morris and its Affiliates shall constitute less than 50% of the net sales recorded by the Borrowers and their

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Subsidiaries during the immediately preceding fiscal year to Philip Morris and its Affiliates, and (ii) the total consolidated net sales of the Company for such year decline by greater than 10% compared to the immediately preceding fiscal year, excluding unfavorable exchange rate impacts.

Section .02.            Optional Acceleration of Maturity.  If any Event of Default (other than an Event of Default pursuant to paragraph (e) of Section 7.01) shall have occurred and be continuing, then, and in any such event the Agent (i) shall at the request of, or may with the consent of, the Majority Banks, by notice to the Borrowers, declare the obligation of each Bank to make Advances to be terminated, whereupon the same shall forthwith terminate, and (ii) shall at the request of, or may with the consent of, the Majority Banks, by notice to the Borrowers, declare the Notes, all interest thereon, and all other amounts payable under this Agreement to be forthwith due and payable, whereupon the Notes, all such interest, and all such amounts shall become and be forthwith due and payable in full, without presentment, demand, protest or further notice of any kind (including, without limitation, any notice of intent to accelerate or notice of acceleration), all of which are hereby expressly waived by the Borrowers;

Section .03.            Automatic Acceleration of Maturity.  If any Event of Default pursuant to paragraph (e) of Section 7.01 shall occur the obligation of each Bank to make Advances shall immediately and automatically be terminated and the Notes, and all other amounts payable under this Agreement shall immediately and automatically become and be due and payable in full, without presentment, demand, protest or any notice of any kind (including, without limitation, any notice of intent to accelerate or notice of acceleration), all of which are hereby expressly waived by the Borrowers.

Section .04.            Non-exclusivity of Remedies.  No remedy conferred upon the Agent is intended to be exclusive of any other remedy, and each remedy shall be cumulative of all other remedies existing by contract, at law, in equity, by statute or otherwise.

Section .05.            Right of Set-off.  Upon (a) the occurrence and during the continuance of any Event of Default and (b) the making of the request or the granting of the consent, if any, specified by Section 7.02 to authorize the Agent upon the consent of the Majority Banks to declare the Notes and any other amount payable hereunder due and payable pursuant to the provisions of Section 7.02 or the automatic acceleration of the Notes and all amounts payable under this Agreement pursuant to Section 7.03, each Bank is hereby authorized at any time and from time-to-time, to the fullest extent permitted by law, to set off and apply any and all deposits (general or special, time or demand, provisional or final) at any time held and other indebtedness at any time owing by such Bank to or for the credit or the account of the Borrowers against any and all of the obligations of the Borrowers now or hereafter existing under this Agreement, the Notes, and the other Credit Documents, irrespective of whether or not such Bank shall have made any demand under this Agreement, the Notes, or such other Credit Documents, and although such obligations may be unmatured.  Each Bank agrees to promptly notify the Borrowers after any such set-off and application made by it, provided that the failure to give such notice shall not affect the validity of such set-off and application.  The rights of each Bank under this Section are in addition to any other rights and remedies (including, without limitation, other rights of set-off) which such Bank may have.

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THE GUARANTY

Section .01.            Guaranty.  The Company hereby unconditionally and irrevocably guarantees the punctual payment of the Guaranteed Obligations when due, whether at stated maturity, by acceleration or otherwise, and agrees to pay any and all expenses (including reasonable counsel fees and expenses) incurred by the Agent and the Banks having a Tranche B Commitment in enforcing any rights under this Section 8.01.  Without limiting the generality of the foregoing, the Company’s liability shall extend to all amounts which constitute part of the Guaranteed Obligations and are owed by the Company even if they are declared unenforceable or not allowable due to the existence of a bankruptcy, reorganization or similar proceeding involving SARL or SME.  The Company will pay to the Banks having a Tranche B Commitment all amounts due and payable under this Section 8.01 in Euros in immediately available funds one Business Day after demand from the Agent.

Section .02.            Guaranty Absolute.  The Company guarantees that the Guaranteed Obligations will be paid strictly in accordance with the terms of this Agreement and the Notes, regardless of any law, regulation or order now or hereafter in effect in any jurisdiction affecting any of such terms or the rights of the Bank with respect thereto.  The guaranty provided for in Section 8.01 is a guaranty of payment, not of collection and the Company’s obligations thereunder are primary, not secondary.  The obligations of the Company under Section 8.01 are independent of the Guaranteed Obligations, and a separate action or actions may be brought and prosecuted against the Company to enforce such obligations, irrespective of whether any action is brought against SARL, SME or any other Person or whether SARL, SME or any other Person is joined in any such action or actions.  The liability of the Company under Section 8.01 shall be absolute and unconditional irrespective of:

(a)           any lack of validity or enforceability of any other provision of the Credit Agreement, the Notes or any other Credit Document;

(b)           any change in the time, manner or place of payment of, or in any other term of, all or any of the Guaranteed Obligations or any other liabilities, or any other amendment or waiver of or any consent to departure from the Credit Agreement, the Notes or any other Credit Document, including, without limitation, any increase in the Guaranteed Obligations or any other liabilities resulting from the extension of additional credit to SARL, SME or otherwise;

(c)           any taking, exchange, release or non-perfection of any collateral (if any), or any taking, release, amendment or waiver of or consent to departure from any other guaranty for all or any of the Guaranteed Obligations or any other liabilities;

(d)           any manner of application of collateral (if any), or proceeds thereof or of collections on account of any other guaranty to all or any of the Guaranteed Obligations or any other liabilities, or any manner of sale or other disposition of any collateral for all or any of the Guaranteed Obligations or any other liabilities or any other assets of SARL or SME;

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(e)           any change, restructuring or termination of the corporate structure or existence of SARL or SME; or

(f)            any other circumstances which might otherwise constitute a defense available to, or a discharge of, SARL, SME or a guarantor (other than the defense of prior payment).

