##### Table of Contents

##### Index to Financial Statements





UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549





FORM 10-K

(Mark One)

|x | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ------------------------------------------------------------------------------------

For the fiscal year ended February 28, 2010

or



| ̈ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ----------------------------------------------------------------------------------------

For the transition period
from                     to

Commission file number 001-34606





Cellu Tissue
Holdings, Inc.

(Exact name of registrant as specified in its charter)



|                                                                                             |  |                                             
|-------------------------------------------------------------------------------------------- |  | --------------------------------------------
|Delaware
(State or other jurisdiction ofincorporation or organization)                       |  | 06-1346495
(IRS Employer Identification No.)
|                                                                                             | 
|1855 Lockeway Drive, Suite 501, Alpharetta, Georgia
(Address of principal executive offices) |  | 30004
(Zip Code)                            

(678) 393-2651

(Registrants telephone number, including area code)

Not Applicable

(Former
name, former address and former fiscal year, if changed since last report)

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



|                              |  |                                          
|----------------------------- |  | -----------------------------------------
|Title of each class           |  | Name of Each Exchange
on Which Registered
|Common Stock, $0.01 par value |  | New York Stock Exchange                  

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





Indicate by check mark if
the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities
Act.    Yes   ̈    No  
x

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange
Act.    Yes   ̈    No  
x

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past
90 days.).    Yes  x    No  
 ̈

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File
required to be submitted and posted pursuant to Rule 405 of Regulation S-T (229.405 of this chapter) during the preceding 12 months (or such shorter period that the registrant was required to submit and post such
files).    Yes   ̈    No  
 ̈

Indicate by check mark if disclosure of delinquent filers pursuant to item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrants knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.  x

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  
 ̈ |  | Accelerated filer  
 ̈ |  | Non-accelerated filer  
x
(Do not check if a smaller reporting company) |  | Smaller reporting company  
 ̈

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

The Registrants voting stock was privately held as of August 27, 2009. The number of shares of issuers Common Stock, $.01 par
value, outstanding on March 31, 2010 was 20,145,176 shares.

Documents incorporated by reference: Portions of the registrants
definitive proxy statement for its annual meeting of stockholders are incorporated by reference into Part III of this report.









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##### Index to Financial Statements

TABLE OF CONTENTS



|            |  |                                                                                                               |  |   
|----------- |  | ------------------------------------------------------------------------------------------------------------- |  | --
|PART I      |  |                                                                                                               |  | 3 
|            |  |                                                                                                              
|ITEM 1.     |  | BUSINESS                                                                                                      |  | 3 
|            |  |                                                                                                              
|ITEM 1A.    |  | RISK FACTORS                                                                                                  |  | 16
|            |  |                                                                                                              
|ITEM 1B.    |  | UNRESOLVED STAFF COMMENTS                                                                                     |  | 24
|            |  |                                                                                                              
|ITEM 2.     |  | PROPERTIES                                                                                                    |  | 25
|            |  |                                                                                                              
|ITEM 3.     |  | LEGAL PROCEEDINGS                                                                                             |  | 25
|            |  |                                                                                                              
|ITEM 4.     |  | RESERVED                                                                                                      |  | 25
|            |  |                                                                                                              
|PART II     |  |                                                                                                               |  | 26
|            |  |                                                                                                              
|ITEM 5.     |  | MARKET FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS 
AND ISSUER PURCHASES OF EQUITY SECURITIES |  | 26
|            |  |                                                                                                              
|ITEM 6.     |  | SELECTED FINANCIAL DATA                                                                                       |  | 27
|            |  |                                                                                                              
|ITEM 7.     |  | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS                         |  | 28
|            |  |                                                                                                              
|ITEM 7A.    |  | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                                                    |  | 44
|            |  |                                                                                                              
|ITEM 8.     |  | FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA                                                                   |  | 45
|            |  |                                                                                                              
|ITEM 9.     |  | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE                          |  | 45
|            |  |                                                                                                              
|ITEM 9A(T). |  | CONTROLS AND PROCEDURES                                                                                       |  | 45
|            |  |                                                                                                              
|ITEM 9B.    |  | OTHER INFORMATION                                                                                             |  | 46
|            |  |                                                                                                              
|PART III    |  |                                                                                                               |  | 46
|            |  |                                                                                                              
|ITEM 10.    |  | DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE                                                        |  | 46
|            |  |                                                                                                              
|ITEM 11.    |  | EXECUTIVE COMPENSATION                                                                                        |  | 47
|            |  |                                                                                                              
|ITEM 12.    |  | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER
MATTERS                |  | 47
|            |  |                                                                                                              
|ITEM 13.    |  | CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE                                     |  | 47
|            |  |                                                                                                              
|ITEM 14.    |  | PRINCIPAL ACCOUNTANT FEES AND SERVICES                                                                        |  | 47
|            |  |                                                                                                              
|PART IV     |  |                                                                                                               |  | 47
|            |  |                                                                                                              
|ITEM 15.    |  | EXHIBITS AND FINANCIAL STATEMENT SCHEDULES                                                                    |  | 47



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PART I



|ITEM 1. | BUSINESS
|------- | --------

Our Company

We are a North American producer of tissue products, with a strategic focus on consumer-oriented private label tissue products and a growing
presence in the value retail tissue market. We manufacture large rolls of tissue, which we refer to as hardrolls, from purchased pulp and our own recycled fiber. We are a vertically integrated manufacturer, which means that we convert some of the
hardrolls we produce into finished and packaged tissue products, and we sell the remainder of our hardrolls to third-party converters of tissue products. Our vertically integrated manufacturing operations and extensive geographic footprint enable us
to deliver a broad range of cost-competitive products with brand-like quality manufactured to our customers specifications. For the fiscal year ended February 28, 2010, we sold 329,095 tons of tissue along with our other products,
generating aggregate net sales of $511.3 million.

We have nine strategically-located manufacturing and converting facilities in
Connecticut, Georgia, Michigan, Mississippi, New York, Ontario and Wisconsin. Six of these facilities manufacture hardrolls for internal conversion and external hardroll sales, two of these facilities produce converted tissue products and one
facility is an integrated hardroll manufacturing and converting site. We have grown our annual hardroll production capacity from approximately 264,000 tons, as of February 28, 2006, to approximately 332,000 tons as of February 28, 2010. In
response to significant market demand for our converted tissue products, we have grown our annual converting capacity from approximately 85,000 tons as of February 28, 2006, to approximately 194,000 tons as of February 28, 2010.

Our Products

Our tissue products consist of two primary product lines sold predominantly to (1) the consumer private label and away-from-home markets and
(2) third-party converters.



| |  |  | Converted tissue.    Our converted tissue products include a full product line of consumer private label and away-from-home bathroom
tissue, facial tissue, napkins, folded towels and kitchen roll towels. We manufacture our converted tissue products according to our customers specifications with a quality range from super premium to value quality. Our flexible manufacturing
assets enable us to produce converted tissue products according to a variety of specifications, including fiber type, weight, softness, size, color, prints, embossing patterns, fold and package configuration. We sell our converted tissue products
through various retailers and away-from-home distributors that serve the consumer and away-from-home markets. We entered the consumer and away-from-home converted tissue products market following our August 2002 acquisition of the manufacturing and
converting facility in Neenah, Wisconsin. We began manufacturing at this facility in August 2002 and began producing our full line of converted tissue products in March 2003. We have significantly increased sales of products out of our Neenah,
Wisconsin facility since its acquisition to $165 million in the year ended February 28, 2010. In July 2008, we completed the APF Acquisition, which provided us with two geographically diverse, stand-alone converting facilities in
Thomaston, Georgia and Long Island, New York and nearly doubled our converting capacity. For the year ended February 28, 2010, sales of converted tissue products comprised 45.9% of our total net sales compared to 36.0% of our total net sales
for fiscal year 2009.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Hardroll tissue.    We manufacture a variety of hardroll tissue and absorbent cover stock to our customers specifications, which
our customers print, cut and process into an assortment of finished converted tissue products and disposable absorbent products in the personal and
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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| | health care markets. These absorbent products include a complete line of away-from-home and consumer bath and towel products, liners for diapers, adult incontinence and feminine care products,
surgical waddings and other medical and sanitary disposable products. For the year ended February 28, 2010, sales of hardroll tissue products comprised 31.2% of our total net sales compared to 41.2% of our total net sales for fiscal year 2009.
We produce hardroll tissue at all of our facilities, except our Menominee, Michigan; Long Island, New York; and Thomaston, Georgia facilities. In March 2007, we acquired CityForest Corporation which increased our capacity to sell hardrolls to
third-party converters and to utilize for internal conversion. We manufacture our hardroll tissue with a variety of pulps and recycled fibers and produce hardroll tissue to our customers specifications by controlling brightness, absorbency,
bulk, strength, porosity and color. We also produce absorbent cover stock in a variety of weights and widths for sale to consumer products companies or third-party converters. For the year ended February 28, 2010, we sold 241,572 tons of
converted tissue and tissue hardrolls, generating net sales of $394.2 million, or approximately 77% of our net sales, and 84% of our gross margin.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

We also produce machine-glazed tissue hardrolls at our Menominee, Michigan; Wiggins, Mississippi; and St. Catharines, Ontario
facilities in a variety of weights, widths and surface characteristics. Machine-glazed tissue is glazed with a coating and, in some cases, other moisture and grease-resistant coatings. We sell our machine-glazed tissue hardrolls to third-party
converters of products such as fast food and commercial food wrappers, gum wrappers, coffee filters, cigarette pack liner paper, wax paper and butter wraps. We also convert a limited amount of our machine-glazed tissue hardrolls into rolls for
retail food wrappers. The majority of our converted wax paper products manufactured at our Menominee, Michigan facility is sold as branded products to a single customer. For the year ended February 28, 2010, we sold 87,523 tons of
machine-glazed tissue hardrolls and converted wax paper products, generating net sales of $109.1 million, or approximately 21% of our net sales, and 13% of our gross margin.

We sell a small amount of foam as a result of our acquisition of the assets of the Thomaston, Georgia facility from APF. We manufacture polystyrene
foam for conversion into foam plates using polystyrene pellets that are heated with natural gas to form a sheet of polystyrene foam. We then convert the sheets into foam plates of various sizes by stamping the sheet with a plate mold. We have
the capability of using different molds to manufacture different products, including foam trays and bowls. We sell our products primarily to a single value retail customer, which also purchases a variety of converted tissue products from us. For the
year ended February 28, 2010, we sold 678,681 cases of polystyrene foam generating net sales of $8.0 million, or approximately 2% of our net sales, and 3% of our gross margin.

Our History

We were incorporated in
Delaware in 1984. At the time of our incorporation, we acquired the assets of our East Hartford, Connecticut facility and, in 1995, we purchased our Wiggins, Mississippi facility. Throughout 1998, we acquired the assets of each of our Menominee,
Michigan; Gouverneur, New York; and St. Catharines, Ontario facilities and, in 2002, we purchased our Neenah, Wisconsin facility.

In March 2007, we acquired our Ladysmith, Wisconsin facility in connection with our purchase of CityForest Corporation, doubling our recycled fiber
capabilities. In July 2008, we acquired our Long Island, New York and Thomaston, Georgia facilities from Atlantic Paper & Foil, which we refer to in this Annual Report on Form 10-K as the APF Acquisition, providing us with two
geographically diverse, stand-alone converting facilities and nearly doubling our converting capacity. Additionally, we recently entered into a lease in Oklahoma City, Oklahoma for a converting facility which should begin production the second half
of fiscal 2011.



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In January 2010 we completed the initial public offering of 8,300,000 shares of our common stock. We
sold 2,675,000 shares at a price to the public of $13.00 per share and selling shareholders sold an additional 5,625,000 previously outstanding shares at a price to the public of $13.00 per share. In connection with the initial public offering, we
completed an internal restructuring whereby Cellu Paper Holdings, Inc., our direct parent, merged with and into us, with us surviving the merger. Immediately following this merger, Cellu Parent Corporation, became our direct parent, and merged with
and into us, with us surviving this second merger. In connection with these reorganization transactions, the holders of Cellu Parent Corporations outstanding Series A preferred stock ultimately received an aggregate of 13,528,287 shares of our
common stock, the holders of Cellu Parent Corporations outstanding Series B preferred stock ultimately received an aggregate of 2,836,771 shares of our common stock, and the holders of Cellu Parent Corporations common stock received an
aggregate of 1,082,913 shares of our common stock. Except as otherwise indicated, the information in this Form 10-K gives effect to the reorganization transactions.

Our Strengths

We believe
our core strengths include the following:

Strategic focus on consumer private label tissue
products.    As a North American tissue manufacturer with a strategic focus on consumer private label products, we benefit from: (1) strong consumer demand for brand-like tissue products, (2) our ability to
produce private label products that are equivalent in quality to branded products, (3) growing consumer acceptance of private label products, (4) consumer demand for products sold through the value retail channel and (5) our ability
to generate higher margins from our converted tissue products than from our sales of hardrolls to third parties or our machine-glazed tissue products.

Low-cost manufacturing operations.Our flexible production capability, low overhead costs and branded-quality
products contribute to our competitive position in the marketplace. We have a proven track record of ongoing cost-savings and productivity improvement initiatives. We have contracted for approximately 50% to 65% of our anticipated fiber requirements
through fiscal year 2012 while achieving highly competitive market discounts and ensuring consistency of supply. Also, because of our significant scale, we are able to optimize our machine schedules to take full advantage of our production
capabilities and minimize freight costs for our customers. To ensure supply and reduce market dependency, we have invested in green energy projects such as a third-party biomass gasification steam project in Wiggins, Mississippi and our cogeneration
installation in East Hartford, Connecticut, which produces steam and electricity.

Significant scale and footprint in the
Northeast, Southeast, South and Central United States.    Our strategic manufacturing facilities produce a full line of private label products and support geographic coverage of the U.S. market east of the Rocky
Mountains. The geographic location of our facilities enables us to be a provider in the consumer private label and away-from-home converted tissue markets in the Northeast, Southeast, South and Central United States, which collectively account for
approximately 76% of the U.S. population. Our Neenah, Wisconsin; Thomaston, Georgia; and Long Island, New York converting lines have approximately 194,000 tons of annual converting capacity. The APF Acquisition described above under Our
History has allowed us to reach new distribution channels and expand our geographic footprint in the South, Southeast, Midwest and Northeast United States. We also recently entered into a lease in Oklahoma City, Oklahoma for a converting
facility which should begin production the second half of fiscal 2011. In addition, our proximity to customers and our diverse reach give us an economic advantage over smaller, and often one- or two-plant, regional tissue converters.



5



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Strong financial position and operating
results.We believe our significant growth in operating income and net cash provided by operating activities, coupled with our balance sheet liquidity will allow us to execute our converting strategy, whether through
organic growth or strategic acquisitions. Our net sales have increased 48.6% from fiscal year 2007 to fiscal 2010 and our operating income improved to $52.2 million in fiscal 2010 compared to an operating loss of $2.7 million in fiscal 2007. Our net
income has grown from a net loss of $13.1 million in fiscal year 2007 to net income of $3.8 million for fiscal 2010. For fiscal 2010 our gross margin equaled 15.5%, compared to 10.6% for fiscal year 2009. In July 2009, we successfully refinanced
most of our debt with $255 million of 111/2% senior secured
notes due 2014. Our net cash provided by operating activities equaled $55.2 million and $24.1 million for fiscal 2010 and 2009, respectively. As of February 28, 2010, we also had $50.9 million available under our revolving line of credit.

Proven acquisition integration capabilities.Since 2007, we have made two strategically
important acquisitions: (1) in March 2007, we acquired CityForest Corporation, which greatly expanded our recycled fiber capabilities, and (2) in July 2008, we acquired our Long Island, New York and Thomaston, Georgia facilities in the APF
Acquisition described above, which provided us with two geographically diverse, stand-alone converting facilities. Due to the successful integration of these businesses, these acquisitions were accretive to our earnings and generated synergies in
excess of original estimates. These acquisitions were strategically important because they have enabled us to reach new distribution channels and expand our geographical footprint in the South, Southeast and Northeast. Given the fragmented nature of
our industry, we believe there are additional opportunities for profitable expansion and consolidation in our markets.

Significant
capital investment.Since 2001, we have made significant capital investment in our hardroll manufacturing capacity, which has increased our hardroll capacity by more than 120,000 tons. These tons are available to
support our vertically integrated, converting growth strategy and further solidify our ability to provide brand-equivalent quality and consistent supply. Furthermore, this additional capacity was added at a capital cost well below that of new tissue
manufacturing assets. We have also grown our converting capacity capabilities over the last three years, increasing our converting capacity by 109,000 tons.

Diversified and high-quality customer base.We sell to a highly diversified customer base of over 200
companies, without dependence on any single customer. In fiscal year 2010 and 2009 no customer accounted for more than 10% of our sales. Our ten largest customers represented 43.9% of our sales for fiscal year 2010 and 46.3% of our sales for the
fiscal year 2009. Our customers include leading consumer retailers and away-from-home distributors including Dollar General, Wal-Mart and Guest Supply, other vertically integrated tissue manufacturers and third-party converters.

Experienced and incentivized management team.Our executive management team has an average of over
25 years of experience in the paper products industry. Russell C. Taylor has been our President and Chief Executive Officer since 2001 and has over 25 years of industry experience. Prior to coming to our company, he was a senior executive
at Kimberly-Clark Corporation, a leading personal care consumer products company. Steven D. Ziessler, our Chief Operating Officer since 2005, has over 25 years of industry experience and prior to joining our company was President of
Kimberly-Clark Europe Ltd.s away-from-home business. David J. Morris, our Chief Financial Officer, has spent 27 years in the paper and wood products business, including 15 years at Georgia-Pacific Corporation and seven years at
Kimberly-Clark Corporation.

Environmentally friendly manufacturing capabilities.We have the
ability to manufacture hardrolls that contain up to 100% recycled fiber. We also convert recycled fiber hardrolls into products that are sold in the consumer retail and away-from-home markets. Our recycled fiber content exceeds current applicable
Environmental Protection Agency guidelines and contains up to 100% recycled,



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post-consumer wastepaper (including magazines, phonebooks and manufacturing and office waste) that is processed without the use of chlorine compounds. Our acquisition of CityForest Corporation
expanded our ability to manufacture recycled hardrolls and enabled us to produce our own recycled fiber. We also focus on other ways to avoid waste, including recycling water used in our manufacturing processes and reconstituting the fiber from our
paper waste. In addition, 100% of our contractually purchased pulp is certified by the Sustainable Forestry Initiative or the Forest Stewardship Council.

Our Strategy

Our principal
strategy is to be the private label tissue manufacturer of choice in North America by continuing to grow sales of our converted tissue products. We believe that our intense focus on customer delight through high levels of service,
efficient and reliable supply-chain management, brand-like quality and consistency, and low cost manufacturing will provide us with continued growth opportunities. Our key initiatives include:

Continue to grow converted tissue sales to both consumer product retailers and value retailers.We have
substantially increased our sales of private label converted tissue products as a percentage of our total sales to both the consumer retail and value retail chains from 3.0% of our net sales in fiscal year 2008 to 31.1% of our net sales for the year
ended February 28, 2010. As these retailers invest heavily in their private label brands, we will continue to focus on growing our business to support this profitable and growing segment of the U.S. tissue market. We also believe that through
organic growth and acquisitions we have attractive opportunities to increase our market share in this growing customer segment. In addition, we currently have the ability to shift a majority of our lower margin, externally sold hardrolls to
converted products sales, which have historically generated higher margins. For the year ended February 28, 2010, sales of tissue hardrolls and machine-glazed tissue hardrolls comprised 52.5% of our total net sales compared to 73.2% in fiscal
year 2008. The decline in hardroll sales resulted from a mix shift to higher margin converted products.

Invest in converting
capacity to service these growing private label market segments.To satisfy increased customer demand and to further expand our geographic reach, we have accelerated our growth strategy and committed to a program to
invest approximately $30 million to increase our retail converting capacity by 50,000 tons. As of February 28, 2010, we had spent $7.6 million and expect to substantially complete spending for this program by March 2011. We anticipate that a
portion of this investment will be used to add converting capacity to our new 323,000 square foot facility in Oklahoma City, Oklahoma. We expect that the balance of this investment will be used to add converting capacity to our three established
facilities in Neenah, Wisconsin, Thomaston, Georgia and Long Island, New York. In December 2009, we completed installation of a new tissue converting line at our Long Island, New York facility. In addition, we also believe the fragmentation of the
U.S. tissue market provides potential acquisition opportunities that would strengthen our market position, continue to expand our geographic reach and offer potential for industry consolidation.

Enhance our fiber and energy cost management initiatives.We have developed and implemented a fiber
procurement strategy that has been effective in reducing our fiber costs while helping to ensure consistent supply. Our agreements with various pulp suppliers enable us to purchase a majority of our fiber requirements at discounts below published
list prices. In addition, these agreements do not preclude us from shifting a portion of our fiber purchases to the spot market to react to favorable market conditions. We believe these supply agreements offer substantial savings from purchasing
pulp on the spot market during periods of tight supply. Furthermore, approximately 50% of our hardroll sales are contracted to customers and include escalators that allow for the pass-through of increased pulp costs. These contracts track a
published pulp benchmark price index that is well accepted in the industry. We also have a targeted strategy that has successfully generated greater energy cost control. This strategy includes the use of gas strips or hedges to minimize price
volatility,



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##### Index to Financial Statements

and capital projects that reduce consumption through alternative green-energy sources, further reducing our dependence on the energy market.

