Exhibit 10.2

 

THIS NOTE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED,
AND MAY NOT BE SOLD OR OTHERWISE TRANSFERRED IN THE ABSENCE OF SUCH REGISTRATION
OR AN EXEMPTION THEREFROM UNDER SUCH ACT.

 

THIS INSTRUMENT AND THE RIGHTS AND OBLIGATIONS EVIDENCED HEREBY ARE SUBORDINATED
TO THE PRIOR PAYMENT OF CERTAIN OBLIGATIONS OF THE OBLIGOR TO THE HOLDERS OF
SENIOR INDEBTEDNESS (AS DEFINED HEREIN).

 

THIS INSTRUMENT AND THE RIGHTS AND OBLIGATIONS EVIDENCED HEREBY ARE SUBJECT TO
RIGHTS OF CANCELLATION AND SETOFF AS SET FORTH IN SECTION 3.6 HEREOF AND
AMENDMENT, WAIVER OR CONSENT BY THE SELLERS’ REPRESENTATIVE AS SET FORTH IN
SECTION 8.1 HEREOF.

 

THIS NOTE MAY NOT BE TRANSFERRED EXCEPT AS PERMITTED IN SECTION 5.1 HEREOF.

 

NO:   S-1

 

CELLU TISSUE HOLDINGS, INC.

 

Subordinated Note Due July 2, 2011

 

$6,300,000.00

 

July 2, 2008

 

Original Holder: ATLANTIC PAPER & FOIL CORP. OF NY.

 

FOR VALUE RECEIVED, the undersigned, Cellu Tissue Holdings, Inc., a Delaware
corporation (the “Company”), hereby promises to pay to the order of Atlantic
Paper & Foil Corp. of N.Y. or its registered and permitted assigns (such
original payee or any successor or permitted assignee from time to time, each a
“Noteholder”), on July 2, 2011 (the “Maturity Date”), at the address specified
in the Noteholder Register for such Noteholder (as may be updated pursuant to
Section 9.10 hereof), $6,300,000.00 (subject to adjustment as provided herein)
and to pay interest on the unpaid principal amount of this Note as provided in
Section 2 hereof.

 

1.             THE NOTE

 

This Note (this “Note”) is issued pursuant to and in accordance with the Asset
Purchase Agreement, dated as of July 2, 2008 among the Company, Atlantic Paper &
Foil Corp of N.Y., Atlantic Lakeside Properties, LLC, Atlantic Paper & Foil LLC,
Atlantic Paper & Foil of Georgia LLC and Consumer Licensing Corporation (as from
time to time in effect, the “Asset Purchase Agreement”).  This Note, together
with all other subordinated notes which may be issued

 

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hereunder as a result of any transfer or assignment permitted hereunder (and any
notes issued in exchange therefor), are collectively referred to herein as the
“Notes”, and the holders of Notes are collectively referred to herein as the
“Noteholders.”  Capitalized terms used in this Note have the meanings ascribed
thereto herein or in Schedule A attached hereto.

 

2.             INTEREST PROVISIONS

 

Any remaining unpaid principal amount owed under this Note bears interest at an
annual rate equal to 12.0% of such principal amount outstanding from time to
time, and is payable quarterly in arrears on each March 31, June 30,
September 30 and December 31 (each an “Interest Payment Date”) and on the
Maturity Date, with the first such payment due on September 30,  2008. 
Notwithstanding the foregoing, the interest rate shall increase to the “Default
Rate” (as defined below) on the following dates and the Default Rate shall
continue in effect until such time as no Event of Default is then continuing or
all Events of Default have been waived in writing by the Sellers’
Representative: (a) on any Interest Payment Date on which any interest then due
on this Note shall not be paid in full unless all such interest not so paid when
due is paid within 10 days following such Interest Payment Date; (b) on the
Maturity Date or any Refinancing Repayment Event if any portion of the remaining
principal shall not be then repaid; and (c) upon the occurrence of any other
Event of Default.  For purposes of this Note, the “Default Rate” shall be 15%
per annum.  On each Interest Payment Date, subject to the provisions of
Section 7 (including Schedule B), the Company shall pay the accrued and unpaid
interest on this Note in cash.  Notwithstanding any provisions of this Note, in
no event will the amount of interest paid or agreed to be paid by the Company
exceed an amount computed at the highest rate of interest permissible under
applicable law.

 

3.             PAYMENT PROVISIONS

 

The Company covenants that so long as this Note is outstanding:

 

3.1.               PAYMENT AT MATURITY OR REFINANCING REPAYMENT EVENT.  ON THE
MATURITY DATE, ON ANY ACCELERATED MATURITY OF THIS NOTE PURSUANT TO THE TERMS
HEREOF OR UPON ANY REFINANCING REPAYMENT EVENT, THE COMPANY WILL PAY THE
PRINCIPAL AMOUNT OF THIS NOTE THEN OWING, TOGETHER WITH ALL ACCRUED AND UNPAID
INTEREST THEREON.

 

3.2.               OPTIONAL REDEMPTION.  AT ANY TIME AND FROM TIME TO TIME, THE
COMPANY MAY PREPAY OR REDEEM ANY OR ALL NOTES, IN WHOLE OR IN PART, AT ANY TIME
WITHOUT PREMIUM OR PENALTY AT A PRICE EQUAL TO 100% OF THE PRINCIPAL AMOUNT OF
THE NOTE SO PREPAID OR REDEEMED, TOGETHER WITH ALL ACCRUED AND UNPAID INTEREST
THEREON.  ANY PARTIAL REDEMPTION SHALL BE ALLOCATED AS AMONG THE VARIOUS NOTES
ON A PRO RATA BASIS BASED ON THEIR THEN OUTSTANDING PRINCIPAL AMOUNT AT THE TIME
OF SUCH PARTIAL REDEMPTION.

 

3.3.               NOTICE OF OPTIONAL REDEMPTION.  NOTICE OF EACH OPTIONAL
REPAYMENT OR REDEMPTION OF THIS NOTE PURSUANT TO SECTION 3.2 HEREOF MUST BE
GIVEN IN ACCORDANCE WITH SECTION 9.1 HEREOF NOT FEWER THAN THREE BUSINESS DAYS
BEFORE THE REPAYMENT OR REDEMPTION DATE, IN EACH CASE BY MAILING TO THE
NOTEHOLDER A NOTICE OF INTENTION TO REPAY OR REDEEM, WHICH SUCH NOTICE MUST
SPECIFY THE DATE OF REPAYMENT OR REDEMPTION, THE PRINCIPAL AMOUNT OF THIS NOTE
TO BE REPAID

 

2

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OR REDEEMED ON SUCH DATE, AND THE ACCRUED AND UNPAID INTEREST APPLICABLE TO THE
PORTION OF THE NOTE SUBJECT TO SUCH REPAYMENT OR REDEMPTION.

 

3.4.               PAYMENT AND INTEREST CUT-OFF.  UPON EACH VOLUNTARY PREPAYMENT
OR REDEMPTION OF ANY OF THE NOTES, IN WHOLE OR IN PART, THE COMPANY WILL PAY TO
THE NOTEHOLDER THE AMOUNT OF THE NOTE TO BE PREPAID OR REDEEMED, AS SET FORTH IN
THE NOTICE DELIVERED PURSUANT TO SECTION 3.3 HEREOF, TOGETHER WITH UNPAID
INTEREST IN RESPECT THEREOF ACCRUED TO AND INCLUDING THE REPAYMENT OR REDEMPTION
DATE (THE “REDEMPTION PRICE”).  ON THE PREPAYMENT OR REDEMPTION DATE, IF
REQUESTED BY THE COMPANY, THE NOTEHOLDER WILL DELIVER THIS NOTE TO THE COMPANY
FOR NOTATION THEREON OF THE AMOUNT OF PRINCIPAL SO PREPAID OR REDEEMED, AND IN
CONSIDERATION THEREFOR, THE COMPANY SHALL PROMPTLY DELIVER (X) THE REDEMPTION
PRICE TO SUCH NOTEHOLDER, WHICH WILL BE PAYABLE BY WIRE TRANSFER OF IMMEDIATELY
AVAILABLE FUNDS TO AN ACCOUNT DESIGNATED WITH REASONABLE ADVANCE NOTICE BY SUCH
NOTEHOLDER OR BY CHECK IF REQUESTED BY THE NOTEHOLDER AND (Y) IN THE CASE OF A
PARTIAL REDEMPTION, A REPLACEMENT NOTE REFLECTING THE REMAINING OUTSTANDING
PRINCIPAL AMOUNT AFTER GIVING EFFECT TO THE PREPAYMENT OR REDEMPTION.