Section .03.            Waiver.  The Company hereby waives promptness, diligence, notice of acceptance and any other notice with respect to any of the Guaranteed Obligations and the guaranty provided for in Section 8.01 and any requirement that the Agent or any Bank protect, secure, perfect or insure any security interest or other Lien or any property subject thereto or exhaust any right to take any action against the Company or any other Person or any collateral.

Section .04.            Subrogation.  (a) Until such time as the Guaranteed Obligations are paid in full, the Company irrevocably waives any and all rights to which it may be entitled, by operation of law or otherwise, by making any payment hereunder or otherwise to be subrogated to the rights of the Agent and the Banks against SARL, SME or any other Person with respect to such payment or otherwise to be reimbursed, indemnified or exonerated by SARL, SME or any other Person in respect thereof.  If any amount shall be paid to the Company on account of such subrogation in violation of the preceding sentence, such amount shall be held in trust for the benefit of the Agent and the Banks and shall forthwith be paid to the Agent to be credited against and applied upon the Guaranteed Obligations, whether matured or unmatured, in such order as may be determined by the Majority Banks.

(a)           The Company agrees that, to the extent that any Borrower makes payment to the Agent or any Bank, or the Agent or any Bank receives any proceeds of collateral, and such payments or proceeds or any part thereof are subsequently invalidated, declared to be fraudulent or preferential, set aside, or otherwise required to be repaid, then to the extent of such repayment the Guaranteed Obligations shall be reinstated and continued in full force and effect as of the date such initial payment or collection of proceeds occurred.  The Company shall defend and indemnify the Agent and the Banks from and against any claim or loss under this subsection 8.04 (including reasonable attorneys’ fees and expenses) in the defense of any such action or suit, but excluding any such losses, liabilities, claims, damages, or expenses incurred by reason of the gross negligence, bad faith or willful misconduct of the Agent and the Banks.

THE AGENT

Section .01.            Authorization and Action.  Each Bank hereby appoints and authorizes the Agent to take such action as agent on its behalf and to exercise such powers under this Agreement as are delegated to the Agent by the terms hereof and of the other Credit Documents, together with such powers as are reasonably incidental thereto.  As to any matters not expressly provided for by this Agreement or any other Credit Document (including, without limitation, enforcement or collection of the Notes), the Agent shall not be required to exercise any discretion or take any action, but shall be required to act or to refrain from acting (and shall be fully protected in so acting or refraining from acting) upon the instructions of the Majority Banks, and such instructions shall be binding upon all Banks and all holders of Notes; provided,

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however, that the Agent shall not be required to take any action which exposes the Agent to personal liability or which is contrary to this Agreement, any other Credit Document, or applicable law.

Section .02.            Agent’s Reliance, Etc.  Neither the Agent nor any of its directors, officers, agents or employees shall be liable for any action taken or omitted to be taken (including the Agent’s own negligence) by it or them under or in connection with this Agreement or the other Credit Documents, except for its or their own gross negligence, bad faith or willful misconduct.  Without limitation of the generality of the foregoing, the Agent:  (a) may treat the payee of any Note as the holder thereof until the Agent receives written notice of the assignment or transfer thereof signed by such payee and in form satisfactory to the Agent; (b) may consult with legal counsel (including counsel for the Borrowers), independent public accountants and other experts selected by it and shall not be liable for any action taken or omitted to be taken in good faith by it in accordance with the advice of such counsel, accountants or experts; (c) makes no warranty or representation to any Bank and shall not be responsible to any Bank for any statements, warranties or representations made in or in connection with this Agreement or the other Credit Documents; (d) shall not have any duty to ascertain or to inquire as to the performance or observance of any of the terms, covenants or conditions of this Agreement or any other Credit Document on the part of the Borrowers or their Subsidiaries or to inspect the property (including the books and records) of the Borrowers or their Subsidiaries; (e) shall not be responsible to any Bank for the due execution, legality, validity, enforceability, genuineness, sufficiency or value of this Agreement or any other Credit Document; and (f) shall incur no liability under or in respect of this Agreement or any other Credit Document by acting upon any notice, consent, certificate or other instrument or writing (which may be by telecopier, telegram, cable, telex, electronic message, Internet or intranet website posting or other distribution) believed by it to be genuine and signed or sent by the proper party or parties.

Section .03.            The Agent and Its Affiliates.  With respect to its Commitments, the Advances made by it and the Notes issued to it, the Agent shall have the same rights and powers under this Agreement as any other Bank and may exercise the same as though it were not the Agent.  The term “Bank” or “Banks” shall, unless otherwise expressly indicated, include the Agent in its individual capacity.  The Agent and its Affiliates may accept deposits from, lend money to, act as trustee under indentures of, and generally engage in any kind of business with, the Borrowers or any of their Subsidiaries, and any Person who may do business with or own securities of the Borrowers or any such Subsidiaries, all as if the Agent were not an agent hereunder and without any duty to account therefor to the Banks.

Section .04.            Bank Credit Decision.  Each Bank acknowledges that it has, independently and without reliance upon the Agent or any other Bank and based on the financial statements referred to in Section 4.05 and such other documents and information as it has deemed appropriate, made its own credit analysis and decision to enter into this Agreement.  Each Bank also acknowledges that it will, independently and without reliance upon the Agent or any other Bank and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit decisions in taking or not taking action under this Agreement.