Further reduce manufacturing costs.We continually pursue opportunities to contain and reduce our costs. As
part of our cost management strategy, we benchmark our machines and manufacturing operations against those of other leading paper manufacturers. Our benchmarking is applied by business sector and machine type on a monthly, year-to-date and
year-on-year basis. We review metrics such as total machine efficiency, fiber loss, waste percentage, tons produced per machine per person per year, fixed and variable costs per ton produced and total energy cost per ton produced. In addition, our
cost management strategy focuses on reducing variable costs through increased operating efficiencies and reduced energy consumption, allowing us to better manage our costs and lessen the impact of fiber price cyclicality.

Manufacturing

We currently operate three
converting facilities at our Long Island, New York; Neenah, Wisconsin; and Thomaston, Georgia facilities. In addition, we recently added a new 323,000 square foot facility in Oklahoma City, Oklahoma, which we expect will add to our converting
capacity and become operational during the second half of fiscal 2011. The tissue converting process involves loading hardroll tissue onto converting machines which unwind, perforate, emboss and print on the tissue. The converting machines then roll
or fold the processed tissue into converted tissue products, such as bath or facial tissue, napkins or paper towels to the specification ordered by our customers. Similarly, our converting operations at our Menominee, Michigan facility are designed
to convert our machine-glazed tissue hardrolls into converted wax paper products.

We currently operate six manufacturing facilities
located in the United States and one manufacturing facility located in St. Catharines, Ontario, Canada. We lease and operate two additional manufacturing facilities in the United States. We produce hardroll tissue at our East Hartford,
Connecticut; Wiggins, Mississippi; Gouverneur, New York; St. Catharines, Ontario; Neenah, Wisconsin; and Ladysmith, Wisconsin facilities for sale to consumer products companies and third-party converters and for use in the production of
converted tissue products at our Neenah, Wisconsin facility. We produce machine-glazed tissue at our Menominee, Michigan; Wiggins, Mississippi; and St. Catharines, Ontario facilities in a variety of specialty hardrolls. We also produce
converted wax paper products at our Menominee, Michigan facility.

Our hardroll tissue manufacturing process begins with wood pulp or
recycled fiber. These raw materials typically are pulped in large blenders or pulpers and moved through networks of pipes and pumps to a tissue machine where sheets of tissue paper are formed according to customer or grade specifications. The tissue
paper is then drawn through the machine and formed on wires as it travels through various press rolls. Once the sheets are formed, they are transferred to a dryer section of the machine that dries the tissue. Following the drying process, the tissue
paper is removed from the drying cylinders and wound into hardroll tissue. Hardroll tissue is either used internally for our converting operations at our Neenah, Wisconsin, Long Island, New York or Thomaston, Georgia facilities or sold to consumer
products companies and third-party converters. We undergo a similar process at each of our Menominee, Michigan; Wiggins, Mississippi; and St. Catharines, Ontario facilities in our machine-glazed tissue operations, which are designed to produce
machine-glazed tissue hardrolls. Also, at our Ladysmith, Wisconsin facility, we process the majority of fiber used in our products received in the form of bales of recycled paper (mostly office paper). The de-inking process removes contaminants such
as ink, staples, paper clips, plastic and paper coatings. Non-chlorine whiteners are used to brighten the fiber and strip colors. The end product is clean, bright fiber pulp.



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Our foam business was acquired as part of the APF Acquisition. We manufacture polystyrene foam for
conversion into foam plates using polystyrene pellets that are heated with natural gas to form a sheet of polystyrene foam. We then convert the sheets into foam plates of various sizes by stamping the sheet with a plate mold. We have the
capability of using different molds to manufacture different products, including foam trays and bowls. Our production is primarily sold to a single retail customer, who also purchases a variety of converted tissue products from us.

The following table illustrates the annual hardroll production capacity at each of our manufacturing facilities based on current utilization and
the type of products produced at each such facility:



|                           |  |                                     |  |                |  |                             |  |                  |  |                               |  |     
|-------------------------- |  | ----------------------------------- |  | -------------- |  | --------------------------- |  | ---------------- |  | ----------------------------- |  | ----
|Location                   |  | Totalhardrollcapacity(tonsper year) |  | Hardrolltissue |  | Hardrollmachine-glazedpaper |  | Tissueconverting |  | Machine-glazedpaperconverting |  | Foam
|East Hartford, Connecticut |  | 29,000                              |  | X              |  |                             |  |                  |  |                               |  |     
|Thomaston, Georgia         |  |                                    |  |                |  |                             |  | X                |  |                               |  | X   
|Menominee, Michigan        |  | 32,000                              |  |                |  | X                           |  |                  |  | X                             |  |     
|Wiggins, Mississippi       |  | 54,000                              |  | X              |  | X                           |  |                  |  |                               |  |     
|Gouverneur, New York       |  | 32,000                              |  | X              |  |                             |  |                  |  |                               |  |     
|Long Island, New York      |  |                                    |  |                |  |                             |  | X                |  |                               |  |     
|St. Catharines, Ontario    |  | 45,000                              |  | X              |  | X                           |  |                  |  |                               |  |     
|Ladysmith, Wisconsin       |  | 55,000                              |  | X              |  |                             |  |                  |  |                               |  |     
|Neenah, Wisconsin          |  | 85,000                              |  | X              |  |                             |  | X                |  |                               |  |     
|Oklahoma City, Oklahoma    |  |                                    |  |                |  |                             |  | X                |  |                               |  |     

The Oklahoma City, Oklahoma, facility is expected to add to our converting capacity and become operational during the second
half of fiscal 2011.

East Hartford, Connecticut Facility

Our East Hartford, Connecticut facility is a 59,000 square foot facility consisting of two paper machines, each of which produces dry creped tissue
that is used by consumer products companies and third-party converters in the manufacture of liner for disposable baby diapers, adult incontinence products, surgical waddings and disposable bibs. The tissue paper is produced with 100% virgin pulp to
insure absolute cleanliness. For fiscal year 2010, both machines in the aggregate produced approximately 27,000 tons of hardroll tissue with an annual production capacity of 29,000 tons. In addition, our East Hartford, Connecticut facility has the
capacity to produce base sheets for facial and bath tissue, napkins and paper towel products.

Thomaston, Georgia Facility

Our Thomaston, Georgia facility is a 426,000 square foot facility, with the capacity to expand further. Its production capacity includes the
manufacture of bath tissue, towels, facial tissue, napkins and foam plates. We produce all of our foam at this facility. We acquired this facility as part of the APF Acquisition.

Menominee, Michigan Facility

Our
Menominee, Michigan facility is a 397,000 square foot complex located along Lake Michigans Bay of Green Bay in the City of Menominee. The facility consists of a paper machine for the manufacture of machine-glazed tissue hardrolls and 20
converting line operations for both wet and dry wax papers. This facility is a producer of machine-glazed tissue hardrolls which are used by third-party converters to make food packaging, wrapping, laminating and moisture-resistant paper products. A



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##### Index to Financial Statements

portion of the machine-glazed tissue hardrolls produced at the Menominee, Michigan facility is converted through our converting equipment into converted wax paper products, including wet and dry
wax paper, sandwich bags and microwavable wax paper. The majority of our converted wax paper products manufactured at the Menominee, Michigan facility is sold as branded products to the facilitys largest customer. For fiscal year 2010, the
facility produced approximately 32,000 tons of machine-glazed tissue hardrolls and converted paper products, with an annual production capacity of 32,000 tons.

Wiggins, Mississippi Facility

Our
Wiggins, Mississippi facility complex consists of a 163,200 square foot manufacturing and warehousing facility in addition to a 6,800 square foot office. The facility is close to major interstate highways and a railroad, with a rail spur that runs
directly to the facility. In addition, the facility is strategically located near the Wiggins, Mississippi gulf coast and three major seaports, including the Port of Gulfport, through which we ship our exports. Our Wiggins, Mississippi facility is
centrally located between Atlanta and Dallas, allowing for optimal service to many of our key customers.

Our manufacturing facility at
the Wiggins, Mississippi location consists of two paper machines. One machine produces machine-glazed tissue hardrolls for food packaging, wrapping, laminating and moisture-resistant and grease-resistant paper products. The second machine produces
dry creped paper that is used in the diaper and hygiene products market. In addition, it produces tissue, napkin and towel roll stock. For fiscal year 2010, the machines in the aggregate produced approximately 54,000 tons of hardroll tissue with an
annual production capacity of 54,000 tons.

Gouverneur, New York Facility

Our Gouverneur, New York facility consists of a 242,000 square foot manufacturing complex and an 86,000 square foot warehouse. The manufacturing
facility consists of two light dry creped paper machines, each of which produces a variety of specialty tissue products, such as personal hygiene grades, medical and surgical drapes, face mask wadding, filtration grades and tissues used in the
personal care markets. In addition, the facility produces flexographic printed (a lower-cost, lower resolution graphic) colored napkins for the party goods industry and premium facial tissue. The facility is in close proximity to major interstate
highways and a railroad, with a rail spur that runs directly to the facility. For fiscal year 2010, the facility produced in the aggregate approximately 32,000 tons of hardroll tissue with an annual production capacity of 32,000 tons.

Long Island, New York Facility

Our
Long Island, New York facility is a 180,000 square foot complex. Its production capacity includes the conversion of bath tissue, towels, facial tissue and napkins. We acquired this facility as part of the APF Acquisition.

St. Catharines, Ontario Facility

Our St. Catharines, Ontario facility is a 256,000 square foot complex currently consisting of two types of actively used machines: through-air
dried and machine-finished. Both of these types of machines have color capability.

Our through-air dried machine produces highly
absorbent bulky sheets in basis weights from nine to 25 pounds used in the manufacture of folded and rolled towels, facial and bath tissue, napkins and absorbent tissues. Our machine-finished machine produces wax paper base stock and wet creped
tissue used in the manufacture of coffee filters and washroom towel base papers. All of the products



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##### Index to Financial Statements

manufactured at our St. Catharines, Ontario facility are produced in jumbo rolls and either converted into finished product at one of our three converting sites or sold to North American
converters for further processing. For fiscal year 2010, the facility produced in the aggregate approximately 45,000 tons of hardroll tissue and machine-glazed tissue hardrolls with an annual production capacity of 45,000 tons.

Neenah, Wisconsin Facility

Our
Neenah, Wisconsin facility is a 1.2 million square foot facility. We acquired this facility in August 2002 and added converting capacity to the facility subsequent to its acquisition. The facility currently consists of five light dry creped
paper machines with up to 85,000 tons of annual hardroll tissue production capacity and 14 converting lines with approximately 90,000 tons of annual converting capacity. A complete distribution center with fully automated unitizing and wrapping
capabilities is located adjacent to the facility. This facility produces converted tissue products such as facial and bath tissue, napkins and paper towels, as well as unconverted hardroll tissue, and enables us to offer our customers flexibility in
the price, grade, softness, package configuration and size of our products. For example, our products can be manufactured completely with virgin pulp (for premium products) or recycled fiber (for value products) or any combination thereof. Our
machines have color and multi-ply capacity. For fiscal year 2010, the facility produced approximately 81,000 tons of hardroll tissue and converted tissue products in the aggregate.

Ladysmith, Wisconsin Facility

Our
Ladysmith, Wisconsin facility is a 259,000 square foot facility. We acquired this facility in March 2007 in the CityForest Acquisition. At this facility, we manufacture tissue hardrolls for third-party converters that resize and convert the rolls
into napkins, towels, bath tissue, specialty medical tissue, industrial wipers and facial tissue. The majority of our sales from this facility are either converted into finished product at one of our three converting sites or sold to third-party
converters serving the away-from-home market, the consumer market, as well as state and federal government agencies and the medical industry. We do not currently convert rolls into finished products at this facility. Our manufacturing process
includes a de-inking facility, two light dry creped paper machines with a combined annual capacity of 55,000 tons used to manufacture tissue hardrolls and water and wastewater treatment capabilities. The facility processes over 98% of the fiber used
in its product. This pulp can be used to make 100% recycled tissue or can be combined with other fiber, such as virgin pulp, at the paper machine. The ability to combine fibers of different types allows the facility to precisely match the specific
requirements for a customers existing or new products. For fiscal year 2010, the facility produced in the aggregate approximately 54,000 tons of hardroll tissue.

Oklahoma City, Oklahoma Facility

Our
Oklahoma City, Oklahoma facility is a 323,000 square foot facility. Its production capacity will include bath tissue, towels, facial tissue and napkins and is expected to become operational in the second half of fiscal 2011.

Raw Material and Energy Sources and Supply

The primary raw material used in our various facilities is wood pulp (both virgin pulp and recycled fiber). Other costs include natural gas,
electricity, fuel oil and, in our Menominee, Michigan facility, coal. We have developed and implemented a pulp cost management strategy that has been highly effective in controlling our pulp costs. Our supply agreements with various pulp suppliers
enable us to purchase a majority of our anticipated total pulp requirements for a given year at competitive market discounts. These agreements further allow us to shift a portion of our pulp purchases to the spot market to take



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##### Index to Financial Statements

advantage of more favorable spot market prices when such prices fall. We believe these supply agreements provide us with significant protection against the risk of fluctuating pulp costs and
offer a substantial savings from purchasing pulp on the spot market during periods of tight supply. In addition, our Ladysmith, Wisconsin facility processes over 98% of the fiber used in its product. We satisfy all of our energy requirements through
purchases of natural gas (other than for our Menominee, Michigan facility) and electricity from local utility companies. At our Menominee, Michigan facility, our power boilers generate most of our energy requirements through the use of coal, with
the balance being supplied through the purchase of natural gas by contract.

Sales and Customer Support

Hardroll tissue.    Our hardroll sales group markets and sells our tissue hardrolls and specialty products to consumer
and away-from-home products companies and third-party converters.

Consumer and away-from-home converted
tissue.    Our converted products sales group markets and sells our converted tissue products to a variety of retail and away-from-home customers, directly to retailers or to distributors, which in turn sell to end-users. The
same members of our consumer and away-from-home tissue sales group are also responsible for polystyrene foam sales.

Our machine-glazed
tissue sales group markets and sells our machine-glazed tissue in a variety of specialty hardrolls from each of our Menominee, Michigan; Wiggins, Mississippi; and St. Catharines, Ontario facilities. In addition, at our Menominee, Michigan
facility, our machine-glazed tissue sales group markets and sells converted wax paper products. We sell our machine-glazed tissue products to third-party converters, consumer products companies and, in certain instances, directly to distributors.

Seasonality

Our business is not
subject to material seasonal variations.

Distribution

We sell and distribute our machine-glazed tissue and tissue hardrolls to our customers manufacturing sites primarily in North America. Our
away-from-home converted cases are sold through major North American distributors. Our retail converted products are sold directly to North American retailers or through other large manufacturers. All of our products are either shipped from our nine
strategically located manufacturing sites east of the Mississippi via third-party common carriers according to contracted freight agreements or are picked up by the customer at the producing mill.

Competition

The hardroll tissue market and
consumer and away-from-home converted tissue products market are highly competitive and are led by a number of large, international companies, such as Kimberly-Clark, Georgia-Pacific, SCA and Proctor & Gamble, as well as smaller, regional
companies, such as Cascades, Irving, Stefco, Orchids, Royal and Clearwater Paper Corporation. Among the value retailers there is a growing trend towards branded-quality private label converted products. Our primary focus since 2005 has been on
delivering branded-quality private label converted products to this fast growing value retail market. We believe these retailers, which are primarily based east of the Mississippi, see us as consistently delivering branded-quality converted products
due to our vertical integration and the geographic locations of our converting facilities.

We also compete in the machine-glazed tissue
market. Our primary competitors in the machine-glazed tissue market are medium-sized North American-based independent organizations, such as Burrows Paper Corporation, Thilmany Papers and Domtar Inc.



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##### Index to Financial Statements

We manufacture a limited line of polystyrene foam products primarily for a single customer that
purchases the foam products as well as converted tissue products. Our primary competitors in this business are small to medium-sized North American-based independent organizations that have the ability to convert both tissue and foam, such as
Genpak, Dalco and Pactiv.

In all areas, we believe that we compete on the basis of product quality, price and service. See Risk
FactorsWe face many competitors, several of which have greater financial and other resources and our customers may choose their products instead of ours.

Major Customers

Our customer base is
comprised of leading tissue consumer products companies, tissue and machine-glazed tissue converters, manufacturers of private label products and distributors of tissue products. Our ten largest customers represented 51.3% of sales for fiscal year
2008, 46.3% of sales for fiscal year 2009 and 43.9% of sales for fiscal 2010. No customer accounted for more than 10% of our sales in fiscal years 2010 or 2009. A summary of our net sales and long-lived assets by geographic area for fiscal years
2008, 2009 and 2010 is presented in Note 12 to our consolidated financial statements for fiscal year 2010 included elsewhere in this Annual Report on Form 10-K.

We have specific agreements with some, but not all, of our customers that allow us to pass through cost increases to them. See
Managements Discussion and Analysis of Financial Condition and Results of OperationsBusiness Drivers and Measures.

Employees
and Labor Relations

As of February 28, 2010, we employed 1,245 active full-time employees, consisting of 1,045 hourly
employees and 200 salaried employees. We have collective bargaining agreements with the United Steelworkers of America covering approximately 548 of our hourly employees in our Menominee, Michigan; Wiggins, Mississippi; Gouverneur, New York; and
Neenah, Wisconsin facilities, collectively. In addition, we have a collective bargaining agreement with Independent Paperworkers of Canada covering approximately 78 employees in our St. Catharines, Ontario facility. We are currently in
collective bargaining negotiations with the United Steelworkers of America at our facilities in Gouverneur, New York and Menominee, Michigan and with the Independent Paperworkers of Canada at our facility in St. Catherines, Ontario. The collective
bargaining agreements at: (i) Gouverneur, New York expired in October 2009; (ii) Menominee, Michigan expired in December 2009; and (iii) St. Catherines, Ontario expired in February 2010. During our collective bargaining
negotiations at these facilities the Company and the respective unions have entered into memoranda of understanding extending the terms and conditions of the collective bargaining agreements for the duration of the negotiations. Our collective
bargaining agreements at the Wiggins, Mississippi and Neenah, Wisconsin facilities expire in June 2011 and June 2013, respectively.

Our facilities have active health and safety programs in place. We have not experienced any work stoppages or significant labor disputes and we
consider relations with our employees to be satisfactory. All of our facilities are situated in areas where adequate labor pools exist.

Intellectual
Property

We are the owner of certain trademarks relating to our products. We are not aware of any existing infringing uses that
could materially affect our business. We believe that our trademarks are valuable to our operations in our tissue and machine-glazed tissue segments and are important to our overall business strategy.

We own the trademark Waxtex which is used in connection with our machine-glazed tissue products brand produced at our Menominee, Michigan
facility. We also own the trademark Magic Soft used in association with the converted facial and bath tissue, paper towel and napkin products



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##### Index to Financial Statements

manufactured at our Neenah, Wisconsin facility and the trademarks acquired as part of the APF Acquisition and used in association with the converted facial and bath tissue, paper towel and napkin
products manufactured at our Long Island, New York and Thomaston, Georgia facilities, as well as the trademarks Interlake and Interlake Paper.

Environmental Laws

We are subject to
comprehensive and frequently changing federal, state, local and foreign environmental, health and safety laws and regulations, including laws and regulations governing emissions of air pollutants, discharges of wastewater and storm water, storage,
treatment and disposal of materials and waste, site remediation and liability for damage to natural resources. We are also subject to frequent inspections and monitoring by government enforcement authorities. Compliance with these laws and
regulations is an important factor in our business. From time to time, we incur significant capital and operating expenditures to comply with applicable federal, state and local environmental laws and regulations and to meet new statutory and
regulatory requirements. We have implemented practices and procedures at our operating facilities that are intended to promote compliance with environmental laws, regulations and permit requirements. We believe that our facilities and manufacturing
operations are currently in material compliance with such laws, regulations and requirements; however, we may not always be in compliance with all such laws, regulations or requirements.

We may be subject to strict liability for the investigation and remediation of environmental contamination (including contamination that may have
been caused by other parties) at properties that we own or operate and at other third-party owned properties where we or our predecessors have disposed of or arranged for the disposal of regulated materials. As a result, we may be involved in
administrative and judicial proceedings and inquiries in the future relating to environmental matters. The total of such environmental compliance costs and liabilities cannot be determined at this time and may be material.

Other Governmental Regulation

We are
regulated by the U.S. Food and Drug Administration because we manufacture paper products used in the food service industry. We are also regulated by the U.S. Occupational Safety and Health Administration. We believe that our manufacturing facilities
are in compliance, in all material respects, with these laws and regulations.

We are committed to ensuring that safe operating
practices are established, implemented and maintained throughout our organization. In addition, we have instituted active health and safety programs throughout our company.

Where You Can Find More Information

We make
our annual report on Form l0-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and all amendments to such reports filed pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, available (free of
charge) on or through our Internet website, located at http://www.cellutissue.com, as soon as reasonably practicable after they are filed with or furnished to the Securities and Exchange Commission.