 

3.5.           APPLICATION OF PAYMENTS.  ALL PAYMENTS MADE BY THE COMPANY
HEREUNDER MUST BE APPLIED:  (I) FIRST, TO THE PAYMENT IN FULL OF ACCRUED AND
UNPAID INTEREST AND (II) SECOND, TO THE REDUCTION OF UNPAID PRINCIPAL.

 

3.6.           CANCELLATION; OFFSET.  FOR SO LONG AS THIS NOTE IS OUTSTANDING,
NOTWITHSTANDING ANYTHING TO THE CONTRARY IN THIS NOTE, THE COMPANY MAY CANCEL
ALL OR A PORTION OF THIS NOTE TO SATISFY AMOUNTS DUE TO THE COMPANY OR ANY BUYER
INDEMNIFIED PERSON UNDER SECTIONS 2.5 OR SECTION 8 OF THE ASSET PURCHASE
AGREEMENT.  THE COMPANY, IN ITS SOLE DISCRETION, MAY ELECT BY WRITTEN NOTICE TO
THE NOTEHOLDER TO CAUSE ANY SUCH CANCELLATION TO BE APPLIED ON A
DOLLAR-FOR-DOLLAR BASIS TO (I) THE PAYMENT OF ACCRUED AND UNPAID INTEREST,
(II) THE PAYMENT OF INTEREST WHICH WILL ACCRUE IN THE FUTURE AND (III) TO THE
REDUCTION OF OUTSTANDING PRINCIPAL, OR ANY COMBINATION OF THE FOREGOING
(PROVIDED THAT THE COMPANY MAKES THE SAME ELECTION AS TO ALL NOTES AND THAT ANY
SUCH OFFSET SHALL BE MADE AGAINST ALL NOTES PRO RATA BASED ON THEIR RESPECTIVE
OUTSTANDING PRINCIPAL AMOUNTS AT THE TIME OF SUCH OFFSET).  TO THE EXTENT THE
COMPANY CANCELS ALL OR A PORTION OF THIS NOTE, (X) THE NOTEHOLDER SHALL BE
OBLIGATED TO REPAY TO THE COMPANY THE AMOUNT OF ANY AND ALL INTEREST THAT HAS
ACCRUED (AT THE RATE OF INTEREST SET FORTH IN SECTION 2) AND BEEN PAID ON AN
AMOUNT OF PRINCIPAL EQUAL IN THE AGGREGATE TO THE AMOUNT OF SUCH CANCELLATION
FROM THE ORIGINAL DATE OF ISSUANCE OF THIS NOTE TO THE DATE OF SUCH CANCELLATION
AND, IN ORDER TO SATISFY SUCH REPAYMENT OBLIGATION OF THE NOTEHOLDER, THE
COMPANY MAY, IN ITS SOLE DISCRETION, ELECT BY WRITTEN NOTICE TO THE NOTEHOLDER
EITHER TO INCREASE THE AMOUNT OF SUCH CANCELLATION BY THE AMOUNT OF SUCH
INTEREST OR REQUIRE THE NOTEHOLDER TO PAY BACK TO THE COMPANY ALL SUCH INTEREST
IN CASH (WHETHER OR NOT THE NOTEHOLDER WAS THE HOLDER OF THE NOTE AT THE TIME
SUCH INTEREST WAS PAID) IN WHICH EVENT THE NOTEHOLDER SHALL REPAY SUCH CASH
AMOUNT TO THE COMPANY WITHIN FIVE (5) BUSINESS DAYS OF SUCH NOTICE AND (Y) THE
COMPANY SHALL BE RELIEVED OF THE OBLIGATION TO PAY ANY AND ALL INTEREST THAT HAS
ACCRUED BUT NOT YET BEEN PAID ON AN AMOUNT OF PRINCIPAL OF THE NOTE EQUAL IN THE
AGGREGATE TO SUCH AMOUNT FROM THE DATE OF ISSUANCE OF THE NOTE UNTIL THE DATE OF
SATISFACTION OF SUCH AMOUNT.  IF THIS NOTE IS TRANSFERRED IN ACCORDANCE WITH THE
TERMS HEREOF, IT WILL CONTINUE TO BE SUBJECT TO THE PROVISIONS OF THIS
SECTION 3.6 (WHETHER OR NOT THE TRANSFEREE IS A SELLER UNDER THE ASSET PURCHASE
AGREEMENT).  IN NO EVENT SHALL THE SUM OF (A) THE AGGREGATE AMOUNT OF PRINCIPAL
AND INTEREST WITH RESPECT TO THIS NOTE CANCELLED BY THE COMPANY BY OPERATION OF
THIS SECTION 3.6

 

3

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AND (B) THE AGGREGATE AMOUNT OF PRINCIPAL AND INTEREST WITH RESPECT TO ALL OTHER
NOTES CANCELLED BY THE COMPANY BY OPERATION OF SECTION 3.6 THEREOF EXCEED
$2,500,000.00.

 

3.7.           PAYMENTS SUBJECT TO SUBORDINATION.  NOTWITHSTANDING THE FOREGOING
PROVISIONS OF THIS SECTION 3, NO CASH PAYMENT OF INTEREST OR PRINCIPAL OR ANY
OTHER AMOUNTS PAYABLE UNDER THIS SECTION 3 SHALL BE MADE AT ANY TIME WHEN THE
PAYMENT THEREOF IS PROHIBITED BY THE PROVISIONS OF SECTION 7 (INCLUDING SCHEDULE
B) HEREOF.

 

4.             DEFAULTS

 

4.1.               AN “EVENT OF DEFAULT” WILL EXIST IF ANY OF THE FOLLOWING
CONDITIONS OR EVENTS OCCURS AND IS CONTINUING:

 

4.1.1.            THE COMPANY (I) DEFAULTS IN THE PAYMENT, WHEN DUE, OF ANY
PRINCIPAL AMOUNT, WHEN DUE, OR (II) DEFAULTS IN THE PAYMENT OF ANY PORTION OF
THE INTEREST OBLIGATIONS UNDER SECTION 2 WHEN DUE AND SUCH DEFAULT IS NOT
REMEDIED WITHIN 10 DAYS AFTER THE SAME BECOMES DUE AND PAYABLE; OR

 

4.1.2.            THE COMPANY (I) FILES, OR CONSENTS BY ANSWER OR OTHERWISE TO
THE FILING AGAINST IT OF, A PETITION FOR RELIEF OR REORGANIZATION, (II) MAKES AN
ASSIGNMENT FOR THE BENEFIT OF ITS CREDITORS, (III) CONSENTS TO THE APPOINTMENT
OF A CUSTODIAN, RECEIVER, TRUSTEE OR OTHER OFFICER WITH SIMILAR POWERS WITH
RESPECT TO IT OR WITH RESPECT TO ANY SUBSTANTIAL PART OF ITS PROPERTY, (IV) IS
ADJUDICATED AS INSOLVENT OR TO BE LIQUIDATED OR (V) TAKES CORPORATE ACTION FOR
THE PURPOSE OF APPROVING A REORGANIZATION WITH RESPECT TO THE COMPANY OR ANY OF
THE FOREGOING; OR

 

4.1.3.            A GOVERNMENTAL AUTHORITY ENTERS AN ORDER APPOINTING, WITHOUT
CONSENT BY THE COMPANY, A CUSTODIAN, RECEIVER, TRUSTEE OR OTHER OFFICER WITH
SIMILAR POWERS WITH RESPECT TO IT OR WITH RESPECT TO ANY SUBSTANTIAL PART OF ITS
PROPERTY, OR CONSTITUTING AN ORDER FOR RELIEF OR APPROVING A PETITION FOR
REORGANIZATION, OR ANY SUCH PETITION IS FILED AGAINST THE COMPANY AND SUCH
PETITION IS NOT DISMISSED WITHIN 60 DAYS; OR

 

4.1.4.            THE COMPANY INCREASES THE AGGREGATE PRINCIPAL AMOUNT
OUTSTANDING UNDER THE CREDIT AGREEMENTS TO IN EXCESS OF $305 MILLION; OR

 