Section .05.            Indemnification.  The Banks severally agree to indemnify the Agent (to the extent not reimbursed by the Borrowers), according to their respective Pro Rata

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Shares from and against any and all liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements of any kind or nature whatsoever which may be imposed on, incurred by, or asserted against the Agent in any way relating to or arising out of this Agreement or any action taken or omitted by the Agent under this Agreement or any other Credit Document (including the Agent’s own negligence), provided that no Bank shall be liable for any portion of such liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements resulting from the Agent’s gross negligence or willful misconduct.  Without limitation of the foregoing, each Bank agrees to reimburse the Agent promptly upon written demand for its ratable share of any out-of-pocket expenses (including reasonable counsel fees) incurred by the Agent in connection with the preparation, execution, delivery, administration, modification, amendment or enforcement (whether through negotiations, legal proceedings or otherwise) of, or legal advice in respect of rights or responsibilities under, this Agreement or any other Credit Document, to the extent that the Agent is not reimbursed for such expenses by the Borrowers.  Upon the request of any Bank, the Agent shall supply documentation reasonably evidencing such expenses.

Section .06.            Successor Agent.  The Agent may resign at any time by giving written notice thereof to the Banks and the Borrowers and may be removed at any time with or without cause by the Majority Banks upon receipt of written notice from the Majority Banks to such effect.  Upon receipt of notice of any such resignation or removal, the Majority Banks shall have the right to appoint a successor Agent subject to, if an Event of Default has not occurred and is not continuing, the consent of the Company, which consent shall not be unreasonably withheld.  If no successor Agent shall have been so appointed, and shall have accepted such appointment, within 30 days after the retiring Agent’s giving of notice of resignation or the Majority Banks’ removal of the retiring Agent then the retiring Agent may, on behalf of the Banks and the Borrower, appoint a successor Agent, which shall be a commercial bank meeting the financial requirements of an Eligible Assignee. Upon the acceptance of any appointment as Agent by a successor Agent, such successor Agent shall thereupon succeed to and become vested with all the rights, powers, privileges and duties of the retiring Agent, and the retiring Agent shall be discharged from its duties and obligations under this Agreement and the other Credit Documents.  After any retiring Agent’s resignation or removal hereunder as Agent, the provisions of this Article IX shall inure to its benefit as to any actions taken or omitted to be taken by it while it was Agent under this Agreement and the other Credit Documents.

Section .07.            “Know Your Customer” Checks.  Each Bank shall promptly upon reasonable request of the Agent supply, or procure the supply of, such documentation and other evidence as is reasonably requested by the Agent (for itself) in order for the Agent to carry out and be satisfied it has complied with all necessary “know your customer” or other similar checks under all applicable laws and regulations pursuant to the transactions contemplated in the Credit Documents.  Nothing in this Agreement shall oblige the Agent to carry out any “know your customer” or other checks in relation to any person on behalf of any Bank and each Bank confirms to the Agent that it is solely responsible for any such checks it is required to carry out and that it may not rely on any statement in relation to such checks made by the Agent.

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MISCELLANEOUS

Section .01.            Amendments, Etc.  No amendment or waiver of any provision of this Agreement, the Notes, or any other Credit Document, nor consent to any departure by any Borrower therefrom, shall in any event be effective unless the same shall be in writing and signed by the Majority Banks and the Borrowers, and then such waiver or consent shall be effective only in the specific instance and for the specific purpose for which given; provided, however, that no amendment, waiver or consent shall:

(a)           increase any Commitment of any Bank without the written consent of such Bank;

(b)           increase the aggregate Commitments of the Banks without the written consent of all of the Banks;

(c)           reduce the principal of, or interest on, the Notes or any fees or other amounts payable hereunder or under any other Credit Document without the written consent of each Bank directly affected thereby;

(d)           postpone any date fixed for any scheduled payment of principal of, or interest on, the Notes or any fees or other amounts payable hereunder without the written consent of each Bank directly affected thereby;

(e)           (i) accelerate any date fixed for any scheduled payment of principal of, or interest on, the Tranche A Notes or any fees or other amounts payable hereunder to Banks having Tranche A Commitments without the written consent of the Majority Tranche B Banks or (ii) accelerate any date fixed for any scheduled payment of principal of, or interest on, the Tranche B Notes or any fees or other amounts payable hereunder to Banks having Tranche B Commitments without the written consent of the Majority Tranche A Banks;

(f)            change the number of Banks which shall be required for the Banks or any of them to take any action hereunder or under any other Credit Document without the written consent of each Bank;

(g)           amend Section 2.12 in a manner that would alter the pro rata sharing of payments required thereby or this Section 10.01 without the written consent of each Bank;

(h)           release the Company from its obligations under Article VIII without the written consent of each Bank having a Tranche B Commitment;

(i)            amend the definition of “Majority Banks” without the written consent of each Bank;

(j)            amend the definition of “Majority Tranche A Banks” without the written consent of each Bank having a Tranche A Commitment;

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(k)           amend the definition of “Majority Tranche B Banks” without the written consent of each Bank having a Tranche B Commitment;

(l)            waive any condition set forth in Section 3.01 without the written consent of each Bank; or

(m)          waive any condition set forth in Section 3.02 without the written consent of each Bank;

and provided, further, that no amendment, waiver or consent shall, unless in writing and signed by the Agent in addition to the Banks required above to take such action, affect the rights or duties of the Agent under this Agreement or any other Credit Document.

Section .02.            Notices, Etc.