Forward-looking Statements

This Annual
Report on Form 10-K includes forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are those that do not



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##### Index to Financial Statements

relate solely to historical fact. They include, but are not limited to, any statement that may predict, forecast, indicate or imply future results, performance, achievements or events. They may
contain words such as believe, anticipate, expect, estimate, intend, project, plan, will or words or phrases of similar meaning. Forward-looking
statements are subject to many uncertainties and other variable circumstances, including those discussed in this Annual Report under the heading Item 1A. Risk Factors, many of which are outside of our control, that could cause our
actual results and experience to differ materially from those we thought would occur. Other risks besides those listed in Item 1A. Risk Factors can adversely affect us. New risk factors can emerge from time to time. It is not
possible for us to predict all of these risks, nor can we assess the extent to which any factor, or combination of factors, may cause actual results to differ from those contained in the forward-looking statements. Given these risks and
uncertainties, we urge you to read this Annual Report completely and with the understanding that actual future results may be materially different from what we plan or expect. We will not update these forward-looking statements even if our situation
changes in the future.

The following listing represents some, but not necessarily all, of the factors that may cause actual results to
differ from those anticipated or predicted. The occurrence of any of these events could have a material adverse effect on our business, financial condition, results of operations and prospects.



| |  |  | the fluctuating demand of the paper industry;
| | - |  | ---------------------------------------------



| |  |  | changes in the cost and availability of raw materials, including future demand for pulp in domestic and export markets;
| | - |  | -----------------------------------------------------------------------------------------------------------------------



| |  |  | our significant debt obligations or the incurrence of additional debt;
| | - |  | ----------------------------------------------------------------------



| |  |  | increases in our energy costs;
| | - |  | ------------------------------



| |  |  | unforeseen or recurring operational problems and maintenance outages at any of our facilities;
| | - |  | ----------------------------------------------------------------------------------------------



| |  |  | labor disputes or increased labor costs;
| | - |  | ----------------------------------------



| |  |  | loss of volumes from significant customers;
| | - |  | -------------------------------------------



| |  |  | restrictive covenants may restrict our ability to pursue our business strategy;
| | - |  | -------------------------------------------------------------------------------



| |  |  | our ability to service our debt obligations and fund our working capital requirements;
| | - |  | --------------------------------------------------------------------------------------



| |  |  | increased costs of compliance with environmental, health and safety laws;
| | - |  | -------------------------------------------------------------------------



| |  |  | acquisitions may divert managements attention and increase our costs;
| | - |  | ----------------------------------------------------------------------



| |  |  | larger competitors with more financial resources may lower prices below our cost which might result in our customers migrating to their products;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | excess supply in the markets we serve may reduce the prices we are able to charge for our products;
| | - |  | ---------------------------------------------------------------------------------------------------



| |  |  | loss of key management;
| | - |  | -----------------------



| |  |  | increases in interest rates;
| | - |  | ----------------------------



| |  |  | changes in political or economic conditions; and
| | - |  | ------------------------------------------------



| |  |  | unexpected legal contingencies.
| | - |  | -------------------------------



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##### Index to Financial Statements

|Item 1A. | RISK FACTORS
|-------- | ------------

Fluctuating demand in the tissue and
specialty paper industry could have a material adverse effect on our business, financial condition and operating results.

The
market for tissue and specialty paper products is sensitive to changes in general business conditions, industry capacity, consumer preferences and other factors. Our business exhibits some of this sensitivity, particularly in the away-from-home
tissue market. Demand is influenced by fluctuations in inventory levels held by customers and consumer preferences. Supply depends primarily on industry capacity and capacity utilization rates. In periods of economic weakness, reduced spending by
consumers and businesses results in decreased demand, potentially causing downward price pressure. In particular, the away-from-home market has experienced a recent decline because of the slowdown in the travel and restaurant industries and an
increase in lay-offs as a result of the current economic downturn. This decline has had an effect on our net sales throughout fiscal year 2010 and may continue to have an effect in the future. Industry participants may also, at times, add new
capacity or increase capacity utilization rates, potentially causing supply to exceed demand and exerting downward price pressure. We have no control over these factors, and they can heavily influence our financial performance.

Our operating results depend upon our wood pulp costs. An increase in wood pulp costs could have a material adverse effect on our business, financial
condition and operating results.

Pulp is the principal raw material used in the manufacture of our specialty paper and tissue
products. It is purchased in highly competitive, price sensitive markets. We buy a significant amount of pulp and other raw materials either through supply agreements or on the spot market. For fiscal year 2010, we purchased approximately 322,000
metric tons of pulp and recycled fiber at a cost of $145 million, compared to 331,000 metric tons of pulp and recycled fiber in fiscal year 2009 at a cost of $185.7 million. Pulp prices continued to increase in fiscal 2010 from their low point
in April 2009 and are expected to continue to increase into the second quarter of fiscal 2011. When pulp prices increase, we can generally pass most increases in the cost of pulp through to our customers, but price increases may not be passed to
customers for three months or more after such increases in pulp prices occur. In some cases, the lag may be longer or we may not be able to pass through such cost increases at all. When pulp prices decline, we generally pass most decreases in the
cost of pulp through to our tissue and machine-glazed tissue hardroll customers. For example, net sales in our machine-glazed tissue segment decreased 8.0% in the fourth quarter of fiscal year 2009 in part because of a decrease in net selling price
per ton following a decrease in pulp prices. In addition, many of our arrangements with away-from-home hardroll customers do not have price escalators relating to wood pulp prices, and consequently, in some instances, we are unable to pass along an
increase in pulp costs to these customers.

We have agreements with various pulp vendors to purchase various amounts of pulp over the
next two years. These commitments require purchases of pulp up to approximately 178,000 metric tons per year at pulp prices below published list prices and allow us to shift a portion of our pulp purchases to the spot market to take advantage of
spot market prices when such prices fall. We believe that our current commitment under these arrangements or their equivalent approximates 50% to 65% of our current budgeted pulp needs through fiscal year 2012. If upon expiration of these
agreements, or upon failure of our suppliers to fulfill their obligations under these agreements, we are unable to obtain wood pulp on terms as favorable as those contained therein, our cost of goods sold may increase and results of operations will
be impaired. As a result, our ability to satisfy customer demands and to manufacture products in a cost-effective manner may be materially adversely affected.

In addition, the costs and availability of wood pulp have at times fluctuated greatly because of weather, economic global buying behaviors or
general industry conditions. From time to time, timber



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##### Index to Financial Statements

harvesting may be limited by natural events, such as fire, insect infestation, disease, ice storms, excessive rainfall and wind storms or by harvesting restrictions. Production levels within the
forest products industry are also affected by such factors as currency fluctuations, duties and finished lumber prices. These factors may increase the price we have to pay to our existing or any new suppliers. In the presence of oversupply in the
markets we serve, selling prices of our finished products may not increase in response to raw material price increases. If we are unable to pass any raw material price increases through to our customers, our business financial condition and
operating results may be materially adversely affected.

Our significant debt obligations, or our incurrence of additional debt, could limit our
flexibility in managing our business and could materially and adversely effect our financial performance.

We are highly
leveraged. As of February 28, 2010 we had approximately $243.3 million of long-term indebtedness outstanding. In addition, we are permitted under our revolving line of credit, which we refer to in this Annual Report on Form 10-K as our working
capital facility, and the indenture governing our senior secured notes to incur additional debt, subject to certain limitations. Our high degree of leverage may have important consequences, including the following:



| |  |  | we may have difficulty satisfying our obligations under our indebtedness and, if we fail to comply with these requirements, an event of default could result;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | we may be required to dedicate a substantial portion of our cash flow from operations to required payments on indebtedness, thereby reducing the availability of
cash flow for working capital, capital expenditures and other general corporate activities (please refer to the table below under the heading Managements Discussion and Analysis of Financial Condition and Results of
OperationsContractual Obligations, which sets forth our payment obligations with respect to our existing long-term debt);
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | covenants relating to our debt may limit our ability to obtain additional financing for working capital, capital expenditures and other general corporate
activities;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | covenants relating to our debt may limit our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | we may be more vulnerable than our competitors to the impact of economic downturns and adverse developments in our business; and
| | - |  | --------------------------------------------------------------------------------------------------------------------------------



| |  |  | we may be placed at a competitive disadvantage against any less leveraged competitors.
| | - |  | --------------------------------------------------------------------------------------

The occurrence of any one of these events could have a material adverse effect on our business, financial condition, operating results, and ability
to satisfy our obligations under our indebtedness.

In addition, subject to restrictions in the indenture governing our senior secured
notes and restrictions in our working capital facility, we may incur additional indebtedness. As of February 28, 2010, we had approximately $50.9 million of availability under our working capital facility, after giving effect to outstanding
letters of credit having a face amount of approximately $4.6 million. The terms of the indenture governing our senior secured notes permit us to incur additional debt, including a limited amount of additional secured debt. Any additional
indebtedness we incur could increase the risks associated with our already substantial indebtedness and could have a material adverse effect on our business, financial condition and operating results.

Our energy costs may be higher than we anticipate, which could have a material adverse effect on our business, financial condition and operating results.

We use energymainly natural gas and electricityto operate machinery and to generate steam, which we use in our
production process. In the past, energy prices, particularly for natural gas and fuel



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##### Index to Financial Statements

oil, have increased, with a corresponding effect on our production costs. Although energy prices have been decreasing recently, such costs may increase again in the future. During fiscal year
2010 and 2009, we spent approximately $45.3 million and $56.3 million, respectively, on electricity, natural gas, oil and coal. If our energy costs are greater than anticipated, our business, financial condition and operating results may be
materially adversely affected.

Unforeseen or recurring operational problems and maintenance outages at any of our facilities may cause
significant lost production, which could have a material adverse effect on our business, financial condition and operating results.

Our manufacturing process could be affected by operational problems that could impair our production capability. Each of our facilities contains
complex and sophisticated machines that are used in our manufacturing process. Disruptions or shutdowns at any of our facilities could be caused by:



| |  |  | maintenance outages to conduct maintenance operations that cannot be performed safely during operations;
| | - |  | --------------------------------------------------------------------------------------------------------



| |  |  | prolonged power failures or reductions, including the effect of lightning strikes on our electrical supply;
| | - |  | -----------------------------------------------------------------------------------------------------------



| |  |  | breakdowns, failures or substandard performance of any of our pulping machines, paper machines, recovery boilers, converting machines, de-inking facility or
other equipment;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the effect of noncompliance with material environmental requirements or permits;
| | - |  | --------------------------------------------------------------------------------



| |  |  | shortages of raw materials, a drought or lower than expected rainfall on our water supply;
| | - |  | ------------------------------------------------------------------------------------------



| |  |  | disruptions in the transportation infrastructure, including railroad tracks, bridges, tunnels or roads;
| | - |  | -------------------------------------------------------------------------------------------------------



| |  |  | fires, floods, tornados, hurricanes, earthquakes or other catastrophic disasters;
| | - |  | ---------------------------------------------------------------------------------



| |  |  | labor difficulties; or
| | - |  | ----------------------



| |  |  | other operational problems.
| | - |  | ---------------------------

If our facilities are shut down, they may experience prolonged startup periods, regardless of the reason for the shutdown. Those startup periods
could range from several days to several weeks, depending on the reason for the shutdown and other factors. Any prolonged disruption in operations of any of our facilities could cause significant lost production, which would have a material adverse
effect on our business, financial condition and operating results.

Labor disputes or increased labor costs could disrupt our business and have a
material adverse effect on our financial condition and operating results.

As of February 28, 2010, approximately 50% of our
active full-time employees were represented by either the United Steelworkers of America or the Independent Paper Workers of Canada through various collective bargaining agreements. We are currently in collective bargaining negotiations with the
United Steelworkers of America at our facilities in Gouverneur, New York and Menoniminee, Michigan and with the Independent Paperworkers of Canada at our facility in St. Catherines, Ontario. The collective bargaining
agreements at: (i) Gouverneur, New York expired in October 2009; (ii) Menominee, Michigan expired in December 2009; and (iii) St. Catherines, Ontario expired in February 2010. The workers have
proposed an increase in wages and benefits to be included in any new collective bargaining agreement. Any significant work stoppage in the future or any significant increase in labor costs could have a material adverse effect on our
business, financial condition and operating results. Our collective bargaining agreements at the Wiggins, Mississippi and Neenah, Wisconsin facilities expire in June 2011 and June 2013, respectively.



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##### Index to Financial Statements

We are dependent upon continued demand from our large customers. If we lose order volumes from any of our
largest customers, our business, financial condition and operating results could be materially and adversely affected.

Our
largest customers account for a significant portion of our sales. Our ten largest customers represented 43.9% of our sales for fiscal year 2010 and 46.3% of our sales for the fiscal year 2009. Our largest single customer represented less than 10% of
our sales in fiscal year 2010 and 2009. Some of our large customers (including four of our ten largest customers) have the capability of producing the products that they currently buy from us. The loss or significant reduction of orders from any of
our largest customers could have a material adverse effect on our business, financial condition and operating results.

Restrictive covenants in
our working capital facility and the indenture governing our senior secured notes may restrict our ability to pursue our business strategies.

Our working capital facility and the indenture governing our senior secured notes limit our ability, among other things, to:



| |  |  | incur additional debt and guarantees;
| | - |  | -------------------------------------



| |  |  | pay dividends and repurchase our stock;
| | - |  | ---------------------------------------



| |  |  | make other restricted payments, including without limitation, investments;
| | - |  | --------------------------------------------------------------------------



| |  |  | create liens;
| | - |  | -------------



| |  |  | sell or otherwise dispose of assets, including capital stock of restricted subsidiaries;
| | - |  | ----------------------------------------------------------------------------------------



| |  |  | enter into sale and leaseback transactions;
| | - |  | -------------------------------------------



| |  |  | enter into agreements that restrict dividends from subsidiaries;
| | - |  | ----------------------------------------------------------------



| |  |  | enter into transactions with our affiliates;
| | - |  | --------------------------------------------



| |  |  | consolidate, merge, sell or otherwise dispose of all or substantially all of our assets; and
| | - |  | --------------------------------------------------------------------------------------------



| |  |  | enter into new lines of business.
| | - |  | ---------------------------------

The agreement governing our working capital facility also requires us to maintain compliance with a 1:1 fixed charge coverage ratio if the average
monthly availability under the facility is less than 15% of the facility commitment. Although the average monthly availability as of February 28, 2010 was $52.8 million, which was significantly higher than the covenant trigger level of
$9 million, our ability to comply with this ratio may be affected by events beyond our control.

The restrictions contained in the
indenture governing our senior secured notes and the agreement governing our working capital facility could:



| |  |  | limit our ability to plan for or react to market conditions or meet capital needs or otherwise restrict our activities or business plans; and
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | adversely affect our ability to finance our operations, strategic acquisitions, investments or alliances or other capital needs or to engage in other business
activities that would be in our interest.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Any failure on our part to comply with these restrictive covenants may
result in an event of default. Such event of default may trigger an acceleration right for our lenders under our working capital facility or the holders of our senior secured notes. If our obligations to repay the indebtedness under our working
capital facility or our senior secured notes were accelerated, we cannot assure you that we would have sufficient assets to repay in full such indebtedness.



19



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##### Index to Financial Statements

We may not be able to generate sufficient cash flows to meet our debt service obligations.

Our ability to make scheduled payments on, or to refinance, our obligations with respect to our indebtedness will depend on our financial and
operating performance, which in turn will be affected by general economic conditions and by financial, competitive, regulatory and other factors beyond our control. We cannot assure you that our business will generate sufficient cash flow from
operations or that future sources of capital will be available to us in an amount sufficient to enable us to service our indebtedness or to fund our other liquidity needs. If we are unable to generate sufficient cash flow to satisfy our debt
obligations, we may have to undertake alternative financing plans, such as refinancing or restructuring our debt, selling assets, reducing or delaying capital investments or seeking to raise additional capital. We cannot assure you that any
refinancing would be possible, that any assets could be sold, or, if sold, of the timing of the sales and the amount of proceeds that may be realized from those sales, or that additional financing could be obtained on acceptable terms, if at all.
Our working capital facility and the indenture governing our senior secured notes restrict our ability to dispose of assets and use the proceeds from the disposition. Our inability to generate sufficient cash flows to satisfy our debt obligations,
or to refinance our indebtedness on commercially reasonable terms, would materially and adversely affect our financial condition and operating results.

We are subject to significant environmental, health and safety laws and regulations and compliance expenditures. The cost of compliance with, and liabilities
under, such laws and regulations could materially and adversely affect our business, financial condition and operating results.

Our business is subject to a wide range of federal, state, local and foreign general and industry specific environmental, health and safety laws and
regulations, including those relating to air emissions, wastewater discharges, solid and hazardous waste management and disposal and site remediation. We are also subject to frequent inspections and monitoring by government enforcement authorities.
Compliance with these laws and regulations is a significant factor in our business. From time to time, we incur significant capital and operating expenditures to achieve and maintain compliance with applicable environmental laws and regulations. Our
failure to comply with applicable environmental laws and regulations or permit requirements could result in substantial civil or criminal fines or penalties or enforcement actions, including regulatory or judicial orders enjoining or curtailing
operations or requiring remedial or corrective measures, installation of pollution control equipment or other actions, which could have a material adverse effect on our business, financial condition and operating results.

Certain of our operations also require environmental permits or other approvals from governmental authorities, and certain of these permits and
approvals are subject to expiration, denial, revocation or modification under various circumstances. Failure to obtain or comply with these permits and approvals, or with other environmental requirements, may subject us to civil or criminal
enforcement proceedings that could lead to substantial fines and penalties being imposed against us, orders requiring us to take certain actions or temporary or permanent shutdown of our affected operations. Such enforcement proceedings could also
have a material adverse effect on our business, financial condition and operating results.

In addition, as an owner and operator of
real estate, we may be responsible under environmental laws and regulations for the investigation, remediation and monitoring, as well as associated costs, expenses and third-party damages, including tort liability and natural resource damages,
relating to past or present releases of hazardous substances on or from our properties. Liability under these laws may be imposed without regard to whether we knew of, or were responsible for, the presence of those substances on our property, may be
joint and several, meaning that the entire liability may be imposed on each party without regard to contribution, and retroactive and may not be limited to the value of the property. In addition, we or others may discover new material environmental
liabilities, including



20



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##### Table of Contents

##### Index to Financial Statements

liabilities related to third-party owned properties that we or our predecessors formerly owned or operated, or at which we or our predecessors have disposed of, or arranged for the disposal of,
certain materials. We may be involved in administrative or judicial proceedings and inquiries in the future relating to such environmental matters which could have a material adverse effect on our business, financial condition and operating results.

New environmental laws or regulations (or changes in existing laws or regulations or their enforcement) may be enacted that require
significant expenditures by us. If the resulting expenses significantly exceed our expectations, our business, financial condition and operating results could be materially and adversely affected. For example, there has been a recent legislative
focus on greenhouse gas emissions, which could lead to laws or regulations requiring expenditures at our coal-based Menominee, Michigan facility or at other of our facilities.

We are also subject to various federal, state, local and foreign requirements concerning safety and health conditions at our manufacturing
facilities. We may also be subject to material financial penalties or liabilities for noncompliance with those safety and health requirements, as well as potential business disruption, if any of our facilities or a portion of any facility is
required to be temporarily closed as a result of any noncompliance with those requirements. Such financial penalties, liabilities or business disruptions could have a material adverse effect on our business, financial condition and operating
results.

We may expand through acquisitions of other companies, which may divert our managements attention and result in unexpected
operating difficulties, increased costs and dilution to our stockholders.

We may make strategic acquisitions of other
businesses. An acquisition may result in unforeseen operating difficulties and expenditures in assimilating or integrating the businesses, technologies, products, personnel or operations of the acquired companies. Furthermore, future acquisitions
may:



| |  |  | involve our entry into geographic or business markets in which we have little or no prior experience;
| | - |  | -----------------------------------------------------------------------------------------------------



| |  |  | create difficulties in retaining the customers of any acquired business;
| | - |  | ------------------------------------------------------------------------



| |  |  | result in a delay or reduction of sales for both us and the company we acquire; and
| | - |  | -----------------------------------------------------------------------------------



| |  |  | disrupt our ongoing business, divert our resources and require significant management attention that would otherwise be available for ongoing development of our
current business.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

To complete an acquisition, we may be required to use a substantial amount of our cash or engage in
equity or debt financing. If we raise additional funds through further issuances of equity or convertible debt securities, our existing stockholders could suffer significant dilution, and any new equity securities we issue could have rights,
preferences and privileges senior to those of holders of our common stock. Any debt financing obtained by us in the future could involve restrictive covenants relating to our capital-raising activities and other financial and operational matters
that make it more difficult for us to obtain additional capital and to pursue business opportunities, including potential acquisitions. In addition, we may not be able to obtain additional financing on terms favorable to us, if at all, which could
limit our ability to engage in acquisitions. Moreover, we can make no assurances that the anticipated benefits of any acquisition, such as operating improvements or anticipated cost savings, would be realized or that we would not be exposed to
unexpected liabilities.

Further, an acquisition may negatively impact our results of operations because it may require us to incur
charges and substantial debt or liabilities, may cause adverse tax consequences, substantial depreciation and amortization or deferred compensation charges, or may require the amortization, write-down or impairment of amounts related to deferred
compensation, goodwill and other intangible assets, or may not generate sufficient financial return to offset acquisition costs.