4.1.5.            ANY CREDIT AGREEMENT AT ANY TIME CONTAINS A PROVISION THAT
PROHIBITS OR LIMITS CASH PAYMENTS UNDER SECTION 2 OR 3.1 HEREOF OF INTEREST OR
PRINCIPAL ON THIS NOTE WHEN SUCH PAYMENTS BECOME DUE (IT BEING ACKNOWLEDGED AND
AGREED THAT THE CREDIT AGREEMENTS MAY CONTAIN PROVISIONS WHICH REQUIRE
SUBORDINATION OF SUCH PAYMENTS TO THE EXTENT SET FORTH IN SECTION 3.7, SECTION 7
AND SCHEDULE B OF THIS NOTE, AND, IN EACH CASE, THE EXISTENCE OF SUCH PROVISIONS
AND THEIR APPLICATION TO SUCH PAYMENTS SHALL NOT CONSTITUTE AN EVENT OF DEFAULT
UNDER THIS SECTION 4.1.5); OR

 

4.1.6.            THE COMPANY OR ANY OF ITS SUBSIDIARY PARTIES THERETO (A) SHALL
DEFAULT IN THE TIMELY PAYMENT OF RENT WHEN DUE ON MORE THAN SEVEN OCCASIONS IN
AGGREGATE FOR ALL LEASES OVER ANY PERIOD OF TWELVE CONSECUTIVE MONTHS, (B) SHALL
FAIL TO MAKE ANY PAYMENT OF OVERDUE RENT UNDER ANY OF THE LEASES WITHIN TEN
CALENDAR DAYS AFTER RECEIVING NOTICE THEREOF FROM THE LESSOR AS PROVIDED IN THE
APPLICABLE LEASE OR (C)  SHALL DEFAULT IN THE PAYMENT OF PURCHASE PRICE PAYABLE
UNDER ANY OF THE LEASES.

 

4

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4.2.               ACCELERATION.  UPON THE OCCURRENCE AND DURING THE CONTINUANCE
OF ANY EVENT OF DEFAULT SPECIFIED IN SECTION 4.1.2  OR SECTION 4.1.3, THIS NOTE
WILL AUTOMATICALLY BECOME IMMEDIATELY DUE AND PAYABLE.  UPON THE OCCURRENCE AND
DURING THE CONTINUANCE OF ANY EVENT OF DEFAULT OF THE TYPE SPECIFIED IN
SECTION 4.1.1, 4.1.4, 4.1.5 OR 4.1.6, SUBJECT TO SECTION 7 OF THIS NOTE
(INCLUDING SCHEDULE B), THE SELLERS’ REPRESENTATIVE MAY DECLARE THIS NOTE
IMMEDIATELY DUE AND PAYABLE BY PROVIDING WRITTEN NOTICE THEREOF TO THE COMPANY. 
INTEREST ON THE OUTSTANDING PRINCIPAL AMOUNT WILL CONTINUE TO ACCRUE AT THE
DEFAULT RATE DURING ANY PERIOD IN WHICH AN EVENT OF DEFAULT EXISTS PURSUANT TO
SECTION 2 HEREOF.

 

5.             TRANSFER AND REPLACEMENTS OF NOTES

 

5.1.               TRANSFER OF NOTES.  NO NOTEHOLDER MAY TRANSFER ALL OR ANY
PORTION OF THE NOTES HELD BY SUCH NOTEHOLDER, EXCEPT AS SET FORTH IN THIS
SECTION 5.

 

5.2.               PERMITTED TRANSFERS.

 

5.2.1.            ANY NOTEHOLDER TO WHOM ANY NOTES ARE ISSUED IN CONNECTION WITH
THE CLOSING UNDER THE ASSET PURCHASE AGREEMENT MAY TRANSFER ANY OF THE NOTES
HELD BY SUCH NOTEHOLDER, AS A GIFT, TO AN INDIVIDUAL OWNER OR A MEMBER OF THE
IMMEDIATE FAMILY OF AN INDIVIDUAL OWNER FOR NO CONSIDERATION.

 

5.2.2.            THIS NOTE MAY NOT BE TRANSFERRED IN DENOMINATIONS OF LESS THAN
$50,000; PROVIDED THAT IF NECESSARY TO ENABLE THE REGISTRATION OF A PERMITTED
TRANSFER BY A NOTEHOLDER OF ITS ENTIRE HOLDING OF NOTES, ONE NOTE MAY BE IN A
DENOMINATION OF LESS THAN $50,000.

 

5.2.3.            THE COMPANY AGREES TO PROMPTLY REGISTER THE TRANSFER OF THIS
NOTE MADE IN ACCORDANCE WITH THIS SECTION 5 IN THE NOTEHOLDER REGISTER UPON
WRITTEN REQUEST OF THE NOTEHOLDER.  NO TRANSFER OR ATTEMPTED TRANSFER IS
EFFECTIVE UNTIL ENTERED ON THE BOOKS AND RECORDS MAINTAINED BY THE COMPANY.  ANY
TRANSFER IN CONTRAVENTION OF ANY OF THE PROVISIONS OF THIS NOTE IS VOID AND OF
NO EFFECT AND WILL NOT BIND NOR BE RECOGNIZED BY THE COMPANY.

 

5.2.4.            IN NO EVENT MAY ALL OR ANY PART OF THIS NOTE BE TRANSFERRED TO
A MINOR OR AN INCOMPETENT EXCEPT IN TRUST OR PURSUANT TO THE UNIFORM GIFTS TO
MINORS ACT OR BY WILL OR THE LAWS OF DESCENT AND DISTRIBUTION (IN WHICH EVENT
ALL REASONABLE EFFORTS WILL BE MADE BY THE EXECUTOR OF THE ESTATE OF SUCH
NOTEHOLDER TO HAVE SUCH NOTE PLACED IN A TRUST FOR THE BENEFIT OF THE
TRANSFEREE).

 

5.2.5.            UPON SURRENDER OF ANY NOTE AT THE PRINCIPAL EXECUTIVE OFFICE
OF THE COMPANY FOR REGISTRATION OF A PERMISSIBLE TRANSFER, DULY ENDORSED OR
ACCOMPANIED BY A WRITTEN INSTRUMENT OF TRANSFER DULY EXECUTED BY THE REGISTERED
NOTEHOLDER AND ACCOMPANIED BY THE ADDRESS FOR NOTICES OF EACH TRANSFEREE OF SUCH
NOTE OR PART THEREOF, THE COMPANY SHALL EXECUTE AND DELIVER, AT THE EXPENSE OF
THE COMPANY (EXCEPT AS PROVIDED BELOW), ONE OR MORE NEW NOTES (AS REQUESTED BY
THE NOTEHOLDER THEREOF) IN EXCHANGE THEREFOR, IN AN AGGREGATE PRINCIPAL AMOUNT
EQUAL TO THE UNPAID PRINCIPAL AMOUNT OF THE SURRENDERED NOTE.  EACH SUCH NEW
NOTE WILL BE DATED AND BEAR INTEREST FROM THE DATE TO WHICH INTEREST HAS BEEN
PAID ON THE SURRENDERED NOTE OR DATED THE DATE OF THE SURRENDERED NOTE IF NO
INTEREST HAS HAVE BEEN PAID THEREON.  THE COMPANY MAY REQUIRE PAYMENT (OR
REASONABLY SATISFACTORY EVIDENCE OF PAYMENT) OF A SUM SUFFICIENT TO COVER ANY
STAMP TAX OR GOVERNMENTAL CHARGE IMPOSED IN RESPECT OF ANY SUCH TRANSFER OF
NOTES.

 

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5.3.               REPLACEMENT OF NOTES.  UPON RECEIPT BY THE COMPANY OF
EVIDENCE REASONABLY SATISFACTORY TO IT OF THE OWNERSHIP OF AND THE LOSS, THEFT,
DESTRUCTION OR MUTILATION OF ANY NOTE, AND, IN THE CASE OF LOSS, THEFT OR
DESTRUCTION, OF INDEMNITY REASONABLY SATISFACTORY TO IT, OR, IN THE CASE OF
MUTILATION, UPON SURRENDER AND CANCELLATION THEREOF, THE COMPANY SHALL, AT ITS
OWN EXPENSE, EXECUTE AND DELIVER, IN LIEU THEREOF, A NEW NOTE, DATED AND BEARING
INTEREST FROM THE DATE TO WHICH INTEREST HAS BEEN PAID ON SUCH LOST, STOLEN,
DESTROYED OR MUTILATED NOTE OR DATED THE DATE OF SUCH LOST, STOLEN, DESTROYED OR
MUTILATED NOTE IF NO INTEREST HAS BEEN PAID THEREON.

 

6.             REPRESENTATIONS AND WARRANTIES OF THE COMPANY

 

The Company represents and warrants as of the date of this Note that:

 

6.1.               ORGANIZATION; POWER AND AUTHORITY.  THE COMPANY IS A
CORPORATION DULY ORGANIZED, VALIDLY EXISTING AND IN GOOD STANDING UNDER THE LAWS
OF THE STATE OF DELAWARE.  THE COMPANY HAS THE REQUISITE POWER AND AUTHORITY TO
TRANSACT THE BUSINESS IT TRANSACTS AND PROPOSES TO TRANSACT, AND TO EXECUTE AND
DELIVER THIS NOTE.