(a)           All notices and other communications shall be in writing (including telecopy, telex or electronic mail (subject to subsection (b) below)) and mailed, telecopied, telexed, hand delivered or delivered by a nationally recognized overnight courier, if to the Company or any other Borrower, at its address as set forth on Schedule 1; if to any Bank,  at its U.S. Lending Office specified opposite its name on Schedule 1; if to the Agent, at its address for notices set forth in Schedule 1; and if a Notice of Borrowing or a Notice of Continuation to the Agent as to Tranche A Advances at the U.S. Lending Office of the Agent and, as to Tranche B Advances to the Agent at its Paris, France lending office or if different, the Applicable Lending Office for the Agent specified opposite its name on Schedule 1 or, as to each party, at such other address or teletransmission number as shall be designated by such party in a written notice to the other parties.  All such notices and communications shall, when mailed, telecopied, telexed or hand delivered or delivered by overnight courier be effective:  upon receipt, if mailed, when telecopy transmission is completed, when confirmed by telex answer-back or when delivered, respectively, except that notices and communications to the Agent pursuant to Article II or IX shall not be effective until received by the Agent.

(b)           Notices and other communications to the Banks hereunder may be delivered or furnished by electronic communication (including e-mail and Internet or intranet websites) pursuant to procedures approved by the Agent, provided that the foregoing shall not apply to notices to any Bank pursuant to Article II if such Bank has notified the Agent that it is incapable of receiving notices under such Article by electronic communication. The Agent or any Borrower may, in its discretion, agree to accept notices and other communications to it hereunder by electronic communications pursuant to procedures approved by it, provided that approval of such procedures may be limited to particular notices or communications. Unless the Agent otherwise prescribes, (i) notices and other communications sent to an e-mail address shall be deemed received upon the sender’s receipt of an acknowledgement from the intended recipient (such as by the “return receipt requested” function, as available, return e-mail or other written acknowledgement), provided that if such notice or other communication is not sent during the normal business hours of the recipient, such notice or communication shall be deemed to have been sent at the opening of business on the next business day for the recipient, and (ii) notices or communications posted to an Internet or intranet website shall be deemed received upon the deemed receipt by the intended recipient at its e-mail address as described in the foregoing

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clause (i) of notification that such notice or communication is available and identifying the website address therefor.

Section .03.            No Waiver; Remedies.  No failure on the part of any Bank or the Agent to exercise, and no delay in exercising, any right hereunder or under any Note shall operate as a waiver thereof; nor shall any single or partial exercise of any such right preclude any other or further exercise thereof or the exercise of any other right.  The remedies provided in this Agreement are cumulative and not exclusive of any remedies provided by law.

Section .04.            Costs and Expenses.  Each of the Borrowers agrees to pay on demand all reasonable and documented out-of-pocket costs and expenses of the Agent in connection with the preparation, execution, delivery, administration, modification and amendment of this Agreement, the Notes and the other Credit Documents including, without limitation, the reasonable fees and out-of-pocket expenses of Bracewell & Giuliani LLP, counsel for the Agent, and with respect to advising the Agent as to its rights and responsibilities under this Agreement, and, after the occurrence of an Event of Default, all reasonable out-of-pocket costs and expenses, if any, of Agent and each Bank (including, without limitation, reasonable counsel fees and expenses of the Agent and each Bank) in connection with the enforcement (whether through negotiations, legal proceedings or otherwise) of this Agreement, the Notes and the other Credit Documents.

Section .05.            Binding Effect.  This Agreement shall become effective when it shall have been executed by the Company, SARL and the Agent, and when the Agent shall have, as to each Bank, either received a counterpart hereof executed by such Bank or been notified by such Bank that such Bank has executed it. Thereafter, this Agreement shall be binding upon and inure to the benefit of the Borrowers, the Agent and each Bank and their respective successors and assigns, except that none of the Borrowers shall have the right to assign its rights or delegate its duties under this Agreement or any interest in this Agreement without the prior written consent of each Bank.

Section .06.            Bank Assignments and Participations.

(a)           Assignments.  Any Bank may assign to one or more banks or other entities all or any portion of its rights and obligations under this Agreement (including, without limitation, all or a portion of its Commitments, the Advances owing to it, and the Notes held by it; provided, however, that (i) each such assignment shall be of a constant, and not a varying, percentage of all of such Bank’s rights and obligations under this Agreement, (ii) the amount of the Commitments and Advances of such Bank being assigned in the various facilities evidenced hereby pursuant to each such assignment (determined as of the date of the Assignment and Acceptance with respect to such assignment) shall in no event be less than $5,000,000 or €5,000,000, as the case may be (or if less, the amount of such Bank’s remaining Commitments) in the aggregate, (iii) each such assignment shall be to an Eligible Assignee, (iv) the parties to each such assignment shall execute and deliver to the Agent, for its acceptance and recording in the Register, an Assignment and Acceptance, together with the Notes subject to such assignment, and (v) each Eligible Assignee (other than the Eligible Assignee of the Agent) shall pay to the Agent a $3,500 administrative fee.  Upon such execution, delivery, acceptance and recording, from and after the effective date specified in each Assignment and Acceptance, which effective date shall be at

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least three Business Days after the execution thereof, (A) the assignee thereunder shall be a party hereto for all purposes and, to the extent that rights and obligations hereunder have been assigned to it pursuant to such Assignment and Acceptance, have the rights and obligations of a Bank hereunder and (B) such Bank thereunder shall, to the extent that rights and obligations hereunder have been assigned by it pursuant to such Assignment and Acceptance, relinquish its rights and be released from its obligations under this Agreement (and, in the case of an Assignment and Acceptance covering all or the remaining portion of such Bank’s rights and obligations under this Agreement, such Bank shall cease to be a party hereto).