21



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##### Table of Contents

##### Index to Financial Statements

We face many competitors, several of which have greater financial and other resources, and our customers may
choose their products instead of ours.

We face competition in each of our markets from companies that produce the same type of
products that we produce or that produce alternative products that customers may use instead of our products. We currently compete in the tissue, converted paper and specialty paper markets. Some of our competitors may be able to produce certain of
our products at lower cost than us. Additionally, several of our competitors are large, vertically integrated companies that are more strongly capitalized than us or have more financial resources than us. Any of the foregoing factors may enable our
competitors to better withstand periods of declining demand and adverse operating conditions. In addition, changes within the paper industry, including the consolidation of our competitors and consolidation of companies in the distribution channels
for our products, have occurred and may continue to occur and may have a material adverse effect on our business, financial condition and operating results.

We compete on the basis of product quality and performance, price, service, sales and distribution. Competing in our markets involves the following
key risks:



| |  |  | our failure to anticipate and respond to changing customer preferences and demographics;
| | - |  | ----------------------------------------------------------------------------------------



| |  |  | our failure to develop new and improved products;
| | - |  | -------------------------------------------------



| |  |  | aggressive pricing by competitors, which may force us to decrease prices in an attempt to maintain market share;
| | - |  | ----------------------------------------------------------------------------------------------------------------



| |  |  | consolidation of our customer base that diminishes our negotiating leverage;
| | - |  | ----------------------------------------------------------------------------



| |  |  | the decision by our large customers to discontinue outsourcing the production of their products to us and to produce their products themselves;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | acquisition of a customer by one of our competitors, who thereafter replaces us as a supplier for that customer; and
| | - |  | --------------------------------------------------------------------------------------------------------------------



| |  |  | our failure to control costs.
| | - |  | -----------------------------

These competitive factors could cause our customers to shift to other products or attempt to produce products themselves. Additional competition
could result in lost market share or reduced prices for our products.

Excess supply in the markets we serve may reduce the prices we are able to
charge for our products.

Our competitors may build new machines or may activate idle machines, which would add more capacity to
the tissue, specialty paper and converted paper and tissue product markets. Increased production capacity in any of these markets could cause an oversupply, resulting in lower market prices for our products and increased competition, either of which
could have a material adverse effect on our business, financial condition and operating results.

We may lose business to competitors who underbid
us, and we may be otherwise unable to compete favorably under declining market conditions.

Demand for tissue, converted paper
and tissue products and specialty paper products tends to be more price-sensitive during declining market conditions than during normal market conditions. When market conditions decline, our competitors are more likely to try to underbid our prices
in markets where we enjoy a leading position to target some of our market share in those markets. This competitive behavior could drive market prices down and hinder our ability to pass on increases in raw



22



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##### Table of Contents

##### Index to Financial Statements

material costs to our customers. Because of the fixed-cost nature of our business, our overall profitability is sensitive to minor shifts in the balance between supply and demand. Competitors
having lower operating costs than we do will have a competitive advantage over us with respect to products that are particularly price-sensitive.

The loss of our key managers could materially and adversely affect our business, financial condition and operating results.

Our future success depends, in significant part, upon the continued services of our management personnel. Our Chief Executive Officer, Russell C.
Taylor, has over 25 years experience in the paper and paper products industry. Our senior executives have an average of over 25 years experience in the paper and paper products industry. The market for qualified individuals is highly
competitive and we may not be able to attract and retain qualified personnel to replace or succeed members of our senior management or other key employees, should the need arise. Therefore, the loss of services of one or more of our key senior
managers could materially and adversely affect our business, financial condition and operating results.

Exposure to interest rate changes and
other types of capital market volatility could increase our financing costs.

We require both short-term and long-term financing
to fund our operations, including capital expenditures. We are exposed to changes in interest rates with respect to our working capital facility and any new debt offerings. Changes in the capital markets, our credit rating or prevailing interest
rates can increase or decrease the cost or availability of financing which may have an adverse effect on our financial condition and operating results. In addition, because some of our operations and sales are in international markets, we could be
adversely affected by unfavorable fluctuations in foreign currency exchange rates.

Changes in the political or economic conditions in the United
States, Canada and, to a lesser extent, other countries in which our products are sold could materially and adversely affect our business, financial condition and operating results.

We sell our products in the United States, Canada, Mexico and South America. The economic and political climate of each of these regions has a
significant impact on costs, prices and demand for our products in these areas. Changes in regional economies or political stability (including acts of war or terrorism) and changes in trade restrictions or laws (including tax laws and regulations,
increased tariffs or other trade barriers) can affect the cost of manufacturing and distributing our products and the price and sales volume of our products, which could materially and adversely affect our business, financial condition and operating
results.

We may develop unexpected legal contingencies, which may have a material adverse effect on our business, financial condition and
operating results.

We are, from time to time, party to various routine legal proceedings arising out of our business. These
proceedings primarily involve commercial claims, personal injury claims and workers compensation claims. We cannot predict the outcome of these lawsuits, legal proceedings and claims with certainty. In the event of unexpected future
developments, it is possible that the ultimate resolutions of such matters, if unfavorable, could have a material adverse effect on our business, financial condition and operating results. In addition, there may also be adverse publicity associated
with legal proceedings that could negatively affect the perception of our business, regardless of whether the allegations are valid or whether we are ultimately found liable. As a result, legal proceedings may have a material adverse effect on our
business, financial condition and operating results.



23



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##### Index to Financial Statements

If we fail to establish and maintain effective internal control over financial reporting, we may have material
misstatements in our financial statements, and we may not be able to report our financial results in a timely and reliable manner.

Pursuant to the Sarbanes-Oxley Act of 2002, we are required to provide a report by management in our Form 10-K on internal control over
financial reporting, including managements assessment of the effectiveness of such control. Internal control over financial reporting may not prevent or detect misstatements because of its inherent limitations, including the possibility of
human error, the circumvention or overriding of controls or fraud. Therefore, even effective internal controls can provide only reasonable assurance with respect to the preparation and fair presentation of financial statements. If we fail to
maintain the adequacy of our internal controls, we may be unable to provide financial information in a timely and reliable manner. Any such difficulties or failure may have a material adverse effect on our business, financial condition and operating
results.



|ITEM 1B. | UNRESOLVED STAFF COMMENTS
|-------- | -------------------------

None.



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##### Index to Financial Statements

|ITEM 2. | PROPERTIES
|------- | ----------

We own and operate seven
facilities located in East Hartford, Connecticut; Menominee, Michigan; Wiggins, Mississippi; Gouverneur, New York; St. Catharines, Ontario, Canada; Ladysmith, Wisconsin; and Neenah, Wisconsin. In addition, we lease facilities in Thomaston,
Georgia, Long Island, New York, and Oklahoma City, Oklahoma as well as our corporate headquarters in Alpharetta, Georgia.

The following
table lists each of our facilities and its location, use, approximate square footage and status:



|                                           |  |                                                                 |  |                          |  |               
|------------------------------------------ |  | --------------------------------------------------------------- |  | ------------------------ |  | --------------
|                                           |  | Use                                                             |  | Approximatesquarefootage |  | Ownedor leased
|East Hartford, Connecticut facility        |  | Tissue manufacturing                                            |  | 59,000                   |  | Owned         
|                                           |  |                                                                 | 
|Alpharetta, Georgia administrative offices |  | Corporate headquarters and administrative offices               |  | 9,000                    |  | Leased        
|                                           |  |                                                                 | 
|Thomaston, Georgia facility                |  | Tissue converting and foam manufacturing and converting         |  | 426,000                  |  | Leased        
|                                           |  |                                                                 | 
|Menominee, Michigan facility               |  | Machine-glazed tissue manufacturing and converting              |  | 397,000                  |  | Owned         
|                                           |  |                                                                 | 
|Wiggins, Mississippi facility              |  | Tissue and machine-glazed tissue manufacturing                  |  | 170,000                  |  | Owned         
|                                           |  |                                                                 | 
|Gouverneur, New York facility              |  | Tissue manufacturing, warehousing                               |  | 328,000                  |  | Owned         
|                                           |  |                                                                 | 
|Long Island, New York facility             |  | Tissue converting                                               |  | 180,000                  |  | Leased        
|                                           |  |                                                                 | 
|Oklahoma City, Oklahoma(1)                 |  | Tissue converting                                               |  | 323,000                  |  | Leased        
|                                           |  |                                                                 | 
|St. Catharines, Ontario facility           |  | Tissue and machine-glazed tissue manufacturing                  |  | 256,000                  |  | Owned         
|                                           |  |                                                                 | 
|Neenah, Wisconsin facility                 |  | Tissue manufacturing, tissue converting and distribution center |  | 1,200,000                |  | Owned         
|                                           |  |                                                                 | 
|Ladysmith, Wisconsin facility              |  | Tissue manufacturing, de-inking facility                        |  | 259,000                  |  | Owned         



|(1) | We recently added this new facility in Oklahoma City, Oklahoma, which we expect will add to our converting capacity and become operational during the second half of fiscal 2011.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|ITEM 3. | LEGAL PROCEEDINGS
|------- | -----------------

We are, from time to time,
party to various routine legal proceedings arising out of our business. These proceedings primarily involve commercial claims, personal injury claims and workers compensation claims. We cannot predict the outcome of these lawsuits, legal
proceedings and claims with certainty. Nevertheless, we believe that the outcome of any currently existing proceedings, even if determined adversely, would not have a material adverse effect on our business, financial condition and operating
results.



|ITEM 4. | RESERVED
|------- | --------



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##### Index to Financial Statements

PART II



|ITEM 5. | MARKET FOR THE REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.
|------- | -----------------------------------------------------------------------------------------------------------------

The Companys common stock has been listed on the New York Stock Exchange under the trading symbol CLU since January 22, 2010.

The table below sets forth, for the fiscal periods indicated, the range of high and low sales prices of the common stock.



|                   |  |                                |       |     |   |     
|------------------ |  | ------------------------------ | ----- | --- | - | ----
|                   |  | Quarter endedFebruary 28, 2010
|                   |  | High                           |       | Low
|4th Fiscal quarter |  | $                              | 12.57 |     | $ | 9.77

As of March 31, 2010, there were 10
shareholders of record of the common stock.

The following table sets forth certain information relating to the Companys equity
compensation plans, which relate to common stock, as of February 28, 2010:



|                                                    |  |                                                                                        |  |                                                                        |       |                                                          |          
|--------------------------------------------------- |  | -------------------------------------------------------------------------------------- |  | ---------------------------------------------------------------------- | ----- | -------------------------------------------------------- | ---------
|                                                    |  | Number ofSecurities to beIssued uponExercise ofOutstandingOptions, 
Warrantsand Rights |  | Weighted AverageExercise Price ofOutstandingOptions Warrantsand Rights |       | Number ofSecuritiesRemainingAvailable forFuture Issuance
|Equity compensation plans approved by Shareholders: |  |                                                                                        |  |                                                                        |       |                                                          |          
|2006 Stock Incentive Plan                           |  | 703,672                                                                                |  | $                                                                      | 5.13  |                                                          |         
|2010 Equity Compensation Plan                       |  | 325,639                                                                                |  | $                                                                      | 11.45 |                                                          | 2,469,361

Dividends

We have not declared or paid any dividends in the last two fiscal years. Any decision to declare and pay dividends in the future will be made at the
discretion of our Board of Directors and will depend on, among other things, our results of operations, cash requirements, financial condition, contractual restrictions and other factors that our Board of Directors may deem relevant.

Use of Proceeds

On January 27, 2010,
we completed the initial public offering (IPO) of 8,300,000 shares of our common stock (the IPO Shares). We sold 2,675,000 shares (the Company Shares) at a price to the public of $13.00 per share and selling
shareholders sold an additional 5,625,000 previously outstanding shares (the Selling Shareholder Shares) at a price to the public of $13.00 per share. The IPO Shares were registered under the Securities Act of 1933, as amended, on a
registration statement on Form S-1 (Registration No. 333-162543). The registration statement was declared effective by the Securities and Exchange Commission on January 21, 2010. Goldman, Sachs & Co. and J.P. Morgan
Securities Inc. served as joint book-running managers for the IPO.

The net proceeds to us from the sale of the Company Shares,
after deducting the underwriting discount and other offering expenses, were approximately $29.0 million. The underwriters received a discount of $0.91 per share on the Company Shares, for a total underwriting discount of approximately $2.4 million,
and the offering expenses were approximately $3.4 million. During the fourth quarter of fiscal 2010, the net proceeds to us from the sale of the Company Shares and available cash on hand have been used to repurchase $20.5 million aggregate principal
amount of our 2014 Notes for an aggregate purchase price of approximately $22.9 million. In addition, we repaid in full, the $6.3 million note that we had entered into as part of the financing for the APF Acquisition.



26



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##### Table of Contents

##### Index to Financial Statements

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

The following table
contains our summary consolidated financial data for fiscal years 2010, 2009, and 2008, the period from March 1, 2006 to June 12, 2006 (pre-merger), for the period from June 13, 2006 to February 28, 2007 (post-merger) and fiscal
year 2006. Our summary consolidated results of operations and other data for fiscal years 2010, 2009, and 2008 and our summary consolidated balance sheet data at February 28, 2010 and 2009 have been derived from audited consolidated financial
statements included elsewhere in this Annual Report. Our summary consolidated results of operations and other data for the period from March 1, 2006 to June 12, 2006 (pre-merger), for the period from June 13, 2006 to February 28,
2007 (post-merger) and for fiscal year 2006, and our summary consolidated balance sheet data as of February 29, 2008 and as of February 28, 2007 and 2006 have been derived from our audited consolidated financial statements not included in
this Annual Report.



|                                                        |  |                                  |            |   |                           |                  |            |   |                      |                               |  |                  |                   |   |  |   |            |     |  |   |            |   |  |   |            |  
|------------------------------------------------------- |  | -------------------------------- | ---------- | - | ------------------------- | ---------------- | ---------- | - | -------------------- | ----------------------------- |  | ---------------- | ----------------- | - |  | - | ---------- | --- |  | - | ---------- | - |  | - | ---------- | -
|(Amounts in thousandsexcept share amounts andtons sold) |  | Fiscal yearendedFebruary 28,2006 |            |   | March 1,2006-June 12,2006 |                  |            |   |                      | June 13,2006-February 28,2007 |  |                  | Fiscal year ended |  
|                                                        |  |                                  |            |   |                           | February 29,2008 |            |   | February 28,2009 (1) |                               |  | February 28,2010 |                  
|                                                        |  |                                  |            |   | (Pre-merger)              |                  |            |   |                      | (Post-merger)                 |  |                  |                   |   |  |   |            |     |  |  
|Statement of operations data:                           |  |                                  |            |   |                           |                  |            |   |                      |                               |  |                  |                   |   |  |   |            |     |  |   |            |   |  |   |            |  
|Net sales:                                              |  |                                  |            |   |                           |                  |            |   |                      |                               |  |                  |                   |   |  |   |            |     |  |   |            |   |  |   |            |  
|Tissue segment                                          |  | $                                | 237,998    |   |                           | $                | 68,715     |   |                      |                               |  | $                | 174,074           |   |  | $ | 333,342    |     |  | $ | 400,640    |   |  | $ | 394,241    |  
|Machine-glazed tissue segment                           |  |                                  | 99,365     |   |                           |                  | 28,029     |   |                      |                               |  |                  | 73,338            |   |  |   | 109,739    |     |  |   | 114,376    |   |  |   | 109,051    |  
|Foam segment                                            |  |                                  |           |   |                           |                  |           |   |                      |                               |  |                  |                  |   |  |   |           |     |  |   | 4,006      |   |  |   | 7,989      |  
|                                                        |  |                                  |            |   |                           |                  |            |   |                      |                               |  |                  |                   |   |  |   |            |     |  |   |            |   |  |   |            |  
|Total net sales                                         |  |                                  | 337,363    |   |                           |                  | 96,744     |   |                      |                               |  |                  | 247,412           |   |  |   | 443,081    |     |  |   | 519,022    |   |  |   | 511,281    |  
|Cost of goods sold                                      |  |                                  | 309,641    |   |                           |                  | 88,556     |   |                      |                               |  |                  | 234,897           |   |  |   | 401,352    |     |  |   | 464,118    |   |  |   | 432,220    |  
|                                                        |  |                                  |            |   |                           |                  |            |   |                      |                               |  |                  |                   |   |  |   |            |     |  |   |            |   |  |   |            |  
|Gross profit                                            |  |                                  | 27,722     |   |                           |                  | 8,188      |   |                      |                               |  |                  | 12,515            |   |  |   | 41,729     |     |  |   | 54,904     |   |  |   | 79,061     |  
|Income (loss) from operations (b)                       |  |                                  | 11,433     |   |                           |                  | (3,330     | ) |                      |                               |  |                  | 611               |   |  |   | 19,630     | (a) |  |   | 30,163     |   |  |   | 52,176     |  
|Net income (loss)                                       |  | $                                | (2,569     | ) |                           | $                | (6,439     | ) |                      |                               |  | $                | (6,660            | ) |  | $ | 3,702      |     |  | $ | 6,560      |   |  | $ | 3,763      |  
|Basic and diluted income (loss) per share               |  | $                                | (0.15      | ) |                           | $                | (0.37      | ) |                      |                               |  | $                | (0.38             | ) |  | $ | 0.21       |     |  | $ | 0.38       |   |  | $ | 0.21       |  
|Basic shares outstanding                                |  |                                  | 17,447,971 |   |                           |                  | 17,447,971 |   |                      |                               |  |                  | 17,447,971        |   |  |   | 17,447,971 |     |  |   | 17,447,971 |   |  |   | 17,684,134 |  
|Diluted shares outstanding                              |  |                                  | 17,447,971 |   |                           |                  | 17,447,971 |   |                      |                               |  |                  | 17,447,971        |   |  |   | 17,447,971 |     |  |   | 17,447,971 |   |  |   | 17,713,863 |  
|Balance sheet data (at end of period):                  |  |                                  |            |   |                           |                  |            |   |                      |                               |  |                  |                   |   |  |   |            |     |  |   |            |   |  |   |            |  
|Cash and cash equivalents                               |  | $                                | 22,824     |   |                           |                  | N/A        |   |                      |                               |  | $                | 16,261            |   |  | $ | 883        |     |  | $ | 361        |   |  | $ | 3,299      |  
|Total assets                                            |  |                                  | 210,843    |   |                           |                  | N/A        |   |                      |                               |  |                  | 345,343           |   |  |   | 423,217    |     |  |   | 484,047    |   |  |   | 502,706    |  
|Total debt                                              |  |                                  | 161,080    |   |                           |                  | N/A        |   |                      |                               |  |                  | 160,356           |   |  |   | 208,647    |     |  |   | 261,653    |   |  |   | 243,298    |  
|Stockholders equity                                    |  |                                  | (7,586     | ) |                           |                  | N/A        |   |                      |                               |  |                  | 38,752            |   |  |   | 46,085     |     |  |   | 67,737     |   |  |   | 110,832    |  
|Other financial data:                                   |  |                                  |            |   |                           |                  |            |   |                      |                               |  |                  |                   |   |  |   |            |     |  |   |            |   |  |   |            |  
|Net cash provided by (used in) operating activities     |  | $                                | 8,600      |   |                           | $                | (6,384     | ) |                      |                               |  | $                | 9,785             |   |  | $ | 19,796     |     |  | $ | 24,060     |   |  | $ | 55,192     |  
|Net cash (used in) investing activities                 |  |                                  | (13,050    | ) |                           |                  | (1,938     | ) |                      |                               |  |                  | (7,677            | ) |  |   | (64,141    | )   |  |   | (80,557    | ) |  |   | (26,993    | )
|Net cash provided by (used in) financing activities     |  |                                  | (282       | ) |                           |                  | (290       | ) |                      |                               |  |                  |                  |   |  |   | 29,193     |     |  |   | 55,244     |   |  |   | (24,247    | )
|Depreciation and amortization                           |  |                                  | 16,277     |   |                           |                  | 4,227      |   |                      |                               |  |                  | 16,759            |   |  |   | 24,146     |     |  |   | 26,529     |   |  |   | 29,222     |  
|Capital expenditures                                    |  |                                  | 13,050     |   |                           |                  | 1,938      |   |                      |                               |  |                  | 7,677             |   |  |   | 20,477     |     |  |   | 16,402     |   |  |   | 26,993     |  



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|(1) | We completed the APF Acquisition in July 2008. As a result, the fiscal year ended February 28, 2009 includes APFs results for eight months. For additional
information relating to these periods, see Note 3 to the consolidated financial statements included elsewhere in this Annual Report on Form 10-K.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (a) | Includes $2,078 of acquisition-related costs incurred in connection with an acquisition that did not transpire.
| | --- | ---------------------------------------------------------------------------------------------------------------

| | (b) | In 2006, Weston Presidio V, L.P. acquired its ownership interest in us from our former majority stockholder, Charterhouse Group International, Inc. In connection with this
acquisition, we incurred significant expenses within a finite period of time that were a direct result of the acquisition and did not reflect the ongoing nature of the business. Merger transaction costs for the period from March 1, 2006 to
June 12, 2006 include bond consent solicitation fees and expenses of $3.0 million, investment banking fees of $2.0 million and legal fees and other of $0.9 million. Merger transaction costs for the period from June 13, 2006 to
February 28, 2007 include $3.3 million of merger incentive compensation and legal and other acquisition-related transactions costs of $0.2 million. In addition, as a result of applying purchase accounting to record inventory at fair value, we
increased the book value of acquired inventory by $0.9 million, which we amortized to cost of goods sold as the inventory was sold to customers during the period from June 13, 2006 to February 28, 2007.
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated
financial statements and accompanying notes appearing elsewhere in this Annual Report on Form 10-K. This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those
discussed below. Factors that could cause or contribute to these differences include, but are not limited to, those identified below and those discussed in Risk Factors appearing elsewhere in this Annual Report on Form 10-K.