 

6.2.               AUTHORIZATION, ETC.  THIS NOTE HAS BEEN DULY AUTHORIZED BY
ALL NECESSARY CORPORATE ACTION ON THE PART OF THE COMPANY, AND THIS NOTE
CONSTITUTES A LEGAL, VALID AND BINDING OBLIGATION OF THE COMPANY ENFORCEABLE
AGAINST THE COMPANY IN ACCORDANCE WITH ITS TERMS.

 

6.3.               NON-CONTRAVENTION.  THE EXECUTION, DELIVERY AND PERFORMANCE
BY THE COMPANY OF THIS NOTE WILL NOT (I) CONTRAVENE, RESULT IN ANY BREACH OF, OR
CONSTITUTE A DEFAULT UNDER ITS CERTIFICATE OF INCORPORATION OR BYLAWS OR
(II) VIOLATE ANY PROVISION OF ANY MATERIAL STATUTE OR OTHER RULE OR REGULATION
OF ANY GOVERNMENTAL AUTHORITY APPLICABLE TO THE COMPANY OR ANY MATERIAL DEBT
AGREEMENT OR OTHER MATERIAL AGREEMENT OF THE COMPANY, INCLUDING WITHOUT
LIMITATION ANY OF THE CREDIT AGREEMENTS AS IN EFFECT AT THE DATE OF THIS NOTE,
COMPLETE AND ACCURATE COPIES OF WHICH HAVE BEEN PROVIDED TO THE SELLER’S
REPRESENTATIVE.

 

6.4.               GOVERNMENTAL AUTHORIZATIONS, ETC.  NO CONSENT, APPROVAL OR
AUTHORIZATION OF, OR REGISTRATION, FILING OR DECLARATION WITH, ANY GOVERNMENTAL
AUTHORITY IS REQUIRED IN CONNECTION WITH THE EXECUTION, DELIVERY OR PERFORMANCE
BY THE COMPANY OF THIS NOTE.

 

7.             SUBORDINATION

 

Notwithstanding any provision of this Note to the contrary, this Note and the
rights and obligations evidenced hereby are subordinate and junior to the prior
payment in full of all other Senior Indebtedness of the Company, and are subject
to the subordination provisions set forth in Schedule B hereto.  Each of the
Company and the Noteholder, by its acceptance hereof, covenants that each of
them will comply with the provisions of Schedule B hereto.

 

8.             AMENDMENT AND WAIVER

 

8.1.               REQUIREMENTS.  THIS NOTE MAY BE AMENDED, AND THE OBSERVANCE
OF THIS NOTE MAY BE WAIVED (EITHER RETROACTIVELY OR PROSPECTIVELY) ONLY AS
FOLLOWS:

 

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(A)  IN THE CASE OF A WAIVER OR CONSENT AFFECTING ONLY THIS NOTE, BY A WRITTEN
WAIVER OR CONSENT SIGNED BY THE PARTY AGAINST WHOM THE WAIVER IS TO BE ENFORCED;

 

(B)  IN THE CASE OF A WAIVER OR CONSENT AFFECTING ALL NOTES, BY A WRITTEN WAIVER
OR CONSENT SIGNED, IN THE CASE OF A WAIVER OR CONSENT TO BE ENFORCED AGAINST THE
COMPANY, BY THE COMPANY, AND IN THE CASE OF A WAIVER OR CONSENT TO BE ENFORCED
AGAINST THE NOTEHOLDERS, BY THE SELLERS’ REPRESENTATIVE;

 

(C)  IN THE CASE OF AN AMENDMENT AFFECTING ONLY THIS NOTE, BY A WRITTEN
INSTRUMENT SIGNED BY THE COMPANY AND THE NOTEHOLDER; AND

 

(D)  IN THE CASE OF AN AMENDMENT AFFECTING ALL NOTES, BY A WRITTEN AMENDMENT
SIGNED BY THE COMPANY AND THE SELLERS’ REPRESENTATIVE.

 

8.2.               DELIVERY OF AMENDMENTS.  THE COMPANY WILL DELIVER TRUE AND
CORRECT COPIES OF EACH EXECUTED AMENDMENT, WAIVER OR CONSENT EFFECTED PURSUANT
TO THE PROVISIONS OF THIS SECTION 8 THAT HAS BEEN CONSENTED TO BY THE SELLERS’
REPRESENTATIVE AND NOT BEEN SIGNED BY THE NOTEHOLDER TO THE NOTEHOLDER PROMPTLY
(BUT IN NO EVENT LATER THAN 15 BUSINESS DAYS) FOLLOWING THE DATE ON WHICH IT IS
EXECUTED AND DELIVERED.

 

8.3.               BINDING EFFECT, ETC.   THIS NOTE SHALL HAVE NO EFFECT UNTIL
IT HAS BEEN COUNTERSIGNED BY THE NOTEHOLDER AND A COUNTERSIGNED COPY OF THE NOTE
HAS BEEN DELIVERED TO THE COMPANY.  ANY AMENDMENT, WAIVER OR CONSENT CONSENTED
TO AS PROVIDED IN THIS SECTION 8 THAT IS SPECIFIED TO APPLY EQUALLY TO ALL
NOTEHOLDERS WILL APPLY EQUALLY TO ALL NOTEHOLDERS AND BE BINDING UPON EACH OF
THEM AND UPON EACH FUTURE NOTEHOLDER AND UPON THE COMPANY WITHOUT REGARD TO
WHETHER SUCH NOTE HAS BEEN MARKED TO INDICATE SUCH AMENDMENT OR WAIVER.  NO SUCH
AMENDMENT OR WAIVER WILL EXTEND TO OR AFFECT ANY OBLIGATION, COVENANT,
AGREEMENT, DEFAULT OR EVENT OF DEFAULT NOT EXPRESSLY AMENDED OR WAIVED OR IMPAIR
ANY RIGHT CONSEQUENT THEREON.  NO COURSE OF DEALING BETWEEN THE COMPANY AND THE
NOTEHOLDERS NOR ANY DELAY IN EXERCISING ANY RIGHTS HEREUNDER OR UNDER ANY NOTE
WILL OPERATE AS A WAIVER OF ANY RIGHTS OF ANY NOTEHOLDER.

 

9.             MISCELLANEOUS

 

9.1.          NOTICES.  ALL NOTICES, REQUESTS, DEMANDS, CLAIMS AND OTHER
COMMUNICATIONS REQUIRED OR PERMITTED TO BE DELIVERED, GIVEN OR OTHERWISE
PROVIDED HEREUNDER MUST BE IN WRITING AND MUST BE DELIVERED, GIVEN OR OTHERWISE
PROVIDED:

 

(A)  BY HAND (IN WHICH CASE, IT WILL BE EFFECTIVE UPON DELIVERY); OR

 

(B)  BY OVERNIGHT DELIVERY BY A NATIONALLY RECOGNIZED COURIER SERVICE (IN WHICH
CASE, IT WILL BE EFFECTIVE ON THE BUSINESS DAY AFTER BEING DEPOSITED WITH SUCH
COURIER SERVICE);

 

in each case, to the address listed below:

 

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If to the Noteholder:

 

c/o Shaun Gabbay

PO Box 222144

Great Neck, NY 11022

Telephone:  (516) 317-7776

 

with a copy to:

 

Skadden, Arps, Slate, Meagher & Flom LLP
Four Times Square
New York, NY 10036
Telephone number:  (212) 735-2524
Attention:  Randall H. Doud

 

and

 

Steve Cohn, PC
One Old Country Road
Carle Place, NY 11514
Telephone:  (516) 294-6410

 

If to the Company, to it at:

 

Cellu Tissue Holdings, Inc.
1855 Lockeway Drive
Suite 501
Alpharetta, GA 30004
Telephone number:  (678) 393-2651
Attention:  Russell Taylor

 

with a copy to:

 

Ropes & Gray LLP
1211 Avenue of the Americas
New York, NY 10036-8704
Telephone number:  (212) 841-0697
Attention:  Christopher C. Henry

 

and

 

Weston Presidio
Pier 1, Bay 2
San Francisco, CA 94111
Telephone number:  (415) 398-0770
Attention:  R. Sean Honey, Therese Mrozek and Jim Morrone

 

Each of the Noteholder and the Company may specify a different address for
itself by giving notice in accordance with this Section 9.1 to each of the other
parties hereto.