(b)           Term of Assignments.  By executing and delivering an Assignment and Acceptance, the Bank thereunder and the assignee thereunder confirm to and agree with each other and the other parties hereto as follows:  (i) other than as provided in such Assignment and Acceptance, such Bank makes no representation or warranty and assumes no responsibility with respect to any statements, warranties or representations made in or in connection with this Agreement or the execution, legality, validity, enforceability, genuineness, sufficiency of value of this Agreement or any other instrument or document furnished pursuant hereto; (ii) such Bank makes no representation or warranty and assumes no responsibility with respect to the financial condition of the Borrowers or the performance or observance by the Borrowers of any of their obligations under this Agreement or any other instrument or document furnished pursuant hereto; (iii) such assignee confirms that it has received a copy of this Agreement, together with copies of the financial statements referred to in Section 4.05 and such other documents and information as it has deemed appropriate to make its own credit analysis and decision to enter into such Assignment and Acceptance; (iv) such assignee will, independently and without reliance upon the Agent, such Bank or any other Bank and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit decisions in taking or not taking action under this Agreement; (v) such assignee appoints and authorizes the Agent to take such action as agent on its behalf and to exercise such powers under this Agreement as are delegated to the Agent by the terms hereof, together with such powers as are reasonably incidental thereto; and (vi) such assignee agrees that it will perform in accordance with their terms all of the obligations which by the terms of this Agreement are required to be performed by it as a Bank.

(c)           The Register.  The Agent shall maintain at its address referred to in Section 10.02 a copy of each Assignment and Acceptance delivered to and accepted by it and a register for the recordation of the names and addresses of the Banks and the Commitments of, and principal amount of the Advances owing to, each Bank from time-to-time (the “Register”).  The entries in the Register shall be conclusive and binding for all purposes, absent manifest error, and the Borrowers, the Agent and the Banks may treat each Person whose name is recorded in the Register as a Bank hereunder for all purposes of this Agreement.  The Register shall be available for inspection by the Borrowers or any Bank at any reasonable time and from time-to-time upon reasonable prior notice.  Notwithstanding anything herein to the contrary, the Agent shall only be obliged to accept an Assignment and Acceptance delivered to it by an existing Bank and a new Bank once it is satisfied it has complied with all necessary “know your customer” or other similar checks under all applicable laws and regulations in relation to the transfer to such new Bank.

(d)           Procedures.  Upon its receipt of an Assignment and Acceptance executed by a Bank and an Eligible Assignee, together with the Tranche A Notes or Tranche B Notes subject to

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such assignment, the Agent shall, if such Assignment and Acceptance has been completed and is in substantially the form of the attached Exhibit A, (i) accept such Assignment and Acceptance, (ii) record the information contained therein in the Register, and (iii) give prompt notice thereof to the Borrowers.  Within five Business Days after its receipt of such notice, the applicable Borrower, at its own expense, shall execute and deliver to the Agent in exchange for the surrendered Tranche A Note or Tranche B Note, a new Tranche A Note or Tranche B Note to the order of such Eligible Assignee in an amount equal to the Tranche A Commitment and Tranche B Commitment assumed and Tranche A Advances and Tranche B Advances purchased by it pursuant to such Assignment and Acceptance and, if such Bank has retained any Commitments hereunder, a new Tranche A Note or new Tranche B Note to the order of such Bank in an amount equal to the Tranche A Commitment, Tranche B Commitment, Tranche A Advances and Tranche B Advances, respectively, retained by it hereunder.  Such new Notes shall be dated the effective date of such Assignment and Acceptance and shall otherwise be in substantially the form of the attached Exhibits B-1 and B-2.

(e)           Participations.  Each Bank may sell participations to one or more banks or other entities in or to all or a portion of its rights and obligations under this Agreement (including, without limitation, all or a portion of its Commitments, the Advances owing to it, and the Notes held by it); provided, however, that (i) such Bank’s obligations under this Agreement (including, without limitation, its Commitments to the Borrowers hereunder) shall remain unchanged, (ii) such Bank shall remain solely responsible to the other parties hereto for the performance of such obligations, (iii) such Bank shall remain the holder of any such Notes for all purposes of this Agreement, (iv) the Borrowers, the Agent and the other Banks shall continue to deal solely and directly with such Bank in connection with such Bank’s rights and obligations under this Agreement, and (v) such Bank shall not require the participant’s consent to any matter under this Agreement, except for change in the principal amount of the Notes, reductions in fees or interest,  or extending the Maturity Date.  Each of the Borrowers hereby agrees that a Bank may pass through to any of its participants the same rights under Sections 2.08, 2.09, 2.11(c), and 10.07 to the extent of their respective participations, provided that no participant shall be able to collect in excess of amounts payable to the Bank selling to such participant under such Sections in respect of the interest sold to such participant or to collect any such amounts from the Borrowers.

(f)            Confidentiality.  Each Bank may furnish any information concerning the Borrowers and their Subsidiaries in the possession of such Bank from time-to-time to assignees and participants (including prospective assignees and participants); provided that, prior to any such disclosure, the assignee or participant or proposed assignee or participant shall, in order to preserve the confidentiality of any confidential information relating to the Borrowers and their Subsidiaries received by it from such Bank, promptly execute and deliver to the Agent and the Borrowers a Confidentiality Agreement in the form of the attached Exhibit G.

(g)           Compliance with Securities Laws.  All transfers of any interests in the Notes shall be in compliance with all applicable Federal and state securities laws.

(h)           “Know Your Customer” Checks.  Notwithstanding anything to the contrary herein, an assignment will only be effective as among the Agent and the Banks and against the Borrowers on performance by the Agent of all “know your customer” or other checks relating to

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any person that it is required to carry out in relation to such assignment to a new Bank, the completion of which the Agent shall promptly notify to the existing Banks and the new Bank.