Overview

We produce
converted tissue products, tissue hardrolls and machine-glazed tissue, and we believe we are one of the leaders in the value retail converted tissue market. Our customers include leading consumer retailers and away-from-home distributors of tissue
products, vertically integrated manufacturers and third-party converters serving the tissue and machine-glazed tissue segments. Most of the tissue products we convert are internally sourced from the tissue hardrolls that we manufacture to the
specifications requested by our customers. The tissue hardrolls that we manufacture, but do not convert, are marketed to customers for use in various end products, including diapers, bath and facial tissue, assorted paper towels and napkins. In
addition to converted tissue products and tissue hardrolls, we also manufacture machine-glazed tissue and polystyrene foam used in various end products, including food wraps and foam plates. However, foam products are not a significant portion of
our business.

We own and operate six facilities in the United States, located in East Hartford, Connecticut; Menominee, Michigan;
Wiggins, Mississippi; Gouverneur, New York; Neenah, Wisconsin; and Ladysmith, Wisconsin and one facility located in St. Catharines, Ontario, Canada. We also lease and operate facilities in Long Island, New York and Thomaston, Georgia. In
addition, we recently added a new 323,000 square foot facility in Oklahoma City, Oklahoma, which we expect will add to our converting capacity and become operational during the second half of fiscal 2011.



28



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##### Index to Financial Statements

Our fiscal year ends on the last day of February. We refer to our fiscal year ending February 28,
2010 as our fiscal year 2010, to our fiscal year ended February 28, 2009 as fiscal year 2009 and to our fiscal year ended February 29, 2008 as fiscal year 2008.

Our Segments

We operate in three segments,
tissue, machine-glazed tissue and foam, although we generally operate our business as an integrated tissue paper company. In our tissue segment, we derive our revenues from the sale of:



| |  |  | converted tissue products, including a variety of consumer private label and away-from-home bath and facial tissue, napkins and folded and rolled towels; and
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | tissue hardrolls sold as facial and bath tissue, special medical tissue, industrial wipers, napkin and paper towel stock, as well as absorbent cover stock.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------

We derive our revenues in our machine-glazed tissue segment from the sale of:



| |  |  | machine-glazed tissue hardrolls to third-party converters that manufacture fast food and commercial food wrap, as well as niche market products such as gum
wrappers, coffee filters, paper used to line packs of cigarettes, wax paper and butter wraps; and
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | converted wax paper products, including wet and dry wax paper, sandwich bags and wax paper.
| | - |  | -------------------------------------------------------------------------------------------

We derive our revenues in our foam segment, which was added in fiscal year 2009 in connection with the APF Acquisition, primarily from the sale of
foam plates as a private branded product to a single customer.

Our net sales by segment are as follows ($ in millions):



|               |  |             |       |  |             |   |  |             |       |  |       |   |  |   |       |  |       |  
|-------------- |  | ----------- | ----- |  | ----------- | - |  | ----------- | ----- |  | ----- | - |  | - | ----- |  | ----- | -
|               |  | Fiscal 2010 |       |  | Fiscal 2009 |   |  | Fiscal 2008 |      
|Tissue         |  | $           | 394.2 |  | 77.1        | % |  | $           | 400.6 |  | 77.2  | % |  | $ | 333.4 |  | 75.2  | %
|Machine-Glazed |  | $           | 109.1 |  | 21.3        | % |  | $           | 114.4 |  | 22.0  | % |  | $ | 109.7 |  | 24.8  | %
|Foam           |  | $           | 8.0   |  | 1.6         | % |  | $           | 4.0   |  | 0.8   | % |  |   |      |  |      |  
|               |  |             |       |  |             |   |  |             |       |  |       |   |  |   |       |  |       |  
|Total          |  | $           | 511.3 |  | 100.0       | % |  | $           | 519.0 |  | 100.0 | % |  | $ | 443.1 |  | 100.0 | %
|               |  |             |       |  |             |   |  |             |       |  |       |   |  |   |       |  |       |  

We entered the consumer and away-from-home converted tissue products market following our August 2002 acquisition of
our Neenah, Wisconsin manufacturing and converting facility. Over the last seven years, our Neenah, Wisconsin facility has added approximately 85,000 tons of annual hardroll tissue production capacity and 14 converting lines with approximately
90,000 tons of annual converting production capacity. Sales of our converted tissue products in the consumer and away-from-home converted tissue products market generate significantly greater revenue per ton than sales of hardroll tissue. Our
Neenah, Wisconsin facility produces our full line of consumer and away-from-home converted tissue products.

In July 2008, we completed
the APF Acquisition, which is described below, adding the strategic geographic converting operations and increasing our capacity to convert tissue hardrolls into finished cases for sale to consumer private label retailers.

During the second quarter of fiscal 2010, we filled our converting capacity for a number of converted tissue product grades, as strong customer
demand reduced inventory below targeted levels. Therefore, to maintain effective customer service levels, improve product mix and support the growth of converted tissue products, we rebuilt inventory levels during the third quarter of fiscal 2010
and



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##### Index to Financial Statements

completed the installation of a new tissue converting line at our Long Island, New York facility that became fully operational in December 2009.

Acquisition by Weston Presidio V, L.P.

On May 8, 2006, Cellu Paper Holdings, Inc., our parent, entered into a merger agreement with Cellu Parent Corporation, a corporation organized
and controlled by Weston Presidio V, L.P., and Cellu Acquisition Corporation, a newly formed wholly-owned subsidiary of Cellu Parent Corporation. Pursuant to the agreement, Cellu Acquisition Corporation was merged with and into Cellu Paper
Holdings, Inc., with Cellu Paper Holdings, Inc. surviving and becoming a wholly-owned subsidiary of Cellu Parent Corporation. As a result, we were controlled by Weston Presidio V, L.P. from June 12, 2006 to January 27, 2010, the date
of our initial public offering. Weston remains the largest holder of our outstanding stock and directly owns approximately 9.9 million shares, or 49.2% of common stock outstanding, as of February 28, 2010.

CityForest Acquisition

On
March 21, 2007, we acquired CityForest Corporation, or CityForest, which is now our wholly-owned subsidiary. The aggregate purchase price was $61.0 million, consisting of a cash payment of $46.8 million and assumed indebtedness of $18.4 million
plus restricted cash and other miscellaneous adjustments of $1.6 million and acquisition costs of $2.6 million. We refer to this transaction as the CityForest Acquisition. The results of CityForests hardroll manufacturing operations from the
date of acquisition, March 21, 2007, are included in our tissue segment.

APF Acquisition

On July 2, 2008, we consummated the APF Acquisition. The aggregate purchase price paid was $68.0 million, including a cash payment at
closing of $61.7 million and the issuance of a promissory note by Cellu Tissue to Atlantic Paper & Foil Corp. of N.Y. in the principal amount of $6.3 million (the Seller Note), plus the assumption of certain
liabilities. We also incurred $2.5 million of transaction-related costs. The purchase price, which was subject to post-closing working capital adjustments, was adjusted downward by approximately $63,000 by the working capital adjustment
settlement that was finalized in the third quarter of fiscal year 2009.

The results of operations of the APF entities from the
July 2, 2008 date of acquisition are primarily included in our tissue segment. Part of the acquisition related to the foam business, which we report as a separate segment.

Business Drivers and Measures

Our
business is driven by several factors affecting our revenues, costs and results of operations. In managing our business, we closely monitor these factors as well as other industry trends.

Revenue Factors



| |  |  | Price and volume dynamics.    Our business is highly dependent on the timing and magnitude of price increases in our industry, the
sensitivity of those prices to subsequent changes in our costs and the volumes we are able to sell to our customers. Because we manufacture consumer products or products that are converted into consumer products and sold in a competitive market, a
small increase in price can have a significant effect on our revenues, and any inability to increase prices can require a disproportionate increase in volumes to achieve the same revenues. We manage these dynamics differently depending on the type
of product.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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| |  |  | Value retail and retail converted tissue products.    Our value retail and retail customers generally award contracts for delivery of
products to specified distribution centers annually with committed volumes and prices. These contracts can generally be terminated by our customers but typically provide that they will continue to take deliveries for a specified period following
termination. Although prices are fixed in the contracts, if major increases in cost occur in the industry, we generally have the ability to negotiate increases in price with these customers so long as we remain market competitive.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Away-from-home converted tissue products.    Approximately three-fourths of our away-from-home business is subject to contracts with a
duration of six months to one year. We sell the remainder of our away-from-home products on the spot market, which we believe increases our flexibility in reacting to cost increases.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Tissue hardrolls.    We generally sell our tissue hardrolls either under contracts with six-month to three-year terms and price
escalators and de-escalators designed to pass through the majority of increases and decreases in pulp and energy costs to our customers or pursuant to sales at current market prices. We experienced downward price pressures in this sector in the
first half of fiscal 2010 due to decreases in pulp prices and general market conditions, although we have begun to see some increases in tissue hardroll prices as pulp prices increased in the latter half of fiscal 2010.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Given our product mix, approximately one-half of our hardroll business is protected by pulp price escalators or specific customer agreements that allow us to pass
through cost increases to our customers. Under these provisions, a price escalation generally becomes effective within a period of one month to three months.



| |  |  | Product mix.    Our product mix is also an essential driver of our revenues and margins. Converted products generate our highest gross
margins, followed by tissue hardrolls and machine-glazed tissue, respectively. While we expect to continue to be active in all three of these sectors, the higher margins in the converted tissue business have influenced our strategic decision to
expand our production of private label products for value retail and retail customers. In recent periods, we have chosen to increase the number of tissue hardrolls that we in-source into our converting operations, which has reduced the number of
tissue hardrolls that we sold to third parties but has had a positive effect on our gross margins.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Cost Factors



| |  |  | Pulp.    The primary component of cost of goods sold for each of our segments is pulp, which represented approximately 39%, 46%, 45%
of our cost of goods sold in fiscal years 2010, 2009, and 2008, respectively. We have supply agreements with various pulp suppliers over the next two years. We believe under these agreements or their equivalents, we will purchase approximately 50%
to 65% of our anticipated pulp requirements through fiscal year 2012. The balance of our pulp requirements are purchased on the open market. These supply agreements permit us to purchase pulp at prices that are discounted from published list prices
and allow us to shift a portion of our pulp purchases to the spot market to take advantage of more favorable spot market prices when such prices fall. In addition, our Ladysmith, Wisconsin facility produces over 98% of the fiber used in its product
from recycled paper and other products, which provides us with a lower cost alternative to purchasing fiber from a third-party supplier.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Energy.    Energy costs are also a significant cost of our business, representing approximately 10%, 12% and 13% for fiscal year 2010,
2009, and 2008, respectively. Other than as described below, we satisfy our energy requirements through purchases of natural gas and electricity from local utility companies. At our Menominee, Michigan facility, our power boilers
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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| | generate most of our energy requirements through the use of coal, with the balance being supplied through the purchase of natural gas by contract. In recent years, we have increasingly managed
our energy costs by entering into forward swap contracts for natural gas. We have also developed other initiatives to reduce our energy costs, including (1) a third-party gasification steam project at our Wiggins, Mississippi plant to replace a
portion of our natural gas consumption with steam, (2) a cogeneration project at our East Hartford, Connecticut facility to reduce electrical consumption, which generates an annual benefit of $2.0 million and (3) a third-party
gasification steam project at our Neenah, Wisconsin facility to replace a portion of our natural gas consumption with steam.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Manufacturing overhead.    Manufacturing overhead represented approximately 17%, 18%, and 17% for fiscal years 2010, 2009 and 2008,
respectively. These are comprised of mill salary overhead, maintenance labor and materials and other facility costs.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Labor.    Wages and benefits made up approximately 10%, 9% and 10% for fiscal year 2010, 2009 and 2008, respectively. As of
February 28, 2010, we employed 1,245 active full-time employees, consisting of 1,045 hourly employees and 200 salaried employees. We have collective bargaining agreements with the United Steelworkers of America covering approximately 548 of our
hourly employees in our Menominee, Michigan; Wiggins, Mississippi; Gouverneur, New York; and Neenah, Wisconsin facilities, collectively. In addition, we have a collective bargaining agreement with Independent Paperworkers of Canada covering
approximately 78 employees in our St. Catharines, Ontario facility. We are currently in collective bargaining negotiations with the United Steelworkers of America at our facilities in Gouverneur, New York and Menominee, Michigan and with the
Independent Paperworkers of Canada at our facility in St. Catherines, Ontario. The collective bargaining agreements at: (i) Gouverneur, New York expired in October 2009; (ii) Menominee, Michigan expired in December 2009; and (iii) St.
Catherines, Ontario expired in February 2010. During our collective bargaining negotiations at these facilities the Company and the respective unions have entered into memoranda of understanding extending the terms and conditions of the collective
bargaining agreements for the duration of the negotiations. Our collective bargaining agreements at the Wiggins, Mississippi and Neenah, Wisconsin facilities expire in June 2011 and June 2013, respectively. Historically, we have not experienced any
significant labor disputes or work stoppages.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Other materials.    Our costs for other materials, including chemicals, wax, dye and packaging, represented approximately 13%, 10% and
9%, for fiscal years 2010, 2009, and 2008, respectively.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Depreciation and amortization.    Depreciation and amortization expense represented approximately 6%, 5%, and 5% of net sales for
fiscal years 2010, 2009 and 2008, respectively.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Other Factors



| |  |  | Effect of APF Acquisition on our production processes.    The APF Acquisition has significantly increased the capacity of our
converted tissue business and expanded our footprint, particularly in the Northeast, South and Southeast. The equipment of the APF entities is comparable to that at the facilities we already owned and is currently operating below full capacity,
representing an opportunity for growth and production flexibility. We expect that an important aspect of managing our business in the near future will be the flexible and efficient allocation of production among all our facilities and the
optimization of production at the APF facilities.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Further investments in converting capacity.    To satisfy increased customer demand and to further expand our geographic reach, we
have accelerated our growth strategy and committed to a program to invest approximately $30 million to increase our retail converting capacity by 50,000 tons. As of February 28, 2010, we had spent $7.6 million and expect to complete
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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| | spending for this program by March 2011. We anticipate that a portion of this investment will be used to add converting capacity to our new facility in Oklahoma City, Oklahoma. We expect to begin
operations at our Oklahoma City facility in the second half of fiscal 2011 and to continue to increase production throughout fiscal 2011 and fiscal 2012. We also recently completed installation of a new tissue converting line at our Long Island, New
York facility.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Results of operations

We compare fiscal year 2010 to fiscal year 2009 and fiscal year 2008 for purposes of managements discussion and analysis of the results of
operations. Material fluctuations in operations resulting from the effect of purchase accounting have been highlighted.

The following
table sets forth certain sales and operating data for our business segments for the periods indicated:



|                             |  |                   |         |   |              |   |         |      |  |   |         |  
|---------------------------- |  | ----------------- | ------- | - | ------------ | - | ------- | ---- |  | - | ------- | -
|                             |  | Fiscal Year Ended |        
|                             |  | February 29,      |         |   | February 28, |  
|(Dollars in millions)        |  | 2008              |         |   | 2009         |   |         | 2010 | 
|Net sales:                   |  |                   |         |   |              |   |         |      |  |   |         |  
|Tissue segment               |  | $                 | 333.4   |   |              | $ | 400.6   |      |  | $ | 394.2   |  
|Machine-glazed paper segment |  |                   | 109.7   |   |              |   | 114.4   |      |  |   | 109.1   |  
|Foam segment                 |  |                   |        |   |              |   | 4.0     |      |  |   | 8.0     |  
|                             |  |                   |         |   |              |   |         |      |  |   |         |  
|Total                        |  | $                 | 443.1   |   |              | $ | 519.0   |      |  | $ | 511.3   |  
|                             |  |                   |         |   |              |   |         |      |  |   |         |  
|Gross profit:                |  |                   |         |   |              |   |         |      |  |   |         |  
|Tissue segment               |  | $                 | 35.0    |   |              | $ | 46.0    |      |  | $ | 66.5    |  
|Machine-glazed paper segment |  |                   | 6.7     |   |              |   | 8.4     |      |  |   | 9.9     |  
|Foam segment                 |  |                   |        |   |              |   | 0.5     |      |  |   | 2.7     |  
|                             |  |                   |         |   |              |   |         |      |  |   |         |  
|Total                        |  | $                 | 41.7    |   |              | $ | 54.9    |      |  | $ | 79.1    |  
|                             |  |                   |         |   |              |   |         |      |  |   |         |  
|Percentage of net sales:     |  |                   |         |   |              |   |         |      |  |   |         |  
|Tissue segment               |  |                   | 75.2    | % |              |   | 77.2    | %    |  |   | 77.1    | %
|Machine-glazed paper segment |  |                   | 24.8    | % |              |   | 22.0    | %    |  |   | 21.3    | %
|Foam segment                 |  |                   |        |   |              |   | 0.8     | %    |  |   | 1.6     | %
|                             |  |                   |         |   |              |   |         |      |  |   |         |  
|Total                        |  |                   | 100.0   | % |              |   | 100.0   | %    |  |   | 100.0   | %
|                             |  |                   |         |   |              |   |         |      |  |   |         |  
|Gross margin:                |  |                   |         |   |              |   |         |      |  |   |         |  
|Tissue segment               |  |                   | 10.5    | % |              |   | 11.5    | %    |  |   | 16.9    | %
|Machine-glazed paper segment |  |                   | 6.1     | % |              |   | 7.4     | %    |  |   | 9.1     | %
|Foam segment                 |  |                   |        |   |              |   | 12.8    | %    |  |   | 33.8    | %
|Total                        |  |                   | 9.4     | % |              |   | 10.6    | %    |  |   | 15.5    | %
|Shipments (tons):            |  |                   |         |   |              |   |         |      |  |   |         |  
|Tissue segment               |  |                   | 235,395 |   |              |   | 250,073 |      |  |   | 241,572 |  
|Machine-glazed paper segment |  |                   | 81,685  |   |              |   | 82,482  |      |  |   | 87,523  |  
|                             |  |                   |         |   |              |   |         |      |  |   |         |  
|Total                        |  |                   | 317,080 |   |              |   | 332,555 |      |  |   | 329,095 |  
|                             |  |                   |         |   |              |   |         |      |  |   |         |  

Fiscal year ended February 28, 2010 (fiscal year 2010) compared to fiscal year ended February 28, 2009 (fiscal year
2009)

Consolidated net sales for fiscal 2010 decreased $7.7 million, or 1.5%, to $511.3 million from $519.0 million for
the comparable prior year period. On an overall basis, pricing contributed $5.1 million of the decrease and lower volume contributed $2.6 million. During fiscal 2010, we sold 329,095 tons of tissue hardrolls, machine-glazed tissue hardrolls and
converted paper products. This decrease of 3,460 tons, or 1.0%, over the comparable prior year period, was due to fewer tons of tissue hardrolls sold, partially offset by an increase in tons sold of converted tissue products, a portion of which was



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due to the July 2008 acquisition of APF, and an increase in shipments of machine-glazed tissue. During fiscal 2010, we in-sourced an additional 12,878 tons of hardrolls for our converting
operations that were previously purchased on the hardroll market. This served to reduce external hardroll shipments by a similar amount. Net selling price per ton decreased to $1,529 during the current year from $1,549 during the prior year
period. This decrease in price primarily reflects the downward pricing pressure associated with declines in pulp prices, partially offset by improvements in product mix.

Net sales for our tissue segment were $394.2 million during 2010, a decrease of $6.4 million over the comparable prior year period. Decreased
hardroll sales volumes were partially offset by an improvement in mix with respect to increased converting tons sold and moderate overall price improvements in revenue per ton of approximately 1.9%. Price and mix improvements were driven by the APF
Acquisition in fiscal 2009 and the achievement of related synergies. Net selling price per ton increased to $1,632 for fiscal 2010 from $1,602 for fiscal 2009. This increase in net selling price per ton reflects improvements in product mix derived
both from the APF Acquisition and organic growth in converted sales and converted product prices, partially offset by decreases in hardroll prices associated with declines in pulp prices. During fiscal 2010, we in-sourced an additional 12,878 tons
of hardrolls for our converting operations that were previously purchased on the hardroll market. This served to reduce external hardroll shipments by a similar amount. For fiscal 2010, we sold 241,572 tons of tissue, of which 133,767 tons were sold
as hardrolls and 107,805 tons were sold as converted tissue products, compared to fiscal 2009 when we sold 250,073 tons of tissue, of which 157,917 tons were sold as hardrolls and 92,156 tons were sold as converted tissue products. Compared to
fiscal 2009, the increase in converted tons sold primarily reflects the APF Acquisition and organic growth in our converted tissue shipments. The reduction in hardroll shipments reflects a mix shift from hardrolls to converted tons within the tissue
segment.