 

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Written notices to the holders of Senior Indebtedness shall be made as specified
in Schedule C attached hereto.

 

9.2.          JURISDICTION; VENUE; SERVICE OF PROCESS.

 

9.2.1.            JURISDICTION.  THE NOTEHOLDER AND THE COMPANY (A) HEREBY
IRREVOCABLY SUBMITS TO THE EXCLUSIVE JURISDICTION OF THE STATE COURTS OF THE
STATE OF NEW YORK OR THE UNITED STATES DISTRICT COURT LOCATED IN THE SOUTHERN
DISTRICT OF THE STATE OF NEW YORK FOR THE PURPOSE OF ANY ACTION BETWEEN THE
PARTIES ARISING IN WHOLE OR IN PART UNDER OR IN CONNECTION WITH THIS NOTE,
(B) HEREBY WAIVES TO THE EXTENT NOT PROHIBITED BY APPLICABLE LAW, AND AGREES NOT
TO ASSERT, BY WAY OF MOTION, AS A DEFENSE OR OTHERWISE, IN ANY SUCH ACTION, ANY
CLAIM THAT IT IS NOT SUBJECT PERSONALLY TO THE JURISDICTION OF THE ABOVE-NAMED
COURTS, THAT ITS PROPERTY IS EXEMPT OR IMMUNE FROM ATTACHMENT OR EXECUTION, THAT
ANY SUCH ACTION BROUGHT IN ONE OF THE ABOVE-NAMED COURTS SHOULD BE DISMISSED ON
GROUNDS OF FORUM NON CONVENIENS, SHOULD BE TRANSFERRED OR REMOVED TO ANY COURT
OTHER THAN ONE OF THE ABOVE-NAMED COURTS, OR SHOULD BE STAYED BY REASON OF THE
PENDENCY OF SOME OTHER PROCEEDING IN ANY OTHER COURT OTHER THAN ONE OF THE
ABOVE-NAMED COURTS, OR THAT THIS NOTE OR THE SUBJECT MATTER HEREOF MAY NOT BE
ENFORCED IN OR BY SUCH COURT AND (C) HEREBY AGREES NOT TO COMMENCE ANY SUCH
ACTION OTHER THAN BEFORE ONE OF THE ABOVE-NAMED COURTS.  NOTWITHSTANDING THE
PREVIOUS SENTENCE A PARTY MAY COMMENCE ANY ACTION IN A COURT OTHER THAN THE
ABOVE-NAMED COURTS SOLELY FOR THE PURPOSE OF ENFORCING AN ORDER OR JUDGMENT
ISSUED BY ONE OF THE ABOVE-NAMED COURTS.

 

9.2.2.            VENUE.  THE NOTEHOLDER AND THE COMPANY AGREE THAT FOR ANY
ACTION BETWEEN THE PARTIES ARISING IN WHOLE OR IN PART UNDER OR IN CONNECTION
WITH THIS NOTE, SUCH PARTY BRING ACTIONS ONLY IN THE BOROUGH OF MANHATTAN.  EACH
PARTY FURTHER WAIVES ANY CLAIM AND WILL NOT ASSERT THAT VENUE SHOULD PROPERLY
LIE IN ANY OTHER LOCATION WITHIN THE SELECTED JURISDICTION.

 

9.3.               SERVICE OF PROCESS.  EACH OF THE NOTEHOLDER AND THE COMPANY
HEREBY (A) CONSENTS TO SERVICE OF PROCESS IN ANY ACTION BETWEEN THE PARTIES
ARISING IN WHOLE OR IN PART UNDER OR IN CONNECTION WITH THIS NOTE IN ANY MANNER
PERMITTED BY NEW YORK LAW, (B) AGREES THAT SERVICE OF PROCESS MADE IN ACCORDANCE
WITH CLAUSE (A) OR MADE BY REGISTERED OR CERTIFIED MAIL, RETURN RECEIPT
REQUESTED, AT ITS ADDRESS SPECIFIED PURSUANT TO SECTION 9.1 (WITH COPY TO ITS
COUNSEL SPECIFIED IN SECTION 9.1 AT THE ADDRESS FOR SUCH COUNSEL SPECIFIED IN
SUCH SECTION), WILL CONSTITUTE GOOD AND VALID SERVICE OF PROCESS IN ANY SUCH
ACTION AND (C) WAIVES AND AGREES NOT TO ASSERT (BY WAY OF MOTION, AS A DEFENSE,
OR OTHERWISE) IN ANY SUCH ACTION ANY CLAIM THAT SERVICE OF PROCESS MADE IN
ACCORDANCE WITH CLAUSE (A) OR (B) DOES NOT CONSTITUTE GOOD AND VALID SERVICE OF
PROCESS.

 

9.4.               GOVERNING LAW.  THIS NOTE, THE RIGHTS OF THE PARTIES AND ALL
ACTIONS ARISING IN WHOLE OR IN PART UNDER OR IN CONNECTION HEREWITH, WILL BE
GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE DOMESTIC SUBSTANTIVE LAWS OF
THE STATE OF NEW YORK, WITHOUT GIVING EFFECT TO ANY CHOICE OR CONFLICT OF LAW
PROVISION OR RULE THAT WOULD CAUSE THE APPLICATION OF THE LAWS OF ANY OTHER
JURISDICTION.

 

9.5.               WAIVER OF JURY TRIAL.  TO THE EXTENT NOT PROHIBITED BY
APPLICABLE LAW THAT CANNOT BE WAIVED, EACH OF THE COMPANY AND

 

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THE NOTEHOLDER HEREBY WAIVE, AND COVENANT THAT THEY WILL NOT ASSERT (WHETHER AS
PLAINTIFF, DEFENDANT OR OTHERWISE), ANY RIGHT TO TRIAL BY JURY IN ANY ACTION
ARISING IN WHOLE OR IN PART UNDER OR IN CONNECTION WITH THIS NOTE, WHETHER NOW
EXISTING OR HEREAFTER ARISING, AND WHETHER SOUNDING IN CONTRACT, TORT OR
OTHERWISE.  THE COMPANY AND THE NOTEHOLDER AGREE THAT EACH OF THEM MAY FILE A
COPY OF THIS PARAGRAPH WITH ANY COURT AS WRITTEN EVIDENCE OF THE KNOWING,
VOLUNTARY AND BARGAINED-FOR AGREEMENT AMONG THE PARTIES IRREVOCABLY TO WAIVE ITS
RIGHT TO TRIAL BY JURY IN ANY PROCEEDING WHATSOEVER BETWEEN THEM RELATING TO
THIS NOTE OR ANY OF THE CONTEMPLATED TRANSACTIONS WILL INSTEAD BE TRIED IN A
COURT OF COMPETENT JURISDICTION BY A JUDGE SITTING WITHOUT A JURY.

 

9.6.               SUCCESSORS AND ASSIGNS.  ALL COVENANTS AND OTHER AGREEMENTS
CONTAINED IN THIS NOTE BY OR ON BEHALF OF ANY OF THE PARTIES HERETO BIND AND
INURE TO THE BENEFIT OF THEIR RESPECTIVE SUCCESSORS AND PERMITTED ASSIGNS
(INCLUDING, WITHOUT LIMITATION, ANY SUBSEQUENT NOTEHOLDER) WHETHER SO EXPRESSED
OR NOT; PROVIDED, THAT THE NOTEHOLDER MAY NOT ASSIGN ITS RIGHTS AND OBLIGATIONS
HEREUNDER EXCEPT PURSUANT TO A TRANSFER PERMITTED BY SECTION 5 HEREOF.

 

9.7.               PAYMENTS DUE ON NON-BUSINESS DAYS.  ANYTHING IN THIS NOTE TO
THE CONTRARY NOTWITHSTANDING, ANY PAYMENT OF PRINCIPAL OF, OR INTEREST ON, ANY
NOTE THAT IS DUE ON A DATE OTHER THAN A BUSINESS DAY MAY BE MADE ON THE NEXT
SUCCEEDING BUSINESS DAY, INCLUDING THE ADDITIONAL DAYS ELAPSED IN THE
COMPUTATION OF THE INTEREST PAYABLE ON SUCH NEXT SUCCEEDING BUSINESS DAY.