Section .07.            Indemnification.  Each of the Borrowers shall indemnify the Agent, the Banks and each affiliate thereof and their respective directors, officers, employees and agents from, and discharge, release, and hold each of them harmless against, any and all losses, liabilities, claims or damages to which any of them may become subject, insofar as such losses, liabilities, claims or damages arise out of or result from (i) any actual or proposed use by the Borrowers or any Affiliate of the Borrowers of the proceeds of any Advance, (ii) any breach by the Borrowers of any provision of this Agreement or any other Credit Document, (iii) any investigation, litigation or other proceeding (including any threatened investigation or proceeding) relating to the foregoing brought by any Person other than a Borrower, or (iv) any Environmental Claim or requirement of Environmental Laws concerning or relating to the present or previously-owned or operated properties, or the operations or business, of the Borrowers or any of their Subsidiaries, and each of the Borrowers shall reimburse the Agent and each Bank, and each affiliate thereof and their respective directors, officers, employees and agents, upon demand for any reasonable out-of-pocket expenses (including legal fees) incurred in connection with any such investigation, litigation or other proceeding; and expressly including any such losses, liabilities, claims, damages, or expense incurred by reason of the Person being indemnified’s own negligence, but excluding any such losses, liabilities, claims, damages or expenses incurred by reason of the gross negligence, bad faith or willful misconduct of the Person to be indemnified, or in the case of clause (iv) above, caused by the affirmative act of the Agent or such Bank.

Section .08.            Execution in Counterparts.  This Agreement may be executed in any number of counterparts and by different parties hereto in separate counterparts, each of which when so executed shall be deemed to be an original and all of which taken together shall constitute one and the same agreement.  This Agreement may be executed and delivered by telecopier.

Section .09.            Survival of Representations, etc.  All representations and warranties contained in this Agreement or made in writing by or on behalf of the Borrower in connection herewith shall survive the execution and delivery of this Agreement and the Credit Documents, the making of the Advances and any investigation made by or on behalf of the Banks, none of which investigations shall diminish any Bank’s right to rely on such representations and warranties.  All obligations of the Borrower provided for in Sections 2.08, 2.09, 2.11(c), and 10.07 shall survive any termination of this Agreement and repayment in full of the Obligations.

Section .10.            Severability.  In case one or more provisions of this Agreement or the other Credit Documents shall be invalid, illegal or unenforceable in any respect under any applicable law, the validity, legality and enforceability of the remaining provisions contained herein or therein shall not be affected or impaired thereby.

Section .11.            Usury Not Intended.  It is the intent of the Borrowers and each Bank in the execution and performance of this Agreement and the other Credit Documents to contract in strict compliance with applicable usury laws, including conflicts of law concepts, governing the

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Advances of each Bank including such applicable laws of the State of New York and the United States of America from time-to-time in effect.  In furtherance thereof, the Banks and the Borrowers stipulate and agree that none of the terms and provisions contained in this Agreement or the other Credit Documents shall ever be construed to create a contract to pay, as consideration for the use, forbearance or detention of money, interest at a rate in excess of the Maximum Rate and that for purposes hereof “interest” shall include the aggregate of all charges which constitute interest under such laws that are contracted for, charged or received under this Agreement; and in the event that, notwithstanding the foregoing, under any circumstances the aggregate amounts taken, reserved, charged, received or paid on the Advances, include amounts which by applicable law are deemed interest which would exceed the Maximum Rate, then such excess shall be deemed to be a mistake and each Bank receiving same shall credit the same on the principal of its Notes (or if such Notes shall have been paid in full, refund said excess to the Borrowers).  In the event that the maturity of the Notes are accelerated by reason of any election of the holder thereof resulting from any Event of Default under this Agreement or otherwise, or in the event of any required or permitted prepayment, then such consideration that constitutes interest may never include more than the Maximum Rate and excess interest, if any, provided for in this Agreement or otherwise shall be canceled automatically as of the date of such acceleration or prepayment and, if theretofore paid, shall be credited on the applicable Notes (or, if the applicable Notes shall have been paid in full, refunded to the Borrowers of such interest).  In determining whether or not the interest paid or payable under any specific contingencies exceeds the Maximum Rate, the Borrowers and the Banks shall to the maximum extent permitted under applicable law amortize, prorate, allocate and spread in equal parts during the period of the full stated term of the Notes all amounts considered to be interest under applicable law at any time contracted for, charged, received or reserved in connection with the Obligations.  The provisions of this Section shall control over all other provisions of this Agreement or the other Credit Documents which may be in apparent conflict herewith.

Section .12.            Global Effective Rate.  Because the interest rates applicable to certain Types of Advances are variable, it is not possible to calculate the “taux effectif global” of the credit facility made available to SARL and SME in accordance with Articles L.313-1 and L.313-2 of the French “Code de la Consommation”.  Each of SARL and SME hereby acknowledges that the Agent has notified SARL and SME of the effective all-in cost of the credit facility pursuant to a “taux effectif global” letter delivered on or before the date hereof.

Section .13.            Judgment Currency.  The obligations of the Borrowers hereunder and under the Notes to make payments in Dollars or in Euros (the “Obligation Currency”) shall not be discharged or satisfied by any tender or recovery pursuant to any judgment expressed in or converted into any currency other than the Obligation Currency except to the extent to which such tender or recovery shall result in the effective receipt by the Banks of the full amount of the Obligation Currency expressed to be payable hereunder and under the Notes, and accordingly such obligations of the Borrowers shall be enforceable as an alternate or additional cause of action for the purpose of recovery in the Obligation Currency of the amount (if any) by which such effective receipt shall fall short of the full amount of the Obligation Currency expressed to be payable hereunder and under the Notes and shall not be affected by judgment being obtained for any other sums due under this Agreement and the Notes.

Section .14.            Governing Law; Consent to Jurisdiction.

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(a)           THIS AGREEMENT AND EACH OF THE OTHER CREDIT DOCUMENTS SHALL BE GOVERNED BY AND INTERPRETED IN ACCORDANCE WITH THE LAW OF THE STATE OF NEW YORK, WITHOUT GIVING EFFECT TO THE CONFLICT OF LAWS PRINCIPLES THEREOF.