Net sales for our machine-glazed tissue segment for fiscal 2010 were $109.1 million, a decrease of $5.3 million, or 4.7%,
compared to $114.4 million in the comparable prior year period. Tons sold during fiscal 2010 increased 6.1%, but were more than offset by a 10.1% decline in selling prices that resulted from lower pulp prices. Net selling price per ton was $1,246
for fiscal 2010 compared to $1,387 per ton for fiscal 2009. For fiscal 2010, we sold 87,523 tons of machine-glazed tissue, of which 77,025 tons were sold as hardrolls and 10,498 tons were sold as converted machine-glazed tissue products, compared to
fiscal 2009 when we sold 82,482 tons of machine-glazed tissue, of which 76,688 tons were sold as hardrolls and 5,794 tons were sold as converted machine-glazed tissue products.

Net sales for our foam segment for fiscal 2010 were $8.0 million compared to $4.0 million in the prior year period, reflecting organic growth as
well as a full year of APF results. The comparable prior year period consisted of approximately 9 months of results from APF, which was acquired in July 2008.

Consolidated gross profit was $79.1 million for fiscal 2010 or an increase of $24.2 million from $54.9 million in the comparable prior year
period. As a percentage of net sales, gross profit increased to 15.5% in fiscal 2010 from 10.6% in fiscal 2009. The improvement was driven by the overall volume, mix and selling price changes as discussed above, as well as favorable improvements in
pulp pricing and lower energy costs.

Gross profit by segment is as follows, (in thousands):



|                      |  |                           |        |                   |   |        |  |   |       
|--------------------- |  | ------------------------- | ------ | ----------------- | - | ------ |  | - | ------
|                      |  | For the year months ended |        | Increase         
|                      |  | February 28, 2010         |        | February 28, 2009 |   |       
|Tissue                |  | $                         | 66,481 |                   | $ | 46,005 |  | $ | 20,476
|Machine-glazed tissue |  |                           | 9,883  |                   |   | 8,386  |  |   | 1,497 
|Foam                  |  |                           | 2,697  |                   |   | 514    |  |   | 2,183 
|                      |  |                           |        |                   |   |        |  |   |       
|Total                 |  | $                         | 79,061 |                   | $ | 54,905 |  | $ | 24,156
|                      |  |                           |        |                   |   |        |  |   |       



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##### Index to Financial Statements

Tissue gross margins increased to 16.9% for the year ended February 28, 2010 compared to 11.5% in
the prior year. In addition to the factors noted above for net sales, these favorable results were also due to lower fiber and energy costs and increased sales of our converted tissue products, which leveraged our ability to incrementally use more
internally manufactured hardrolls.

Machine-glazed tissue gross margins increased to 9.1% for the year ended February 28, 2010
compared to 7.4% in the comparable prior year period. In addition to the factors noted above for net sales, the increase in gross margin was primarily attributable to lower pulp, energy and other raw material prices, along with favorable machine
productivity.

Foam gross margins were 33.8% for fiscal 2010 compared to 12.8% in fiscal 2009 as a result of reduced resin prices, which
is the primary raw material used to manufacture our foam products, and improvement in selling prices.

Selling, general and
administrative expenses were $22.6 million for the year ended February 28, 2010 compared to $21.9 million for fiscal 2009. As a percentage of net sales, expenses were 4.4% for the current year, compared to 4.2% for the prior year. The
increase is primarily attributable to stock-based compensation of $2.1 million and $0.9 million in fiscal 2010 and fiscal 2009, respectively. The increase in fiscal 2010 was primarily due to $1.1 million from accelerated vesting of certain equity
awards in connection with the January 2010 initial public offering.

Amortization expense in fiscal 2010 and fiscal 2009 of $4.3
million and $2.9 million, respectively, relates to the amortization of the intangible assets recorded in connection with the APF Acquisition.

Interest expense, net in fiscal 2010 was $39.6 million compared to $24.7 million in fiscal 2009. Fiscal 2010
includes non-recurring costs to both extinguish our 93/4%
Senior Secured Notes due 2010 (2010 Notes) and repurchase a portion of our
111/2% Senior Secured Notes due 2014 (2014 Notes) using
proceeds from the January 2010 IPO, as well as the issuance of our 2014 Notes. Non-recurring costs of extinguishing our 2010 Notes include both the write-off of deferred financing fees of $2.2 million and incremental interest expense of $1.7 million
due to the period of time that elapsed between the issuance of the 2014 Notes and the extinguishment of the 2010 Notes. Additionally, the current year includes $3.7 million of non-recurring interest costs associated with using the January 2010
initial public offering proceeds to retire a portion of the 2014 Notes. The remaining increase is primarily attributable to the higher interest rates and debt issuance costs related to the issuance of the 2014 Notes.

Foreign currency (gain) loss in fiscal 2010 was a loss of $1.3 million compared to a gain of $0.6 million in fiscal 2009. The
fluctuation relates to the change in the Canadian currency exchange rate period over period.

Income tax expense for fiscal 2010
was $7.5 million compared to income tax benefit of $0.6 million for fiscal 2009. Included in income tax expense for fiscal 2010 are $1.3 million of discrete tax adjustments, which increased income tax expense. These discrete adjustments primarily
arose from changes in management estimates relating to the calculation of foreign subsidiary deemed dividends and the utilization of alternative minimum tax credits, which were recorded as tax expense. Additionally, fiscal 2010 also includes
discrete tax expense of $1.8 million associated with an increase in the Companys effective federal tax rate which is expected to be realized in the future. The effective tax rate for the fiscal year ended February 28, 2010, including
discrete adjustments, is 66.74%.



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##### Index to Financial Statements

Fiscal year ended February 28, 2009 (fiscal year 2009) compared to fiscal year ended February 29, 2008
(fiscal year 2008)

Net sales for fiscal year 2009 increased $75.9 million, or 17.1%, to $519.0 million from
$443.1 million for fiscal year 2008. On a consolidated basis, tons sold increased for fiscal year 2009 compared to fiscal year 2008. For fiscal year 2009, we sold 332,555 tons of tissue hardrolls, machine-glazed tissue hardrolls and converted
paper products, an increase of 15,475, or 4.9%, compared to fiscal year 2008. The net selling price per ton increased from $1,397 for fiscal year 2008 to $1,549 for fiscal year 2009.



| |  |  | Tissue    Net sales for our tissue segment for fiscal year 2009 increased $67.2 million, or 20.2%, to $400.6 million
from $333.4 million for fiscal year 2008. The majority of this increase was the result of the APF Acquisition; sales were also favorably impacted by improvements in price and mix. Net selling price per ton increased from $1,416 for fiscal year 2008
to $1,602 for fiscal year 2009. This increase was primarily the result of improvements in product mix derived both from the APF Acquisition and organic growth in converted sales and, to a lesser extent, increases in prices. For fiscal year 2009, we
sold 250,073 tons of tissue, of which 157,917 tons were sold as hardrolls and 92,156 tons were sold as converted tissue products, compared to 235,395 tons sold in fiscal year 2008, of which 180,539 tons were sold as hardrolls and 54,856 tons
were sold as converted tissue products. Compared to fiscal year 2008, the increase in tons sold as converted tissue products primarily reflects of the APF Acquisition and organic growth in our converted tissue shipments. The reduction in hardroll
shipments reflects a mix shift from hardrolls to converted tons within the tissue segment.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Machine-glazed tissue    Net sales for our machine-glazed tissue segment for fiscal year 2009 increased $4.7 million, or
4.2%, to $114.4 million from $109.7 million for fiscal year 2008. This increase is primarily as a result of increases in prices. Net selling price per ton increased from $1,343 for fiscal year 2008 to $1,387 for fiscal year 2009. For the
fiscal year 2009, we sold 82,482 tons of machine-glazed tissue, of which 76,688 tons were sold as hardrolls and 5,794 tons were sold as converted machine-glazed products, compared to the fiscal year 2008 when we sold 81,685 tons of machine-glazed
tissue, of which 74,599 tons were sold as hardrolls and 7,086 tons were sold as converted machine-glazed tissue products.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Foam    Net sales for our foam segment for fiscal year 2009 from the date of acquisition, July 2, 2008, were
$4.0 million. We started reporting with respect to the foam segment following the APF Acquisition.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Gross
profit for fiscal year 2009 increased to $54.9 million from $41.7 million for fiscal year 2008, an increase of $13.3 million, or 31.9%, from fiscal year 2008. The increase reflects both the 17.1% increase in sales noted above and
an increase in gross profit as a percentage of sales from 9.4% in fiscal year 2008 to 10.5% in fiscal year 2009. The increase in gross profit as a percentage of sales reflects improvements in product mix and prices, partially offset by increases in
pulp and energy costs.

Gross profit for our tissue segment for fiscal year 2009 was $46.0 million, an increase of
$11.0 million, or 31.7%, from fiscal year 2008. Gross profit for our machine-glazed tissue segment for fiscal year 2009 was $8.4 million, an increase of $1.7 million, or 25.7%, from fiscal year 2008. As a percentage of net sales,
gross profit for the tissue segment increased to 11.5% for fiscal year 2009 from 10.5% in fiscal year 2008. As a percentage of net sales, gross profit for the machine-glazed tissue segment increased to 7.4% for fiscal year 2009 from 6.1% in fiscal
year 2008. Gross profit for our foam segment for fiscal year 2009 from the date of acquisition, July 2, 2008, was $0.5 million.

Selling, general and administrative expenses for fiscal year 2009 increased $1.8 million, or 9.2%, to $21.9 million from
$20.0 million for fiscal year 2008. As a percentage of net sales, selling,



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##### Index to Financial Statements

general and administrative expenses decreased to 4.2% in fiscal year 2009 from 4.5% for fiscal year 2008. Included in fiscal year 2009 are $0.3 million of ongoing APF administrative expenses
and $0.4 million of transition expenses related thereto. Also, included in fiscal year 2009 are increases in workers compensation expense, bad debt expense due to two customer bankruptcies and an increase in incentive compensation expense
associated with strong business performance.

Additionally, fiscal year 2009 includes $1.1 million of stock compensation expense
compared to $1.4 million for fiscal year 2008. These amounts relate to vesting of equity awards and compensation expense associated with the payment of taxes associated with restricted stock award grants in each year.

Terminated acquisition costs for fiscal 2008 includes $2.1 million of terminated acquisition related transaction costs for an acquisition
that did not transpire.

Amortization expense for fiscal year 2009 of $2.9 million relates to the amortization of the
intangible assets recorded in connection with the APF Acquisition.

Interest expense, net for fiscal year 2009 was
$24.7 million compared to $19.9 million for fiscal year 2008. This increase is due to the additional debt incurred in connection with the APF Acquisition.

Foreign currency gain (loss) for fiscal year 2009 was a gain of $0.6 million and for fiscal year 2008 was a loss of $0.1 million.
This fluctuation relates to the change in the Canadian currency year over year.

Income tax benefit for fiscal year 2009 was
$0.6 million compared to a benefit for fiscal year 2008 of $3.9 million. Included in the income tax benefit for fiscal year 2009 is a $1.1 million benefit related to foreign tax credits generated in fiscal 2009 and a $2.9 million
benefit associated with changes in our effective state tax rates, which are expected to be realized in the future. Included in the income tax benefit for fiscal year 2008, is $1.5 million and $1.4 million, respectively, of benefit
associated with future changes in Canadian tax rates due to legislative changes and changes in our effective state tax rates, which are expected to be realized in the future.

Net income for fiscal year 2009 was $6.6 million compared to $3.7 million for fiscal year 2008. Included in fiscal year 2008 net
income is $2.1 million of terminated acquisition-related costs and $1.4 million of cash and non-cash stock compensation charges. Also, included in fiscal year 2008 net income is a tax benefit of $3.9 million.

Liquidity and Capital Resources

Our
principal liquidity requirements are to service debt and meet working capital, tax and capital expenditure needs. Our total debt at February 28, 2010 was $244.3 million including our revolving line of credit of $1.0 million. We fund our working
capital requirements, capital expenditure needs and tax liabilities from net cash provided by operating activities and borrowings under our working capital facility. Additionally, in the past, we have issued debt securities to fund acquisitions.

Based on current forecasts and anticipated market conditions, we believe that funding generated from operating cash flows and available
sources of liquidity will be sufficient to meet all of our operating needs, to make planned capital expenditures and to make all required interest and principal payments on indebtedness for the next twelve to eighteen months. However, our operating
cash flows and liquidity are significantly influenced by numerous factors, including prices of pulp fiber, interest rates and the general economy.



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##### Index to Financial Statements

The following is a summary of our indebtedness. For additional information regarding our indebtedness,
see the notes to the consolidated financial statements.

Working Capital Facility

We have a working capital facility that is based on accounts receivable and inventory levels, that matures on June 12, 2011. Borrowings
under the working capital facility can not exceed $60.0 million and are secured by liens on substantially all of our assets and guaranteed by our subsidiaries. As of February 28, 2010, there were $1.0 million of borrowings outstanding under the
working capital facility and excess availability, less letters of credit of $4.6 million in the aggregate principal amount, was $50.9 million.

2014 Notes

In
June 2009, we issued $255 million principal face amount of
111/2% senior secured notes maturing on June 1, 2014,
with an effective interest rate of 12.48%. The 2014 Notes pay interest in arrears on June 1 and December 1 of each year, commencing on December 1, 2009. The 2014 Notes are secured by liens on substantially all of our assets and
guaranteed by our subsidiaries. The net proceeds of $245.7 million from the issuance of the 2014 Notes were primarily used to redeem the 2010 Notes and fund the contingent earnout payment made on August 28, 2009 in conjunction with the 2006
Merger. During fiscal 2010, using the proceeds from the January 2010 initial public offering, the company repurchased $20.5 million of notional bonds outstanding.

APF Note

As part of the financing of
the APF Acquisition, we entered into a subordinated, unsecured promissory note in the amount of $6.3 million that bears interest at 12% per year payable in quarterly installments. This promissory note was repaid in full during February 2010
using proceeds from the January 2010 IPO.

CityForest Industrial Revenue Bonds

Our subsidiary, CityForest, had approximately $16.4 million in aggregate principal amount of industrial revenue bonds outstanding as of
February 28, 2010. We have guaranteed all of the obligations of CityForest. We are required to annually pay $760,000 of principal of the bonds in two semi-annual payments of $380,000. The balance is payable at maturity on
March 1, 2028.

Debt Covenants

The Indenture in connection with the 2014 Notes contains customary covenants and events of default, including limitations on certain restricted
payments, the incurrence of additional indebtedness and the sale of certain assets. Additionally the CityForest Reimbursement Agreement has a maximum leverage ratio of 2.5 to 1.0 and a minimum fixed charge ratio of 1.2 to 1.0; the Reimbursement
Agreement covenants apply only to CityForest financial statements. The Company is compliant with these covenants as of February 28, 2010.

Contingent Payment

In connection
with the acquisition of Cellu Tissue by Weston Presidio, we were required to pay up to $35.0 million of contingent consideration, in cash and shares of Cellu Parent Corporations Series A preferred stock, to the former owners and advisors of
Cellu Parent Corporation in the event certain financial targets were met. All financial targets were met and $15.0 million, consisting of cash and shares of Series A preferred stock, was paid in fiscal 2009. The second payment of $15.0 million,
consisting of $13.7 million in cash and 1,274 shares of Cellu Parent Corporations Series A preferred



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##### Table of Contents

##### Index to Financial Statements

stock (which was valued at approximately $1.3 million) was paid on August 28, 2009. The final payment of $5.0 million, consisting of $4.6 million in cash and 425 shares of Cellu Parent
Corporations Series A preferred stock (which was valued at approximately $0.4 million) was paid on November 24, 2009. In connection with the reorganization transactions described under Business-Our History, the shares of Cellu
Parents Series A preferred stock converted into shares of our common stock.

Cash Flows

The table that follows presents cash flows information for fiscal years 2010 and 2009.



|                                                    |  |                                |             |   |      |   |             |  
|--------------------------------------------------- |  | ------------------------------ | ----------- | - | ---- | - | ----------- | -
|                                                    |  | Fiscal year ended February 28, |            
|                                                    |  | 2010                           |             |   | 2009 |  
|Net Cash Provided by Operating Activities           |  |                                |             |   |      |   |             |  
|Net (loss) income                                   |  | $                              | 3,762,621   |   |      | $ | 6,560,188   |  
|Non-cash items                                      |  |                                | 42,924,639  |   |      |   | 27,619,677  |  
|Changes in working capital                          |  |                                | 8,504,905   |   |      |   | (10,120,022 | )
|                                                    |  |                                |             |   |      |   |             |  
|Net cash provided by operating activities           |  | $                              | 55,192,165  |   |      | $ | 24,059,843  |  
|                                                    |  |                                |             |   |      |   |             |  
|Net Cash Used in Investing Activities               |  | $                              | (26,993,044 | ) |      | $ | (80,556,754 | )
|                                                    |  |                                |             |   |      |   |             |  
|Net Cash (Used in) Provided by Financing Activities |  | $                              | (24,247,013 | ) |      | $ | 55,244,403  |  
|                                                    |  |                                |             |   |      |   |             |  
|Effect of foreign currency                          |  | $                              | (1,014,110  | ) |      | $ | 730,155     |  
|                                                    |  |                                |             |   |      |   |             |  
|Net increase (decrease) in cash                     |  | $                              | 2,937,998   |   |      | $ | (522,353    | )
|                                                    |  |                                |             |   |      |   |             |  

Net cash provided by operations was $55.2 million for fiscal 2010 and $24.1 million for fiscal year 2009.
Non-cash items for fiscal years 2010 and 2009 were $42.9 million and $27.6 million, respectively, and consisted primarily of depreciation, amortization, derivative gain (loss), stock compensation and deferred income taxes. Additionally,
non-cash items consisted of debt related non-cash interest expense of $6.6 million and $2.1 million in fiscal years 2010 and 2009, respectively. Cash flows provided by changes in working capital totaled $8.5 million in fiscal year 2010 compared to
cash flows used by changes in working capital of $10.1 million. With respect to changes in accounts receivable and inventory, cash used by these items was $3.1 million and $9.7 million for fiscal years 2010 and 2009, respectively. Cash
used by changes in prepaids and other assets was $4.0 million in fiscal 2010 and cash provided by changes in prepaid expenses, income tax receivable and other assets was $1.6 million for fiscal year 2009. Cash provided by changes in accounts
payable, accrued expenses, accrued interest and other liabilities was $15.6 million in fiscal 2010, whereas cash used by changes in accounts payable, accrued expenses, accrued interest and other liabilities was $2.0 million for fiscal year
2009.

Net cash used in investing activities in fiscal 2010 related to the level of capital spending. Cash used in investing
activities in fiscal 2009 was $80.6 million. Included in fiscal year 2009 is the cash paid for the APF Acquisition, net of cash received, of $64.2 million and capital spending of $16.4 million.

Net cash (used in) provided by financing was cash used by financing activities of $24.2 million in fiscal 2010, primarily due to net
repayments on the working capital facility of $17.5 million, payout of the final earnout liability of $18.3 million, payment of deferred financing fees of $9.7 million related to our 2010 refinancing and overall net reductions in long-term debt of
$4.0 million. These amounts were partially offset by proceeds of $29.0 million from our January 2010 initial public offering. Cash provided



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##### Index to Financial Statements

by financing activities in fiscal 2009 was $55.2 million, primarily due to an equity investment by shareholders of $15.0 million, proceeds from a note offering of $36.9 million, net borrowings on
the working capital facility of $8.7 million, partially offset an earnout payment of $7.0 million.

Balance Sheet

Assets

Cash as of
February 28, 2010 increased to $3.3 million from $0.4 million as of the end of the prior fiscal year as a result of the items described above.

Receivables, net as of February 28, 2010 decreased to $49.7 million from $54.1 million as of the end of the prior fiscal
year. Receivables decreased as a result of increased cash collections that resulted primarily from a focus on accelerating certain customer payments and to a lesser extent a decrease in net sales.

Inventories as of February 28, 2010 increased to $56.6 million from $47.2 million as of the end of the prior fiscal year.
Inventories increased primarily as a result of higher overall pulp prices and a shift in the mix of products on-hand from hard rolls to higher value converted products and to a lesser extent a modest slow down in sales in the fourth quarter of
fiscal 2010.

Property, plant and equipment, net as of February 28, 2010 increased to $307.6 million from
$302.0 million as of the prior fiscal year as a result of increased capital expenditures that were primarily related to purchasing additional converting equipment for our converting facilities, including our new Oklahoma City, Oklahoma facility
that will begin operations in the second half of fiscal 2011.

Other intangibles, net as of February 28, 2010 decreased to
$27.4 million from $31.7 million as of the end of the prior fiscal year as a result of amortization expense during the year.

Other assets as of February 28, 2010 increased to $9.4 million from $1.9 million as of the end of the prior fiscal year
primarily due to bond issuance costs capitalized in Fiscal 2010 debt refinancing.

Liabilities

Bank overdrafts as of February 28, 2010 were zero compared to $3.3 as of the end of the prior fiscal year. As of the end of the prior
fiscal year, checks outstanding exceeded cash balances in our lockbox account by this amount due to timing of payments.

Revolving
line of credit as of February 28, 2010 decreased to $1.0 million from $18.5 million as of the end of the prior fiscal year. At the end of the prior fiscal year, there were additional borrowings in connection with the financing of the
APF Acquisition.