 

9.8.               SEVERABILITY.  ANY TERM OR PROVISION OF THIS NOTE THAT IS
INVALID OR UNENFORCEABLE IN ANY SITUATION IN ANY JURISDICTION WILL NOT AFFECT
THE VALIDITY OR ENFORCEABILITY OF THE REMAINING TERMS AND PROVISIONS HEREOF OR
THE VALIDITY OR ENFORCEABILITY OF THE OFFENDING TERM OR PROVISION IN ANY OTHER
SITUATION OR IN ANY OTHER JURISDICTION.  IN THE EVENT THAT ANY PROVISION HEREOF
WOULD, UNDER APPLICABLE LAW, BE INVALID OR UNENFORCEABLE IN ANY RESPECT, EACH
PARTY HERETO INTENDS THAT SUCH PROVISION WILL BE CONSTRUED BY MODIFYING OR
LIMITING IT SO AS TO BE VALID AND ENFORCEABLE TO THE MAXIMUM EXTENT COMPATIBLE
WITH, AND POSSIBLE UNDER, APPLICABLE LAW.

 

9.9.               NO THIRD PARTY BENEFICIARIES.  EXCEPT AS SET FORTH IN
SCHEDULE B HERETO, NOTHING IN THIS NOTE MAY BE DEEMED OR CONSTRUED TO GIVE ANY
PERSON, OTHER THAN THE COMPANY AND THE NOTEHOLDER AND HIS, HER OR ITS RESPECTIVE
PERMITTED SUCCESSORS AND ASSIGNS, ANY LEGAL OR EQUITABLE RIGHTS HEREUNDER.

 

9.10.             NOTEHOLDER REGISTER.  FOR PURPOSES OF DETERMINING THE
NOTEHOLDERS AT ANY TIME, THE COMPANY AND ANY HOLDER OF SENIOR INDEBTEDNESS IS
ENTITLED TO RELY ON THE RECORDS OF THE COMPANY AND, FOR SUCH PURPOSE, THE
COMPANY HEREBY AGREES TO MAINTAIN A REGISTER OF NOTEHOLDERS (THE “NOTEHOLDER
REGISTER”) AT ITS PRINCIPAL OFFICE IN WHICH THE COMPANY SHALL PROVIDE FOR
REGISTRATION AND TRANSFER OF NOTES.  ABSENT DEMONSTRABLE ERROR, THE NOTEHOLDER
REGISTER WILL BE CONCLUSIVE EVIDENCE OF THE OWNERSHIP OF THE NOTEHOLDERS AT ANY
POINT IN TIME.

 

10

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IN WITNESS WHEREOF, the undersigned has caused this Note to be executed by a
duly authorized officer as of the date first written above.

 

 

CELLU TISSUE HOLDINGS, INC.

 

 

 

 

 

By

/s/ Russell C. Taylor

 

Name:

Russell C. Taylor

 

Title:

President and Chief Executive Officer

 

 

Accepted and Agreed:

 

Atlantic Paper & Foil Corp. of N.Y.

 

 

By:

/s/ Shaun Gabbay

 

Name:

Shaun Gabbay

Title:

Secretary

 

11

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SCHEDULE A

 

DEFINED TERMS

 

As used herein, the following terms have the respective meanings set forth
below:

 

“Action” means any claim, action, cause of action or suit (whether in contract
or tort or otherwise), litigation (whether at law or in equity, whether civil or
criminal), controversy, assessment, arbitration, investigation, hearing, charge,
complaint, demand, notice or proceeding to, from, by or before any Governmental
Authority.

 

“Affiliate” means, with respect to any specified Person at any time means,
(a) each Person directly or indirectly controlling, controlled by or under
direct or indirect common control with such specified Person at such time,
(b) each Person who is at such time an officer or director of, or direct or
indirect beneficial holder of at least 20% of any class of the Equity Interests
of, such specified Person, (c) each Person that is managed by a common group of
executive officers and/or directors as such specified Person, (d) the Members of
the Immediate Family (i) of each officer, director or holder described in clause
(b) and (ii) if such specified Person is an individual, of such specified Person
and (e) each Person of which such specified Person or an Affiliate (as defined
in clauses (a) through (d)) thereof will, directly or indirectly, beneficially
own at least 20% of any class of Equity Interests at such time.

 

“Associated Bank Agreement” means the Amended and Restated Reimbursement
Agreement dated as of March 21, 2007 between Cellu Tissue-CityForest LLC
(formerly known as CityForest Corporation) and Associated Bank, National
Association, as the same may be amended, supplemented or otherwise modified from
time to time

 

“Business Day” means any weekday other than a weekday on which banks in New
York, New York are authorized or required to be closed.

 

“Buyer Indemnified Person” shall have the meaning ascribed to such term in the
Asset Purchase Agreement.

 

“Contractual Obligation” means, with respect to any Person, any contract,
agreement, deed, mortgage, lease, license, commitment, promise, undertaking,
arrangement or understanding, whether written or oral and whether express or
implied, or other document or instrument (including any document or instrument
evidencing or otherwise relating to any Indebtedness,) to which or by which such
Person is a party or otherwise subject or bound or to which or by which any
property, business, operation or right of such Person is subject or bound.

 

“Credit Agent” means (i) the “Agent” (if any) as defined in the Senior Credit
Agreement and (ii) in the absence of any such Agent, a “Lender” or the “Lenders”
as defined in the Senior Credit Agreement.

 

“Credit Agreement(s)” means the Senior Credit Agreement, the Indenture,
Associated Bank Agreement, any notes or other instruments issued pursuant to any
of the foregoing, any agreement providing for the replacement or refinancing
thereof (whether or not with the same

 

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agent or lenders), in each case as the same may be amended, modified, extended
or renewed, and any document evidending Senior Indebtedness or entered into or
issued in connection with or issued in connection with the issuance of Senior
Indebtedness.

 

“Equity Interests” means (a) any capital stock, share, partnership or membership
interest, unit of participation or other similar interest (however designated)
in any Person and (b) any option, warrant, purchase right, conversion right,
exchange rights or other Contractual Obligation which would entitle any Person
to acquire any such interest in such Person or otherwise entitle any Person to
share in the equity, profit, earnings, losses or gains of such Person (including
stock appreciation, phantom stock, profit participation or other similar
rights).

 

“Excluded Default” means a default or event of default existing only with
respect to Senior Indebtedness that (a) has an outstanding principal balance of
less than $1,000,000 and is not owing under the Senior Credit Agreement, the
Indenture or the Associated Bank Agreement or any replacement or refinancing of
any thereof or (b) is owing to an Affiliate of the Company.

 

“GAAP” means generally accepted accounting principles as in effect from time to
time in the United States of America and consistently applied across the periods
involved.

 

“Governmental Authority” means any United States federal, state or local or any
foreign government, or political subdivision thereof, or any multinational
organization or authority or any authority, agency or commission entitled to
exercise any administrative, executive, judicial, legislative, police,
regulatory or taxing authority or power, any court or tribunal (or any
department, bureau or division thereof), or any arbitrator or arbitral body.

 

“INDEBTEDNESS” MEANS, WITH RESPECT TO ANY PERSON, WITHOUT DUPLICATION, ALL
OBLIGATIONS (INCLUDING IN RESPECT OF PRINCIPAL, ACCRUED INTEREST, PENALTIES,
FEES AND PREMIUMS) OF SUCH PERSON (I) FOR BORROWED MONEY (INCLUDING OVERDRAFT
FACILITIES TO THE EXTENT DRAWN ON), (II) EVIDENCED BY NOTES, BONDS, DEBENTURES
OR OTHER SIMILAR INSTRUMENTS (OTHER THAN PERFORMANCE, SURETY AND APPEAL BONDS
ARISING IN THE ORDINARY COURSE OF BUSINESS IN RESPECT OF WHICH SUCH PERSON’S
LIABILITY REMAINS CONTINGENT), (III) FOR THE DEFERRED PURCHASE PRICE OF
PROPERTY, GOODS OR SERVICES (OTHER THAN TRADE PAYABLES OR ACCRUALS AND DEFERRED
COMPENSATION ITEMS INCURRED IN THE ORDINARY COURSE OF BUSINESS), (IV) UNDER
LEASES THAT HAVE BEEN, OR SHOULD HAVE BEEN, IN ACCORDANCE WITH GAAP, RECORDED AS
CAPITAL LEASES, TO THE EXTENT REQUIRED TO BE SO RECORDED, (V) IN RESPECT OF
LETTERS OF CREDIT AND BANKERS’ ACCEPTANCES, (VI) RELATING TO INTEREST RATE
PROTECTION, SWAP AGREEMENTS AND COLLAR AGREEMENTS AND (VII) IN THE NATURE OF
GUARANTEES OF THE OBLIGATIONS DESCRIBED IN CLAUSES (I) THROUGH (VI) ABOVE OF ANY
OTHER PERSON.