(b)           Any litigation based hereon, or arising out of, under, or in connection with, this Agreement or any other Credit Document, or any course of conduct, course of dealing, statements (whether oral or written) or actions of the Borrowers, the Agent or the Banks relating to this Agreement or any other Credit Document may be brought and maintained in the courts of the State of New York sitting in New York City or in the United States District Court for the Southern District of New York.  Each of the Borrowers, the Agent and the Banks hereby expressly and irrevocably submits to the non-exclusive jurisdiction of the courts of the State of New York sitting in New York City and the United States District Court for the Southern District of New York for the purpose of any such litigation as set forth above and irrevocably agrees to be bound by any judgment rendered thereby in connection with such litigation.  To the fullest extent permitted by applicable Legal Requirements, each of the Borrowers, the Agent and the Banks further irrevocably consents to the service of process, by registered mail, postage prepaid, or by personal service within or without the State of New York.  Each of the Borrowers, the Agent and the Banks hereby expressly and irrevocably waives, to the fullest extent permitted by Legal Requirements, any objection which it may have or hereafter may have to the laying of venue of any such litigation brought in any such court referred to above and any claim that any such litigation has been brought in an inconvenient forum.  To the extent that any of the Borrowers, the Agent or the Banks has or hereafter may acquire any immunity from jurisdiction of any court or from any legal process (whether through service of notice, attachment prior to judgment, attachment in aid of execution or otherwise) with respect to itself or its property, each of the Borrowers, the Agent and the Banks hereby irrevocably waives, to the fullest extent permitted by applicable Legal Requirements, such immunity in respect of its obligations under this Agreement and the other Credit Documents.

Section .15.            Confidentiality.  All information and documents concerning the Borrowers or their respective Subsidiaries supplied by the Borrowers to the Banks pursuant to this Agreement which are not otherwise in the public domain shall be held in confidence by the Banks and the Banks shall not disclose such information and documents to any other Person, except that the Borrowers hereby authorize the Banks to disclose any information obtained pursuant to this Agreement (i) to any independent auditors of a Bank, (ii) to any Person who is an Eligible Assignee and executes and delivers a confidentiality agreement to the Company and the Agents that is otherwise consistent with this Section 10.16 (solely for the purpose of evaluating such proposed participation or assignment) whereby such Eligible Assignee agrees, for the benefit of the Borrowers, in writing, to be bound by the same confidentiality obligations as those imposed on the Banks hereunder, and, in the event that such financial institution does not enter into any proposed participation, such financial institution agrees to return to the furnishing Bank all information furnished to it hereunder, (iii) to an Affiliate of the Bank making the disclosure and to any employees of such Bank or such Affiliate on a need to know basis, and then only to the extent that such Affiliate and employees have agreed for the benefit of the Borrowers to be bound to the foregoing confidentiality provisions, and (iv) to all appropriate governmental regulatory authorities to the extent requested or subpoenaed in accordance with all applicable notices and procedures, but only to the extent permitted by applicable laws and

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regulations, including those applying to classified material.  Upon receipt of a request, demand, or subpoena to disclose any information to any Person other than governmental bank examiners and independent auditors of a Bank, the affected Bank will promptly notify, to the extent not prohibited by applicable law, regulations, or court order, the Borrowers and the Agent of such request.

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EXECUTED as of the 31st day of July, 2006.

BORROWERS:
SCHWEITZER-MAUDUIT INTERNATIONAL, INC.
By	/s/ Wayne H. Deitrich
	Wayne H. Deitrich
	Chief Executive Officer
SCHWEITZER-MAUDUIT FRANCE S.A.R.L.
By:	/s/ Jean-Yves Klein
	Jean-Yves Klein
	General Manager Finance and
	Administration
SCHWEITZER-MAUDUIT ENTREPRISE S.A.S
By:
Name:
Title:

Signature Page to Credit Agreement
Schweitzer-Mauduit International, Inc.

	AGENT:
	SOCIÉTÉ GÉNÉRALE
	By:	/s/ Anne-Marie Dumortier
	Name:	Anne-Marie Dumortier
	Title:	Director
	BANKS:
TRANCHE A COMMITMENT	SOCIÉTÉ GÉNÉRALE
$15,090,689.67
TRANCHE B COMMITMENT	By:	/s/ Anne-Marie Dumortier
€20,613,496.93	Name:	Anne-Marie Dumortier
	Title:	Director

Signature Page to Credit Agreement
Schweitzer-Mauduit International, Inc.

TRANCHE A COMMITMENT	NATEXIS BANQUES POPULAIRES
$13,294,178.99
TRANCHE B COMMITMENT	By:	/s/ Jacques Rouquette
€18,159,509.20	Name:	Jacques Rouquette
	Title:	Regional Director
	By:	/s/ Didier Barbes
	Name:	Didier Barbes
	Title:

Signature Page to Credit Agreement
Schweitzer-Mauduit International, Inc.

TRANCHE A COMMITMENT	SUNTRUST BANK
$36,433,752.00
TRANCHE B COMMITMENT	By:	/s/ Stacy M. Lewis
€0	Name:	Stacy M. Lewis
	Title:	Vice President

Signature Page to Credit Agreement
Schweitzer-Mauduit International, Inc.

TRANCHE A COMMITMENT	CRÉDIT LYONNAIS
$9,341,855.51
TRANCHE B COMMITMENT	By:	/s/ Eric Corbisier
€12,760,736.20	Name:	Eric Corbisier
	Title:	Director
	By:
	Name:
	Title:

Signature Page to Credit Agreement
Schweitzer-Mauduit International, Inc.