Accounts payable as of February 28, 2010 increased to $34.3 million from $16.7 million as of the end
of the prior fiscal year. The increase in accounts payable is due primarily to the timing of payments and higher pulp prices.

Accrued interest as of February 28, 2010 decreased to $6.7 million from $10.2 million as of the end of the prior fiscal year.
The decrease is due to the timing of semi-annual interest payments related to outstanding bonds partially offset by increased borrowing rates on the new 2014 Notes compared to the 2010 Notes that were extinguished during the current fiscal year.



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##### Table of Contents

##### Index to Financial Statements

Other current liabilities as of February 28, 2010 decreased to $0.6 million from
$17.4 million as of the end of the prior fiscal year. The prior year balance includes a liability of $2.4 million related to the fair value of our cash flow hedging instruments and a $15.0 million earnout liability that was paid
during the current fiscal year.

Other liabilities as of February 28, 2010 decreased to $1.0 million from $5.4 million
as of the end of the prior fiscal year primarily due to the earnout payment in November 2009.

Capital in excess of par value as
of February 28, 2010 increased to $103.1 million from $70.8 million as of the end of the prior fiscal year primarily due to the proceeds from the Companys initial public offering in January 2010 and stock-based compensation
expense.

Accumulated earningsas of February 28, 2010 was $7.5 million compared to $3.7 million as of the end of
the prior fiscal year due to the earnings generated in fiscal year 2010.

Accumulated other comprehensive income (loss) as
of February 28, 2010 was income of $0.1 million compared to a loss of $6.9 million as of the end of the prior fiscal year. The change is primarily due to changes in foreign currency translation and changes in unrealized natural gas
derivative positions.

Capital Spending Summary

Capital expenditures were $27.0 million, $16.4 million and $20.5 million for fiscal years 2010, 2009, and 2008, respectively. We have
increased capital expenditures since fiscal year 2002 to support ongoing cost savings programs (cost improvements) and growth in our manufacturing capacity. Cost improvement refers to our initiatives to continue to reduce our manufacturing costs in
accordance with our business strategy. We have concentrated the growth in our manufacturing capacity since fiscal year 2003 on our converting operations facilities for the production of value-added converted tissue products.

Additionally, included in the fiscal year 2008 spending described above is $5.5 million that we spent to buy out an operating lease. The
assets and the associated lease were put into place in 1999.

We expect that the percentage of our capital expenditures dedicated to
additional converting capacity may increase in the future as we execute our strategy of increasing our sales of converted tissue products. In order to satisfy increased customer demand for converted tissue products and to further expand our
geographic reach, we completed the installation of a new tissue converting line in our Long Island, New York facility (which became operational in December 2009) and we expect to invest approximately $30 million to further increase our retail
converting capacity by 50,000 tons. It is anticipated that a portion of this investment will be used to add converting capacity to our new 323,000 square foot facility in Oklahoma City, Oklahoma. We expect that the balance of this investment will be
used to add converting capacity to our three established facilities in Neenah, Wisconsin, Thomaston, Georgia and Long Island, New York. As of February 28, 2010, we had spent $7.6 million and expect to substantially complete this program by
March 2011.



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##### Index to Financial Statements

Contractual Obligations

At February 28, 2010, our material obligations under firm contractual arrangements, including commitments for future payments under long-term
debt arrangements, operating lease arrangements and other long-term obligations, are summarized below.



|                            |  |                             |         |                 |   |           |  |           |         |                  |   |         |  |   |       
|--------------------------- |  | --------------------------- | ------- | --------------- | - | --------- |  | --------- | ------- | ---------------- | - | ------- |  | - | ------
|                            |  | Cash payments due by period
|(Dollars in
thousands)      |  | Total                       |         | Less than1 year |   | 1-3 years |  | 3-5 years |         | More than5 years
|Long-term debt obligations  |  | $                           | 250,839 |                 | $ | 760       |  | $         | 1,520   |                  | $ | 236,004 |  | $ | 12,555
|Interest obligations        |  |                             | 126,494 |                 |   | 27,445    |  |           | 54,822  |                  |   | 41,247  |  |   | 2,980 
|Operating lease obligations |  |                             | 18,151  |                 |   | 4,132     |  |           | 7,389   |                  |   | 3,820   |  |   | 2,810 
|Purchase obligations        |  |                             | 222,096 |                 |   | 125,276   |  |           | 77,083  |                  |   | 4,386   |  |   | 15,351
|                            |  |                             |         |                 |   |           |  |           |         |                  |   |         |  |   |       
|Total(1)                    |  | $                           | 617,580 |                 | $ | 157,613   |  | $         | 140,814 |                  | $ | 285,457 |  | $ | 33,696
|                            |  |                             |         |                 |   |           |  |           |         |                  |   |         |  |   |       



|(1) | Due to uncertainty regarding potential tax audits and their possible outcomes, the estimate of obligations related to unrecognized tax benefits cannot be made. See Note 8 to
the consolidated financial statements for additional detail.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Net Operating Loss Carryforwards

At February 28, 2010, we had state NOLs of approximately $37 million and state tax credits of approximately $1 million, which begin to expire
in 2019 and foreign tax credit carryforwards of approximately $3 million which begin to expire in 2017. We currently believe that it is more likely than not that we will not realize the benefits of the majority of our state net operating
losses, a portion of our state tax credits and a portion of our foreign tax credits prior to their expiration.

In assessing the
realizability of deferred tax assets, we consider whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future
taxable income during the periods in which those temporary differences become deductible. We consider the scheduled reversal of deferred tax liabilities, projected future taxable income and tax planning strategies in making this assessment. Based on
the level of historical taxable income and projections for future taxable income over the periods in which the deferred tax assets are deductible, we believe it is more likely than not that we will realize the majority of the benefits of the foreign
tax credit and state tax credit deductible differences. We believe that it is more likely than not that we will not realize the benefits of the majority of our state net operating losses prior to the expiration. We have recorded a valuation
allowance on the majority of our state net operating losses and a portion of our state tax credits and foreign tax credits.

New Accounting Standards

Refer to Note 2 (Summary of Significant Accounting Policies) of the notes to our consolidated financial statements for a
discussion of new accounting pronouncements and the potential impact to our consolidated results of operations and financial position.

On July 31, 2009, the Financial Accounting Standards Board Accounting Standards Codification became the authoritative source of accounting
principles to be applied to the financial statements of nongovernmental entities prepared in accordance with U.S. GAAP. The following is a list of recent pronouncements issued by the Financial Accounting Standards Board and which we adopted during
the second quarter of fiscal 2010:



| |  |  | Fair Value Measurements and Disclosures:    The pronouncements define fair value, establish guidelines for measuring fair value and
expand disclosures regarding fair value measurements. The adoption of fair value measurements and disclosures did not have a material impact on our results of operations and financial position.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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##### Index to Financial Statements

| |  |  | Subsequent Events:    The pronouncement codifies existing standards of accounting for and disclosures of events that occur after the
balance sheet date but before financial statements are issued or are available to be issued. The adoption of the pronouncement did not have any impact on our consolidated financial statements.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Critical Accounting Policies and Estimates

Preparation of our financial statements requires management to make estimates and assumptions that affect the reported amounts of assets,
liabilities, revenues and expenses. Significant accounting policies used in the preparation of our consolidated financial statements are described in Note 2 (Summary of Significant Accounting Policies) of the notes to our consolidated financial
statements included elsewhere in this Form 10-K. Management believes the most complex and sensitive judgments, because of their critical nature, result primarily from the need to make estimates about the effects of matters with inherent uncertainty.
The most critical areas involving management estimates are described below. Actual results in these areas could differ from managements estimates.

Allowance for Doubtful Accounts

We
estimate our allowance for doubtful accounts using two methods. First, we determine a specific reserve for individual accounts where information is available that the customer may have an inability to meet its financial obligation. Second, we
estimate additional reserves for all customers based on historical write-offs. Accounts are charged-off against the allowance for doubtful accounts when we have exhausted all collection efforts and have deemed the accounts uncollectible.

Reserve for Obsolete or Excess Inventory

We estimate our reserve for obsolete and excess inventory utilizing a lower-of-cost or market approach. We review inventory quantities and related
costs at least quarterly to identify potential obsolete or excess inventory. After identifying potential obsolete or excess inventory, management evaluates such factors as anticipated usage, inventory turnover, inventory levels and ultimate product
sales value. Inventory that, in the judgment of management, is obsolete or in excess of our normal usage is written down to its estimated market value, if less than its costs. Significant judgments must be made when establishing the reserve for
obsolete or excess inventory.

Goodwill and Trademarks

Goodwill is not amortized but tested for impairment annually at year-end, and at any time when events suggest impairment may have occurred. Our
goodwill impairment test is performed by comparing the fair value of each reporting unit to the carrying value of each reporting unit. We incorporate assumptions involving future growth rates, discount rates and tax rates in projecting the future
cash flows. In the event the carrying value of a reporting unit exceeds its fair value, an impairment loss would be recognized to the extent the carrying amount of the reporting units goodwill exceeds its implied fair value. Goodwill as of
February 28, 2010 and 2009 was $41.0 million in each year, of which $29.7 million was recorded in connection with the APF Acquisition in fiscal 2009. No goodwill impairment has been recorded through February 28, 2010.

Trademarks are not generally amortized but tested for impairment annually at the end of our second quarter, and at any time when events suggest
impairment may have occurred. Our impairment test is performed by comparing the carrying amount to its fair market value at the time of assessment. We incorporate assumptions involving future growth rates, discount rates and tax rates in projecting
the future cash flows. In the event the carrying value of the trademark exceeds its fair value, an impairment loss would be recognized. No trademark impairments have been recorded through February 28, 2010.



43



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##### Index to Financial Statements

Income Taxes

We recognize deferred tax assets and liabilities for expected future tax consequences of events that have been included in the financial statements
or income tax returns. Under this methodology, deferred tax assets and liabilities are determined based on the difference between the financial statements and the tax basis of assets and liabilities using enacted tax rates in effect for the year in
which the differences are expected to reverse.

Derivatives and Hedging

We use derivative financial instruments to offset a substantial portion of our exposure to market risk arising from changes in the price of natural
gas. Hedging of this risk is accomplished by entering into forward swap contracts, which are designated as hedges of specific quantities of natural gas expected to be purchased in future months. These contracts are held for purposes other than
trading and are designated as cash flow hedges. We measure fair value of our derivative financial instruments as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants.
We use a fair value hierarchy for valuation inputs that gives the highest priority to quoted prices in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. The fair value hierarchy is as follows:
level 1-inputs utilize quoted prices (unadjusted) in active markets for identical assets or liabilities that we have the ability to access; level 2-inputs utilize data points that are observable such as quoted prices, interest rate and
yield curves; level 3-inputs are unobservable data points for the asset or liability, and include situations where there is little, if any, market activity for the asset or liability.

Our derivative contracts, natural gas forward contracts, are valued using industry-standard models that use observable market inputs (forward
market prices for natural gas) as their basis. We classify these instruments within level 2 of the valuation hierarchy. For level 2 and 3 of the fair value hierarchy, where appropriate, valuations are adjusted for various factors such as
liquidity, bid/offer spreads and credit considerations (non performance risk).



|ITEM 7A. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
|-------- | ----------------------------------------------------------

We use natural gas swap contracts with a cumulative total notional amount of approximately $4.4 million for 706,137 MMbtu at February 28, 2010
to hedge against cash flow variability arising from changes in natural gas prices in conjunction with our anticipated purchases of natural gas through February 2011. These swap contracts fix the rates on portions of our natural gas purchases to
rates ranging from $5.15 per MMbtu to $7.37 per MMbtu for various periods through February 2011. These swap contracts were accounted for as effective hedges during fiscal year 2010. These natural gas swap contracts had a liability fair value of $0.6
million at February 28, 2010, which was included in other current liabilities. Approximately 45% of our natural gas requirements are hedged through February 28, 2011.

We have minimal foreign currency translation risk. All international sales, other than sales originating from our Canadian subsidiary, are
denominated in U.S. dollars. Due to our Canadian operations, however, we could be adversely affected by unfavorable fluctuations in foreign currency exchange rates.

Although, as of February 28, 2010, we had $1.0 million outstanding in borrowings under our working capital facility, to the extent that we
increase our borrowings under the working capital facility in the future, our interest expense for such borrowings would be affected by changes in interest rates. In addition, as described in Note 6 to the consolidated financial statements, amounts
borrowed by CityForest Corporation under the Associated Bank Revolving Credit Facility bear interest at a rate per



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##### Index to Financial Statements

annum equal to the LIBOR Rate (as defined in the Reimbursement Agreement), plus an applicable margin. Accordingly, the interest expense for borrowings under the Associated Bank Revolving Credit
Facility would also be affected by changes in interest rates.

We are also subject to commodity price risk associated with pulp costs
and take advantage of spot prices on pulps to minimize market risk arising from changes in pulp costs. We have agreements with various pulp vendors to purchase various amounts of pulp over the next two years. These commitments require purchases of
pulp up to approximately 178,000 metric tons per year at pulp prices below published list prices and allow us to shift a portion of our pulp purchases to the spot market to take advantage of spot market prices when such prices fall. We believe that
our current commitment under these arrangements or their equivalent approximates 50% to 65% of our current budgeted pulp needs through fiscal year 2012.



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

See Item 15 for an index to financial statements and financial statement schedules. Such financial statements and financial statement schedules
are incorporated herein by reference.



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

None.



|ITEM 9A (T). | CONTROLS AND PROCEDURES
|------------ | -----------------------

Evaluation of Disclosure Controls
and Procedures

We maintain disclosure controls and procedures designed to ensure that information required to be disclosed in the
reports that we file or submit under the Securities Exchange Act of 1934, as amended (the Exchange Act) is recorded, processed, summarized and reported within the time periods specified in the SECs rules and forms. Disclosure
controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, include controls and procedures designed to ensure that information required to be disclosed in the reports we file or submit under the Exchange Act is
accumulated and communicated to our management, including the Chief Executive Officer and the Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. Any system of controls, however well designed and
operated, can provide only reasonable, and not absolute, assurance that the objectives of the system are met.

As required by Securities
and Exchange Commission rules, we have evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this Annual Report on Form 10-K. This evaluation was carried out
under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer. Based on this evaluation, our management, including our Chief Executive Officer and Chief Financial Officer have
concluded that our disclosure controls and procedures were effective as of February 28, 2010.

Managements Report on Internal Control over
Financial Reporting

Management of the Company is responsible for establishing and maintaining adequate internal control over
financial reporting. The Companys internal control over financial reporting is designed 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 in the United States of America. The Companys internal control over financial reporting includes those



45



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##### Index to Financial Statements

policies and procedures that: (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the
Company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles in the United States of America, and that receipts
and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use
or disposition of the Companys assets that could have a material effect on the financial statements.

Because of the inherent
limitations, a system of internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of
changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Management assessed the
effectiveness of the Companys internal control over financial reporting as of February 28, 2010. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission
(COSO) in Internal Control: Integrated Framework. Based on its assessment, management has concluded that, as of February 28, 2010, the Companys internal control over financial reporting was effective based on those criteria.

This Annual Report does not include an attestation report of the Companys independent registered public accounting firm regarding
internal control over financial reporting. Managements report was not subject to attestation by the Companys independent registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit
the Company to provide only managements report in this Annual Report.

There were no changes in the Companys internal
controls over financial reporting during the quarter ended February 28, 2010 that have materially affected, or are reasonably likely to materially affect, the Companys internal control over financial reporting.



|ITEM 9B. | OTHER INFORMATION
|-------- | -----------------

None.

PART III



|ITEM 10. | DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
|-------- | ------------------------------------------------------

Code of Conduct

The Board has adopted a Code
of Business Conduct and Ethics (Code of Conduct) which is applicable to all employees, directors and officers of the Company including our principal executive and senior financial officer. The code of Conduct is posted on our website at
www.cellutissue.com under the Investors section and Corporate Governance caption and is available in print to stockholders who request a copy. In the event that we make changes in, or provide waivers from, the
provisions of the Code of Conduct that the Securities and Exchange Commission requires us to disclose, we intend to disclose these events in the corporate governance section of our investor relations website. We have made available an Ethics
Hotline, where employees can anonymously report a violation of the Code of Conduct.



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##### Index to Financial Statements

Additional Information

Additional information, as required in Item 10. Directors, Executive Officers and Corporate Governance of the Registrant are
incorporated by reference to the Proxy Statement (the 2010 Proxy Statement) included in the Schedule 14A to be filed by the Company with the Securities and Exchange Commission (the Commission) under the Securities
Exchange Act of 1934, as amended.



|ITEM 11. | EXECUTIVE COMPENSATION
|-------- | ----------------------

Information regarding
this item will appear in our Proxy Statement and is hereby incorporated by reference in this Annual Report on Form 10-K.



|ITEM 12. | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
|-------- | ----------------------------------------------------------------------------------------------

The equity compensation plan information as required by Item 201(d) of Regulation S-K is illustrated in Part II, Item 5 of this
document. All other information as required by Item 12 is incorporated by reference to the 2010 Proxy Statement.



|ITEM 13. | CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
|-------- | -------------------------------------------------------------------------

Information regarding this item will appear in our Proxy Statement and is hereby incorporated by reference in this Annual Report on Form 10-K.



|ITEM 14. | PRINCIPAL ACCOUNTANT FEES AND SERVICES
|-------- | --------------------------------------

Information regarding
this item will appear in our Proxy Statement and is hereby incorporated by reference in this Annual Report on Form 10-K.

PART IV



|ITEM 15. | EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
|-------- | ------------------------------------------



| | (a) | Index to documents filed as part of this report:
| | --- | ------------------------------------------------

1.
and 2. Financial Statements and Financial Statement Schedules

The response to this portion of Item 15 is submitted as a separate
section of this report beginning with an index thereto on page F-1.



| | (b) | Exhibits
| | --- | --------



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##### Index to Financial Statements

The following exhibits are filed with this report or incorporated by reference:

INDEX TO EXHIBITS



|           |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|---------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|ExhibitNo. |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|3.1        |  | Amended and Restated Certificate of Incorporation of Cellu Tissue Holdings, Inc. (Cellu Tissue) (incorporated by reference to Exhibit 3.1 of Cellu Tissues Current Report on
Form 8-K dated January 27, 2010)                                                                                                                                                                                                                                     
|           | 
|3.2        |  | Amended and Restated Bylaws of Cellu Tissue Holdings, Inc. (incorporated by reference to Exhibit 3.1 of Cellu Tissues Current Report on Form 8-K dated January 27, 2010)                                                                                                                                                                                                                                                                            
|           | 
|4.1        |  | Form of Stock Certificate for Common Stock (incorporated by reference to Exhibit 4.1 of Cellu Tissues Registration Statement on Form S-1A dated December 4, 2009)                                                                                                                                                                                                                                                                                   
|           | 
|4.2        |  | Indenture, dated as of June 3, 2009, by and among Cellu Tissue, the Subsidiary Guarantors (as defined therein) and The Bank of New York Mellon Trust Company, N.A., as trustee
(incorporated by reference to Exhibit 4.1 of Cellu Tissues Current Report on Form 8-K dated June 3, 2009) and schedules and exhibits thereto (incorporated by reference to Exhibit 4.2 of Cellu Tissues Registration Statement
on Form S-1/A dated December 4, 2009)
|           | 
|4.3        |  | Form of
111/2% Senior Secured Exchange Note due 2014 (included in
Exhibit 4.2 hereto)                                                                                                                                                                                                                                                                                                                                                                
|           | 
|4.4        |  | Form of Subsidiary Guarantee (included in Exhibit 4.2 hereto)                                                                                                                                                                                                                                                                                                                                                                                        
|           | 
|4.5        |  | Shareholders Agreement of Cellu Tissue Holdings, dated January 27, 2010 (incorporated by reference to Exhibit 4.1 of Cellu Tissues Current Report on Form 8-K dated January 27,
2010)                                                                                                                                                                                                                                                               
|           | 
|10.1       |  | Employment Agreement, dated June 12, 2006, between Russell Taylor and Cellu Tissue (incorporated by reference to Exhibit 10.1 of Cellu Tissues Quarterly Report on
Form 10-Q for the quarter ended May 25, 2006)                                                                                                                                                                                                                                    
|           | 
|10.2       |  | Amendment to Employment Agreement, dated January 18, 2010, between Russell Taylor and Cellu Tissue (incorporated by reference to Exhibit 10.5 of Cellu Tissues Current Report on Form 8-K
dated January 27, 2010)                                                                                                                                                                                                                                   
|           | 
|10.3       |  | Employment Agreement, dated June 12, 2006, between Steven Ziessler and Cellu Tissue (incorporated by reference to Exhibit 10.3 of Cellu Tissues Quarterly Report on
Form 10-Q for the quarter ended May 25, 2006)                                                                                                                                                                                                                                   
|           | 
|10.4       |  | Amendment to Employment Agreement, dated January 18, 2010, between Steven Ziessler and Cellu Tissue (incorporated by reference to Exhibit 10.6 of Cellu Tissues Current Report on Form
8-K dated January 27, 2010)                                                                                                                                                                                                                                  
|           | 
|10.5       |  | Employment Agreement, dated August 6, 2007, between David Morris and Cellu Tissue (incorporated by reference to Exhibit 10.1 of Cellu Tissues Quarterly Report on
Form 10-Q for the quarter ended August 30, 2007)                                                                                                                                                                                                                                  
|           | 
|10.6       |  | Amendment to Employment Agreement, dated January 18, 2010, between David Morris and Cellu Tissue (incorporated by reference to Exhibit 10.7 of Cellu Tissues Current Report on Form 8-K
dated January 27, 2010)                                                                                                                                                                                                                                     
|           | 
|10.7       |  | Cellu Tissue Holdings, Inc. 2010 Equity Compensation Plan (incorporated by reference to Exhibit 10.1 of Cellu Tissues Current Report on Form 8-K dated January 27, 2010)                                                                                                                                                                                                                                                                            
|           | 
|10.8       |  | Cellu Tissue Holdings, Inc. Annual Executive Bonus Program (incorporated by reference to Exhibit 10.2 of Cellu Tissues Current Report on Form 8-K dated January 27,
2010)                                                                                                                                                                                                                                                                           