 

“Indenture” means the Indenture dated as of March 12, 2004, among Cellu Tissue
Holdings, Inc., the Subsidiary Guarantors party thereto and The Bank of New
York, as Trustee, as the same may be amended, supplemented or otherwise modified
from time to time.

 

“Individual Owner” shall have the meaning ascribed to such term in the Asset
Purchase Agreement.

 

“Leases” mean collectively (i) the lease between Atlantic Paper & Foil, Corp. of
N.Y. and Cellu Tissue – Hauppauge, LLC with respect to the real property located
at 325 Kennedy Drive, Hauppauge, New York 11788, (ii) the lease between Atlantic
Long Island Properties, Inc. and

 

A-2

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Cellu Tissue – Hauppauge, LLC with respect to the real property located at 50
Gilpin Avenue, Hauppauge, New York 11788, and (iii) the lease between Atlantic
Lakeside Properties, LLC and Cellu Tissue – Thomaston, LLC with respect to the
property located at 1201 Barnesville Street, Thomaston, Georgia 30286.

 

“Lenders” means the Credit Agent (if applicable) and each lender or noteholder
under each Credit Agreement.

 

“Liability” means, with respect to any Person, any liability or obligation of
such Person whether known or unknown, whether asserted or unasserted, whether
determined, determinable or otherwise, whether absolute or contingent, whether
accrued or unaccrued, whether liquidated or unliquidated, whether incurred or
consequential, whether due or to become due and whether or not required under
GAAP to be accrued on the financial statements of such Person.

 

“Members of the Immediate Family” means, with respect to any individual,
(a) such Person’s spouse, (b) each parent, brother, sister or child of such
Person or such Person’s spouse, (c) the spouse of any Person described in clause
(b) above, (d) each child of any Person described in clauses (a), (b) or
(c) above, (e) each trust created solely for the benefit of one or more of the
Persons described in clauses (a) through (d) above and (f) each custodian or
guardian of any property of one or more of the Persons described in clauses
(a) through (e) above in his capacity as such custodian or guardian.

 

“Non-payment Default” means any event or condition, other than a Payment
Default, that causes, or permits the holder of any Senior Indebtedness to cause,
any Senior Indebtedness to become due and payable prior to its stated maturity;
provided, that “Non-payment Default” shall not include an Excluded Default.

 

“Payment Default” means any default in the payment when due (whether at maturity
or upon acceleration, mandatory prepayment or otherwise) of any Senior
Indebtedness, including any payment of principal, interest, premium, letter of
credit reimbursement obligations, fees, costs, expenses or other amounts;
provided, that “Payment Default” shall not include an Excluded Default.

 

“Permitted Junior Securities” means securities of the Company or any subsidiary
or any other Person that are subordinated in right of payment to all Senior
Indebtedness to substantially the same or greater extent as the Notes are so
subordinated as provided in Schedule B hereto.

 

“Person” means any individual or corporation, association, partnership, limited
liability company, joint venture, joint stock or other company, business trust,
trust, organization, Governmental Authority or other entity of any kind.

 

“Refinancing Repayment Event” means any refinancing of the Indebtedness
outstanding under the Indenture which, after giving effect thereto, results in
the aggregate principal amount of Senior Indebtedness outstanding immediately
following such refinancing exceeding $305 million.

 

“Reorganization” means (i) any insolvency or bankruptcy case or proceeding, or
any receivership, liquidation, reorganization or other similar case or
proceeding in connection

 

A-3

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therewith, relative to the Company or its assets or (ii) any liquidation,
dissolution or other winding up of the Company, whether voluntary or involuntary
and whether or not involving insolvency or bankruptcy.

 

“Reorganization Securities” means shares of stock of the Company or any
Affiliate, or their successors, as reorganized, or other securities of the
Company or any Affiliate or any other Person provided for by a plan of
reorganization, the payment of which is subordinated in right of payment to the
payment in full of all Senior Indebtedness, where such plan of reorganization is
either authorized by a court decree or order that states that effect has been
given to the subordination of the Notes to the Senior Indebtedness or approved
by holders of Senior Indebtedness as a class.

 

“Sellers’ Representative” shall mean the person appointed as such under the
Asset Purchase Agreement.

 

“Senior Credit Agreement” means the Credit Agreement, dated as of June 12, 2006,
by and among Cellu Paper Holdings, Inc., Cellu Tissue Holdings, Inc., Interlake
Acquisition Corporation Limited, the Loan Guarantors party thereto, the lenders
party thereto, JPMorgan Chase Bank, N.A., as US Administrative Agent, and
JPMorgan Chase Bank, N.A., Toronto Branch, as Canadian Administrative Agent, as
previously amended and as may be further amended, supplemented or otherwise
modified from time to time.

 

“Senior Indebtedness” means (i) all Indebtedness under the Senior Credit
Agreement, the Indenture, any notes or other instruments issued pursuant to
either of the foregoing, any agreement providing for the replacement or
refinancing thereof (whether or not with the same agent or lenders), in each
case as the same may be amended, modified, extended or renewed, (ii) all
Indebtedness under or in respect of the Associated Bank Agreement, and (iii) any
other Indebtedness that is permitted to be incurred under the Senior Credit
Agreement or the Indenture and is specifically designated in the instrument
evidencing such Indebtedness as “Senior Indebtedness” for the purpose of this
Note.

 

A-4

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SCHEDULE B

 

SUBORDINATION PROVISIONS

 

1.1           Notes Subordinated to Senior Indebtedness.  The Company covenants
and agrees and the Noteholder by his, her or its acceptance of this Note
covenants and agrees for the benefit of the holders of the Senior Indebtedness
that the Notes are subordinated in right of payment as provided in this Schedule
B to the prior payment in full of all Senior Indebtedness.  Until all amounts
outstanding under all Credit Agreements have been paid in full and all
obligations thereunder have been discharged, the Noteholder is not entitled to
any payment from the Company on account of this Note, other than payments of
principal and interest pursuant to Sections 2 and 3.1 of this Note, subject in
all cases to the payment blockage provisions set forth below in this Schedule B.

 

1.2           Payment Over of Proceeds Upon Bankruptcy.

 

(a)           In the event of (i) any Reorganization or (ii) any general
assignment for the benefit of creditors or any other marshaling of assets or
liabilities of the Company (the events described in the foregoing clauses (i),
and (ii) are referred to collectively as “Proceedings”), then and in any such
event the holders of Senior Indebtedness shall be entitled to receive payment in
full of all Senior Indebtedness, before any Noteholder is entitled to receive
any payment or distribution of any kind or character (excluding Reorganization
Securities and Permitted Junior Securities) on account of the Notes and to that
end the holders of Senior Indebtedness shall be entitled to receive, for
application to the payment of such Senior Indebtedness, any payment or
distribution of assets of the Company of any kind or character (excluding
Reorganization Securities and Permitted Junior Securities) that may be payable
or deliverable in respect of the Notes in connection with any such Proceeding.

 

(b)           If, notwithstanding Section 1.2(a) of this Schedule B, any
Noteholder shall have received, after the commencement of any Proceeding, any
payment or distribution of assets of the Company of any kind or character in
respect of the Notes before all Senior Indebtedness is paid in full or payment
thereof provided for, then such payment or distribution (excluding
Reorganization Securities and Permitted Junior Securities) shall be paid over or
delivered forthwith upon demand therefor to the holders of Senior Indebtedness
for application to the payment of all Senior Indebtedness remaining unpaid, to
the extent necessary to pay all Senior Indebtedness in full, after giving effect
to any concurrent payment or distribution to or for the holders of Senior
Indebtedness.

 

(c)           Each of the Noteholders irrevocably authorizes and directs the
Lenders and the Credit Agent and its successors and assigns and any trustee in
bankruptcy, receiver or assignee for the benefit of creditors of the Company,
whether in voluntary or involuntary liquidation, dissolution or reorganization,
on its behalf to take such action as may be necessary or appropriate to
effectuate the subordination provisions and other rights granted to the Credit
Agent and the Lenders in Schedule B (including without limitation to file a
proof of claim and to vote upon matters with respect to which any Noteholder may
be able to vote in connection with any Proceedings relating to the Company) and
irrevocably appoints the Lenders and the Credit Agent and their successors and
assigns, acting severally, or any such trustee, receiver or assignee, each

 

B-1

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such Noteholder’s attorney- or attorneys-in-fact for such purposes with full
powers of substitution and resubstitution.