TRANCHE A COMMITMENT	JPMORGAN CHASE BANK, N.A.
$9,341,855.51
TRANCHE B COMMITMENT	By:	/s/ Robert P. Carswell
€12,760,736.20	Name:	Robert P. Carswell
	Title:	Vice President

Signature Page to Credit Agreement
Schweitzer-Mauduit International, Inc.

TRANCHE A COMMITMENT	BNP PARIBAS
$7,186,042.70
TRANCHE B COMMITMENT	By:	/s/ Robert Sabourault
€9,815,950.92	Name:	Robert Sabourault
	Title:	Director
	By:	/s/ Jean Euler Bleher
	Name:	Jean Euler Bleher
	Title:

Signature Page to Credit Agreement
Schweitzer-Mauduit International, Inc.

TRANCHE A COMMITMENT	BANK OF CHINA LIMITED PARIS BRANCH
$4,311,625.62
TRANCHE B COMMITMENT	By:	/s/ Phan Nhay
€5,889,570.55	Name:	Phan Nhay
	Title:	General Manager
	By:
	Name:
	Title:

Signature Page to Credit Agreement
Schweitzer-Mauduit International, Inc.

EX-15

EXHIBIT 15

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

We have reviewed, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the unaudited interim financial information of Schweitzer-Mauduit International, Inc. and subsidiaries for the periods ended June 30, 2006 and 2005, as indicated in our report dated August 8, 2006; because we did not perform an audit, we expressed no opinion on that information.

We are aware that our report referred to above, which is included in your Quarterly Report on Form 10-Q for the quarter ended June 30, 2006, is incorporated by reference in Registration Statements No. 33-99812, No. 33-99814, No. 33-99816, No. 33-99848, No. 333-74634, No. 333-105986 and No. 333-105998 on Form S-8.

We also are aware that the aforementioned report, pursuant to Rule 436(c) under the Securities Act of 1933, is not considered a part of the Registration Statements 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.

/s/ DELOITTE & TOUCHE LLP

Atlanta, Georgia

August 8, 2006

EX-31.1

EXHIBIT 31.1

CERTIFICATION OF CHIEF EXECUTIVE OFFICER
PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Wayne H. Deitrich, certify that:

1.I have reviewed this quarterly report on Form 10-Q of Schweitzer-Mauduit International, Inc. (the “Registrant”);

2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this report;

4.The Registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the Registrant and have:

a)Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b)Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c)Evaluated the effectiveness of the Registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d)Disclosed in this report any change in the Registrant’s internal control over financial reporting that occurred during the Registrant’s most recent fiscal quarter (the Registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the Registrant’s internal control over financial reporting; and

5.The Registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Registrant’s auditors and the audit committee of the Registrant’s board of directors (or persons performing the equivalent functions):

a)All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Registrant’s ability to record, process, summarize and report financial information; and

b)Any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant’s internal control over financial reporting.

Date:  August 8, 2006

/s/ WAYNE H. DEITRICH

Wayne H. Deitrich

Chairman of the Board and

Chief Executive Officer

A signed original of this written statement required by Section 302 of the Sarbanes-Oxley Act of 2002 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.

EX-31.2

EXHIBIT 31.2

CERTIFICATION OF CHIEF FINANCIAL OFFICER

PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Peter J. Thompson, certify that:

1.I have reviewed this quarterly report on Form 10-Q of Schweitzer-Mauduit International, Inc. (the “Registrant”);

2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this report;

4.The Registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the Registrant and have:

a)Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b)Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c)Evaluated the effectiveness of the Registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d)Disclosed in this report any change in the Registrant’s internal control over financial reporting that occurred during the Registrant’s most recent fiscal quarter (the Registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the Registrant’s internal control over financial reporting; and

5.The Registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Registrant’s auditors and the audit committee of the Registrant’s board of directors (or persons performing the equivalent functions):

a)All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Registrant’s ability to record, process, summarize and report financial information; and

b)Any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant’s internal control over financial reporting.

Date:  August 8, 2006

/s/ PETER J. THOMPSON

Peter J. Thompson

Chief Financial Officer and

Treasurer

A signed original of this written statement required by Section 302 of the Sarbanes-Oxley Act of 2002 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.

EX-32

EXHIBIT 32

CERTIFICATION OF PERIODIC FINANCIAL REPORTS

UNDER SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

The undersigned, in their respective capacities as chief executive officer and chief financial officer of Schweitzer-Mauduit International, Inc. (the “Company”), hereby certify to the best of their knowledge following reasonable inquiry that this Quarterly Report of the Company on Form 10-Q for the period ended June 30, 2006, which accompanies this certification, fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and that the information contained in such periodic report fairly presents, in all material respects, the financial condition of the Company at the end of such period and the results of operations of the Company for such period.  The foregoing certification is made pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. Section 1350) and no purchaser or seller of securities or any other person shall be entitled to rely upon the foregoing certification for any purpose.  The undersigned expressly disclaim any obligation to update the foregoing certification except as required by law.

By:	/s/ WAYNE H. DEITRICH	By:	/s/ PETER J. THOMPSON
	Wayne H. Deitrich		Peter J. Thompson
	Chairman of the Board and		Chief Financial Officer and
	Chief Executive Officer		Treasurer
	August 8, 2006	August 8, 2006

A signed original of this written statement required by Section 906 of the Sarbanes-Oxley Act of 2002 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.

The foregoing certification is being furnished as an exhibit to the Report pursuant to Item 601(b)(32) of Regulation S-K and Section 1350 of Title 18 of the United States Code and, accordingly, is not being filed with the Securities and Exchange Commission as part of the Report and is not incorporated by reference into any filing of the Company under the Securities Act of 1933 or the Securities Exchange Act of 1934 (whether made before or after the date of the Report, irrespective of any general incorporation language contained in such filing).