 

1.3           Suspension of Payments When Senior Indebtedness in Default.

 

(a)           After the occurrence and during the continuation of any Payment
Default, the Company shall not make any payment or distribute any assets of the
Company or its Subsidiaries of any kind or character (other than
(x) Reorganization Securities, (y) Permitted Junior Securities and (z) payment
of interest by capitalizing it and adding it to the principal amount of the
Notes) on account of the Notes unless and until the earliest to occur of
(i) such Payment Default is cured or waived to the satisfaction of the holders
of the Senior Indebtedness as required under the terms of the Senior
Indebtedness under which such Payment Default occurred, (ii) all Senior
Indebtedness with respect to which such Payment Default occurred is discharged
in full or (iii) the benefit of this provision has been waived by the holders of
the Senior Indebtedness as required under the terms of the Senior Indebtedness
under which such Payment Default occurred, after which event under clause (i),
(ii) or (iii) the Company shall resume making any and all required payments in
respect of the Notes, including any payment in arrears at the Default Rate
(provided that, for the avoidance of doubt, the Default Rate shall not apply
during any period when there is no continuing Event of Default).

 

(b)           After the occurrence and during the continuation of any
Non-payment Default and the receipt by the Company and the Noteholders of a
written notice from the holders of Senior Indebtedness which notice makes
reference to the Notes, the subordination provisions of this Schedule B and
states that a Non-payment Default has occurred, the Company shall not make any
payment or distribute any assets of the Company or its Subsidiaries of any kind
or character (other than (x) Reorganization Securities, (y) Permitted Junior
Securities and (z) payment of interest by capitalizing it and adding it to the
principal amount of the Notes) on account of the Notes unless and until the
earliest to occur of (i) such Non-payment Default is cured or waived to the
satisfaction of the required holders of the Senior Indebtedness under which such
Non-payment Default occurred, (ii) all Senior Indebtedness is discharged in
full, (iii) the required holders of Senior Indebtedness under which such
Non-payment Default occurred waive the benefit of this provision, after which
event under clause (i), (ii) or (iii) the Company shall resume making any and
all required payments in respect of the Notes, including any payments in arrears
at the Default Rate (provided that, for the avoidance of doubt, the Default Rate
shall not apply during any period when there is no continuing Event of Default),
or (iv) 180 days from the date of receipt by the Noteholders of such notice of
the occurrence of a Non-payment Default.

 

(c)           If, notwithstanding the foregoing, the Company makes any payment
to any holder of a Note prohibited by the foregoing provisions of this
Section 1.3 of this Schedule B, then such payment shall be paid over and
delivered forthwith by such holder to the holders of Senior Indebtedness
entitled thereto.

 

(d)           Notwithstanding any provision of this Section 1.3 to the contrary,
the holders of Senior Indebtedness shall not be permitted to declare a payment
blockage with respect to a Non-payment Default under Section 1.3(b) more than
one time in any 360 day period.

 

B-2

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1.4           Standstill.  If any Event of Default occurs and continues, the
Noteholders shall not, without the prior written consent of the holders of all
Senior Indebtedness, accelerate the maturity of, or institute proceedings to
enforce or collect, any Note or commence or join with any other creditor of the
Company in commencing any Proceeding against the Company until the Senior
Indebtedness has been discharged in full or 180 days from the date of receipt by
the holders of Senior Indebtedness of written notice by the Noteholders that an
Event of Default has occurred, whichever first occurs.  If any Noteholder,
contrary to this Schedule B, commences or participates in any action or
Proceeding against the Company, the holders of the Senior Indebtedness may
intervene and interpose as a defense or dilatory plea the making of this Note. 
Should the Noteholders, contrary to this Schedule B, in any way attempt to
enforce the payment of this Note or any part thereof, the holders of the Senior
Indebtedness may restrain the Noteholder from so doing, it being understood and
agreed that (i) the damages suffered by the holders of the Senior Indebtedness
from the Noteholder’s actions may at that time be difficult to ascertain and may
be irreparable, and (ii) the Noteholder waives any defense that the holders of
the Senior Indebtedness cannot demonstrate damage and/or can be made whole by
the awarding of damages.

 

1.5           Provisions Solely to Define Relative Rights.  The provisions of
this Schedule B are and are intended solely for the purpose of defining the
relative rights of the Noteholders, on the one hand, and the holders of Senior
Indebtedness, on the other hand.  Nothing contained in this Schedule B or in the
Notes is intended to or shall: (a) impair, as among the Company and the
Noteholders, the obligation of the Company to pay to the Noteholders all amounts
payable under the Notes as and when the same shall become due and payable, all
in accordance with the terms hereof and of the Notes and subject to the terms
and conditions of this Schedule B; (b) prevent the Noteholders from exercising
all remedies otherwise permitted by applicable law upon default under this Note,
subject to the terms and conditions of this Schedule B; or (c) limit the rights
of Noteholders to pursue any rights or remedies hereunder or under applicable
law, subject to the terms and conditions of this Schedule B.

 

1.6           Payments Held in Trust.  Should any distribution or the proceeds
thereof, in respect of the Notes, be collected or received by the Noteholders at
a time when the Noteholders are not permitted to receive any such distribution
or proceeds thereof, including, if the same is collected or received when there
is or would be after giving effect to such payment, a Payment Default or
Non-payment Default, then the Noteholders shall forthwith deliver, or cause to
be delivered, the same to the holders of Senior Indebtedness in precisely the
form received by the Noteholders (except for any necessary endorsement) and
until so delivered the same shall be held in trust by the Noteholders for the
benefit of the Lenders and the Credit Agent and shall not be commingled with
other property of the Noteholders.

 

1.7           No Waiver of Subordination Provisions; Indemnification by
Noteholders. No right of any present or future holder of any Senior Indebtedness
to enforce subordination as herein provided shall at any time in any way be
prejudiced or impaired by any act or failure to act on the part of the Company,
or by any act or failure to act by any such holder, or by any noncompliance by
the Company with the terms, provisions and covenants of this Note, regardless of
any knowledge thereof that any such holder may have or be otherwise charged
with.  The Noteholder agrees to indemnify the holders of the Senior Indebtedness
and to hold the holders of the Senior Indebtedness harmless from and against any
and all costs and expenses

 

B-3

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(including, without limitation, reasonable attorney’s fees and expenses) as they
arise, relating to (i) any actions of the Noteholder taken contrary to this
Schedule B and (ii) the enforcement of this Schedule B by the holders of the
Senior Indebtedness against the Noteholder.

 

1.8           Notices.  The Noteholders hereby agree, and by accepting delivery
of any Note their assigns hereby agree, to provide to the Company notice in
accordance with Section 9.1 of the Note of any change of address of such holder
and the address of any assignee of any Note and the Company agrees to update the
Noteholder Register promptly upon receipt of such Notice.  In so relying on the
Noteholder Register, and otherwise delivering notice to the Noteholders as
required by any section of this Schedule B, any holder of Senior Indebtedness
shall not be prejudiced and no holder of a Note shall benefit as the result of a
failure of any Noteholder to receive the notice so given due to the holder of
Senior Indebtedness having relied upon any incorrect notice information provided
to such holder by the Company or any failure by the Company to maintain an
accurate Noteholder Register and provide it to any holder of Senior
Indebtedness.

 

1.9           Benefits of Subordination.  Each holder of Senior Indebtedness is
entitled to rely on this Schedule B and is a beneficiary hereof, and the holders
of Senior Indebtedness are entitled to directly enforce the provisions of this
Schedule B against the Noteholders and the Company (including having the right
to bring an action for specific performance or other equitable relief, and
without requiring that all holders of Senior Indebtedness or the Notes be named
as parties in such action).

 

B-4

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SCHEDULE C

 

NOTICE ADDRESSES FOR HOLDINGS OF SENIOR INDEBTEDNESS

 

(as of July 2, 2008)

 

JP Morgan Chase Bank, N.A.

120 S. LaSalle St., 8th Floor

Chicago, Illinois 60603

Attention:  Michael Culbertson

Telecopy:  (312)  661-9604

 

with a copy to:

 

JP Morgan Chase Bank, N.A.

One Chase Square, Tower 25

Rochester, New York 14643

Attention:  John Hariaczyi

Telecopy:  (585) 258-7440

 

JP Morgan Chase Bank, N.A.,

  Toronto Branch

200 Bay Street, Suite 1800

Toronto, Ontario M5J 2J2

Attention:  Funding Office

Telecopy:  (416) 981-9174

 

The Bank of New York

101 Barclay Street, Floor 8W

New York, New York 10286

Attention:  Corporate Trust Administration

Telecopy:  (212) 815-5707

 

Associated Bank, National Association

200 North Adams Street

Green Bay, Wisconsin 54301

Attention:  Mr. Stephen E. Pasowicz

Telecopy:  (920) 433-3290

 

C-1

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