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##### Index to Financial Statements

|           |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|---------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|ExhibitNo. |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|10.9       |  | Cellu Parent Corporation 2006 Stock Option and Restricted Stock Plan (incorporated by reference to Exhibit 10.1 of Cellu Tissues Current Report on Form 8-K, filed with the SEC
on June 16, 2006)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|           | 
|10.10      |  | Amendment No. 1 to Cellu Parent Corporation 2006 Stock Option and Restricted Stock Plan (incorporated by reference to Exhibit 10.3 of Cellu Tissues Current Report on Form 8-K dated
January 27, 2010)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|           | 
|10.11      |  | Amendment No. 2 to Cellu Parent Corporation 2006 Stock Option and Restricted Stock Plan (incorporated by reference to Exhibit 10.4 of Cellu Tissues Current Report on Form 8-K dated
January 27, 2010)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|           | 
|10.12      |  | Form of Cellu Tissue Holdings, Inc. Director Non-Incentive Stock Option Certificate (incorporated by reference to Exhibit 10.8 of Cellu Tissues Current Report on Form 8-K dated January
27, 2010)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|           | 
|10.13      |  | Form of Cellu Tissue Holdings, Inc. 2010 Equity Compensation Plan Stock Grant Certificate (incorporated by reference to Exhibit 10.7 of Cellu Tissues Current Report on Form 8-K dated
January 27, 2010)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|           | 
|10.14      |  | Agreement and Plan of Merger, dated as of May 8, 2006, by and among Cellu Parent Corporation, Cellu Acquisition Corporation and Cellu Paper Holdings, Inc. (incorporated by reference to
Exhibit 10.14 of Cellu Tissues Annual Report on Form 10-K, filed with the SEC on May 9, 2006) and schedules and exhibits thereto (incorporated by reference to Exhibit 10.14 of Cellu Tissues Registration Statement on Form
S-1/A dated December 4, 2009)                                                                                                                                                                                                                                                          
|           | 
|10.15      |  | Credit Agreement, dated as of June 12, 2006, among Cellu Paper Holdings, Inc., Cellu Tissue, as U.S. Borrower, Interlake Acquisition Corporation Limited, a subsidiary of Cellu Tissue, as
Canadian Borrower, the loan guarantors party thereto, JPMorgan Chase Bank, N.A., as U.S. Administrative Agent, JPMorgan Chase Bank, N.A. Toronto Branch, as Canadian Administrative Agent, and the lenders party thereto (incorporated by reference to
Exhibit 10.3 of Cellu Tissues Current Report on Form 8-K, filed with the SEC on June 16, 2006) and schedules and exhibits thereto (incorporated by reference to Exhibit 10.15 of Cellu Tissues Registration Statement on Form
S-1/A dated December 4, 2009)
|           | 
|10.16      |  | Merger Agreement among Cellu Tissue, Cellu City Acquisition Corporation, Wayne Gullstad as the Shareholders Representative and CityForest Corporation, dated February 26, 2007
(incorporated by reference to Exhibit 10.1 of Cellu Tissues Current Report on Form 8-K, filed with the SEC on March 1, 2007) and schedules and exhibits thereto (incorporated by reference to Exhibit 10.16 of Cellu Tissues
Registration Statement on Form S-1/A dated December 4, 2009)                                                                                                                                                                                                                                    
|           | 
|10.17      |  | First Amendment, dated March 21, 2007, to Credit Agreement, dated June 12, 2006, among Cellu Tissue, as U.S. Borrower, Interlake Acquisition Corporation Limited, a subsidiary of
Cellu Tissue, as Canadian Borrower, certain subsidiaries of Cellu Tissue, Cellu Paper Holdings, Inc., the parent corporation of Cellu Tissue, JPMorgan Chase Bank, N.A. and JPMorgan Chase Bank, N.A., Toronto Branch (incorporated by reference to
Exhibit 10.3 of Cellu Tissues Current Report on Form 8-K/A, filed with the SEC on March 27, 2007) and schedules and exhibits thereto (incorporated by reference to Exhibit 10.17 of Cellu Tissues Registration Statement on
Form S-1/A dated December 18, 2009)        
|           | 
|10.18      |  | Amended and Restated Reimbursement Agreement, dated March 21, 2007, between Cellu Tissue-CityForest LLC and Associated Bank, National Association (incorporated by reference to
Exhibit 10.4 of Cellu Tissues Current Report on Form 8-K/A, filed with the SEC on March 27, 2007) and schedules and exhibits thereto (incorporated by reference to Exhibit 10.18 of Cellu Tissues Registration Statement on
Form S-1/A dated December 18, 2009)                                                                                                                                                                                                                                                              



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##### Index to Financial Statements

|           |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|---------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|ExhibitNo. |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|10.19      |  | Loan Agreement, dated March 1, 1998, between CityForest Corporation and City of Ladysmith, Wisconsin (incorporated by reference to Exhibit 10.5 of Cellu Tissues Current Report
on Form 8-K/A, filed with the SEC on March 27, 2007)                                                                                                                                                                                                                                                                                                                                                                                                        
|           | 
|10.20      |  | Guaranty, dated March 1, 1998, executed by Cellu Tissue in favor of Associated Bank, National Association (incorporated by reference to Exhibit 10.7 of Cellu Tissues Current
Report on Form 8-K/A, filed with the SEC on March 27, 2007)                                                                                                                                                                                                                                                                                                                                                                                                   
|           | 
|10.21      |  | Asset Purchase Agreement, dated July 2, 2008, between Cellu Tissue Holdings, Inc. and 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 Sellers (incorporated by reference to Exhibit 10.1 of Cellu Tissues Current Report on Form 8-K, filed with the SEC
on July 8, 2008) and schedules and exhibits thereto (incorporated by reference to Exhibit 10.22 of Cellu Tissues Registration Statement on Form S-1/A dated December 4, 2009)                                                                    
|           | 
|10.22      |  | Second Amendment, dated July 2, 2008, to the Credit Agreement, dated June 12, 2006, among Cellu Tissue, as U.S. Borrower, Interlake Acquisition Corporation Limited, a subsidiary of
Cellu Tissue, as Canadian Borrower, certain subsidiaries of Cellu Tissue, Cellu Paper Holdings, Inc., JPMorgan Chase Bank, N.A. and JPMorgan Chase Bank, N.A., Toronto Branch. (incorporated by reference to Exhibit 10.7 of Cellu
Tissues Current Report on Form 8-K, filed with the SEC on July 8, 2008)                                                                                                                                             
|           | 
|10.23      |  | Third Amendment, dated September 26, 2008, to the Credit Agreement, dated June 12, 2006, among Cellu Tissue, as U.S. Borrower, Interlake Acquisition Corporation Limited, a
subsidiary of Cellu Tissue, as Canadian Borrower, certain subsidiaries of Cellu Tissue, Cellu Paper Holdings, Inc., JPMorgan Chase Bank, N.A. and JPMorgan Chase Bank, N.A., Toronto Branch (incorporated by reference to Exhibit 10.7 of Cellu
Tissues Quarterly Report on Form 10-Q, filed with the SEC on October 10, 2008)                                                                                                                                  
|           | 
|10.24      |  | Fourth Amendment, dated May 19, 2009, to the Credit Agreement, dated June 12, 2006, among Cellu Tissue, as U.S. Borrower, Interlake Acquisition Corporation Limited, a subsidiary of
Cellu Tissue, as Canadian Borrower, certain subsidiaries of Cellu Tissue, Cellu Paper Holdings, Inc., JPMorgan Chase Bank, N.A. and JPMorgan Chase Bank, N.A., Toronto Branch (incorporated by reference to Exhibit 99.1 of Cellu Tissues
Current Report on Form 8-K dated June 3, 2009) and schedules and exhibits thereto (incorporated by reference to Exhibit 10.25 of Cellu Tissues Registration Statement on Form S-1/A dated December 18, 2009)
|           | 
|10.25      |  | Second Amended and Restated Intercreditor Agreement, dated as of June 3, 2009, among Cellu Tissue Holdings, Inc., The Bank of New York Mellon Trust Company, N.A., as note collateral
agent, JPMorgan Chase Bank, N.A., as U.S. Administrative Agent, JPMorgan Chase Bank, N.A., Toronto Branch, as Canadian Administrative Agent and The Bank of New York Mellon Trust Company, N.A., as prior collateral agent (incorporated by reference to
Exhibit 10.2 of Cellu Tissues Current Report on Form 8-K dated June 3, 2009)                                                                                                                 
|           | 
|10.26      |  | Note Security Agreement, dated as of June 9, 2006, by and among Cellu Tissue Holdings, Inc., and certain of its subsidiaries and The Bank of New York Mellon Trust Company, N.A., as
Collateral Agent (incorporated by reference to Exhibit 10.1 of Cellu Tissues Current Report on Form 8-K dated June 3, 2009) and schedules and exhibits thereto (incorporated by reference to Exhibit 10.27 of Cellu Tissues
Registration Statement on Form S-1/A dated December 4, 2009)                                                                                                                                                              
|           | 
|10.27      |  | Pledge and Security Agreement, dated as of June 12, 2006, by and among Cellu Paper Holdings, Inc., Cellu Tissue Holdings, Inc. and certain of its subsidiaries and JPMorgan Chase Bank,
N.A., as U.S. Administrative Agent and schedules and exhibits thereto (incorporated by reference to Exhibit 10.28 of Cellu Tissues Registration Statement on Form S-1/A dated December 4, 2009)                                                                                                                                                                                                                                                     



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##### Index to Financial Statements

|           |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|---------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|ExhibitNo. |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|10.28      |  | Corporate Bonus Plan, Fiscal Year 2009 (incorporated by reference to Exhibit 10.34 to Cellu Tissues Annual Report on Form 10-K, filed with the SEC on May 8,
2009)                                                                                                                                                                                                                                                                                                                                   
|           | 
|10.29      |  | Corporate Bonus Plan, dated June 21, 2007 (incorporated by reference to Exhibit 10.26 of Cellu Tissues Annual Report on Form 10-K/A, filed with the SEC on
February 3, 2009)                                                                                                                                                                                                                                                                                                                         
|           | 
|10.30      |  | Performance Stock Option Agreement by Cellu Parent Corporation to David Morris, dated April 13, 2009 (incorporated by reference to Exhibit 10.1 of Cellu Tissues Quarterly
Report on Form 10-Q, filed with the SEC on July 2, 2009)                                                                                                                                                                                                                                                                  
|           | 
|10.31      |  | Performance Stock Option Agreement by Cellu Parent Corporation to Steven Ziessler, dated April 13, 2009 (incorporated by reference to Exhibit 10.2 of Cellu Tissues Quarterly
Report on Form 10-Q, filed with the SEC on July 2, 2009)                                                                                                                                                                                                                                                               
|           | 
|10.32      |  | Performance Stock Option Agreement by Cellu Parent Corporation to Russell Taylor, dated April 13, 2009 (incorporated by reference to Exhibit 10.3 of Cellu Tissues Quarterly
Report on Form 10-Q, filed with the SEC on July 2, 2009)                                                                                                                                                                                                                                                                
|           | 
|10.33      |  | Form of Indemnity Agreement to be entered into between Cellu Tissue and its directors and executive officers (incorporated by reference to Exhibit 10.34 of Cellu Tissues Registration
Statement on Form S-1/A dated December 4, 2009)                                                                                                                                                                                                                                                               
|           | 
|10.34      |  | Form of Indemnity Agreement to be entered into between Cellu Tissue and representatives of Weston Presidio (incorporated by reference to Exhibit 10.35 of Cellu Tissues Registration
Statement on Form S-1/A dated December 4, 2009)                                                                                                                                                                                                                                                                 
|           | 
|10.35      |  | Fifth Amendment, dated December 4, 2009, to the Credit Agreement, dated June 12, 2006, among Cellu Tissue, as U.S. Borrower, Interlake Acquisition Corporation Limited, a subsidiary of Cellu
Tissue, as Canadian Borrower, certain subsidiaries of Cellu Tissue, Cellu Paper Holdings, Inc., JPMorgan Chase Bank, N.A. and JPMorgan Chase Bank, N.A., Toronto Branch (incorporated by reference to Exhibit 10.1 of Cellu Tissues Current Report
on Form 8-K, filed with the SEC on December 9, 2009)
|           | 
|10.36      |  | First Amendment, dated December 4, 2009, to the Amended and Restated Reimbursement Agreement, dated March 21, 2007, between Cellu Tissue-CityForest LLC and Associated Bank, National
Association (incorporated by reference to Exhibit 10.2 of Cellu Tissues Current Report on Form 8-K, filed with the SEC on December 9, 2009)                                                                                                                                                                    
|           | 
|21.1*      |  | List of subsidiaries of the Company                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|           | 
|23.1*      |  | Consent of PricewaterhouseCoopers LLP, independent registered public accounting firm.                                                                                                                                                                                                                                                                                                                                                                                                                 
|           | 
|23.2*      |  | Consent of Ernst & Young LLP, independent registered public accounting firm.                                                                                                                                                                                                                                                                                                                                                                                                                          
|           | 
|31.1*      |  | Certification of Chief Executive Officer pursuant to Section 302 of Sarbanes-Oxley Act of 2002                                                                                                                                                                                                                                                                                                                                                                                                        
|           | 
|31.2*      |  | Certification of Chief Financial Officer pursuant to Section 302 of Sarbanes-Oxley Act of 2002                                                                                                                                                                                                                                                                                                                                                                                                        
|           | 
|32.1*      |  | Certification of the Chief Executive Officer pursuant to 18 U.S.C. 1350, as adopted under Section 906 of the Sarbanes-Oxley Act of 2002                                                                                                                                                                                                                                                                                                                                                               
|           | 
|32.2*      |  | Certification of the Chief Financial Officer pursuant to 18 U.S.C. 1350, as adopted under Section 906 of the Sarbanes-Oxley Act of 2002                                                                                                                                                                                                                                                                                                                                                               



|* | Filed herewith.
|- | ---------------



| | (c) | See Financial Statements immediately following Index to Consolidated Financial Statements and Consolidated Financial Statement Schedule.
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------



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##### Index to Financial Statements

SIGNATURES

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



Cellu Tissue Holdings, Inc.By:

/S/    RUSSELL C.
TAYLORRussell C. Taylor,
President and Chief Executive Officer


April 30, 2010

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



|                                                                                                                          |  |  |  |                                                                                            
|------------------------------------------------------------------------------------------------------------------------- |  |  |  | -------------------------------------------------------------------------------------------
|                                                                                                                          |  | 
|/S/    RUSSELL C. TAYLOR
Russell C. Taylor, President and Chief Executive Officer
(Principal Executive Officer), Director |  |  |  | /S/    DAVID J. MORRIS
Chief Financial Officer (Principal Financial and Accounting Officer)
|                                                                                                                          |  | 
|/S/    SEAN HONEY
Chairman and Director                                                                                   |  |  |  | /S/    DAVID FERGUSON
Director                                                             
|                                                                                                                          |  | 
|/S/    STEVEN ZIESSLER
Chief Operating Officer Director                                                                   |  |  |  | /S/    CYNTHIA JAMISON
Director                                                            
|                                                                                                                          |  | 
|/S/    JOSEPH TROY
Director                                                                                               |  |  |  | /S/    GORDON ULSH
Director                                                                



52



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##### Table of Contents

##### Index to Financial Statements

FORM 10-K

ITEM 15(a) (1) and (2)

CELLU TISSUE HOLDINGS, INC.

INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE



|                                                                                                                                                  |  |     
|------------------------------------------------------------------------------------------------------------------------------------------------- |  | ----
|Report of Independent Registered Public Accounting Firm                                                                                           |  | F-2 
|                                                                                                                                                  | 
|Report of Independent Registered Public Accounting Firm                                                                                           |  | F-3 
|                                                                                                                                                  | 
|Consolidated Balance SheetsFebruary 28, 2010 and February 28, 2009                                                                               |  | F-4 
|                                                                                                                                                  | 
|Consolidated Statements of Operationsfor the fiscal years ended February 28, 2010, February 
28, 2009 and February 29, 2008                      |  | F-5 
|                                                                                                                                                  | 
|Consolidated Statements of Changes in Stockholders Equityfor the fiscal years ended February 
28, 2010, February 28, 2009 and February 29, 2008 |  | F-6 
|                                                                                                                                                  | 
|Consolidated Statements of Cash Flowsfor the fiscal years ended February 28, 2010, February 
28, 2009 and February 29, 2008                      |  | F-7 
|                                                                                                                                                  | 
|Notes to Consolidated Financial Statements                                                                                                        |  | F-8 
|                                                                                                                                                  | 
|Schedule IIValuation and Qualifying Accounts of Cellu Tissue Holdings, Inc. is included in Item 
15                                              |  | F-33

All other schedules for which provision is
made in the applicable accounting regulations of the Securities and Exchange Commission are not required under the related instructions or are inapplicable, and therefore have been omitted.



F-1



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##### Table of Contents

##### Index to Financial Statements

Report of Independent Registered Public Accounting Firm

To the Board of Directors and Stockholders of

Cellu Tissue
Holdings, Inc. and Subsidiaries:

In our opinion, the accompanying consolidated balance sheets and the related consolidated
statements of operations, of changes in stockholders equity and of cash flows present fairly, in all material respects, the financial position of Cellu Tissue Holdings, Inc. and its subsidiaries (the Company) at February 28, 2010 and
February 28, 2009, and the results of their operations and their cash flows for each of the two years ended February 28, 2010 and February 28, 2009 in conformity with accounting principles generally accepted in the United States of America. In
addition, in our opinion, the financial statement schedule information for the years ended February 28, 2010 and February 28, 2009 presents fairly, in all material respects, the information set forth therein when read in conjunction with the
related consolidated financial statements. These financial statements and financial statement schedule are the responsibility of the Companys management. Our responsibility is to express an opinion on these financial statements and financial
statement schedule based on our audits. We conducted our audits of these statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting
principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

/s/ PricewaterhouseCoopers LLP

Atlanta, Georgia

April 30, 2010



F-2



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##### Table of Contents

##### Index to Financial Statements

Report of Independent Registered Public Accounting Firm

To the Board of Directors

Cellu Tissue Holdings, Inc. and
Subsidiaries

We have audited the accompanying consolidated statements of operations, changes in stockholders equity, and cash
flows of Cellu Tissue Holdings, Inc. and Subsidiaries (the Company), for the fiscal year ended February 29, 2008. Our audit also included the financial statement schedule for the year ended February 29, 2008, listed in the Index at
Item 15(a). These 2008 financial statements and related schedule are the responsibility of the Companys management. Our responsibility is to express an opinion on these financial statements and schedule based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. We were not engaged to perform an audit of the Companys internal control over financial reporting. Our
audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the
Companys internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting
principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

In our opinion, the 2008 financial statements referred to above present fairly, in all material respects, the consolidated results of operations
and cash flows of Cellu Tissue Holdings, Inc. and Subsidiaries for the fiscal year ended February 29, 2008, in conformity with U. S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedule for
the year ended February 29, 2008, when considered in relation to the basic 2008 financial statements taken as a whole, presents fairly in all material respects the information set forth therein.

/s/ Ernst & Young LLP

Hartford, Connecticut

January 28, 2009, except

for Note 19,
as to

which the date is

October 16, 2009



F-3



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##### Table of Contents

##### Index to Financial Statements

Cellu Tissue Holdings, Inc. and Subsidiaries

Consolidated Balance Sheets



|                                                                                                                                                                                                                                                              |  |                  |             |                  |   |             |  
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---------------- | ----------- | ---------------- | - | ----------- | -
|                                                                                                                                                                                                                                                              |  | February 28,2010 |             | February 28,2009 |  
|Assets                                                                                                                                                                                                                                                        |  |                  |             |                  |   |             |  
|Current assets:                                                                                                                                                                                                                                               |  |                  |             |                  |   |             |  
|Cash and cash equivalents                                                                                                                                                                                                                                     |  | $                | 3,299,033   |                  | $ | 361,035     |  
|Receivables, net of allowance of $195,000 in 2010 and $385,323 in 2009                                                                                                                                                                                        |  |                  | 49,659,464  |                  |   | 54,065,899  |  
|Inventories                                                                                                                                                                                                                                                   |  |                  | 56,586,982  |                  |   | 47,216,049  |  
|Prepaid expenses and other current assets                                                                                                                                                                                                                     |  |                  | 3,810,934   |                  |   | 2,085,774   |  
|Income tax receivable                                                                                                                                                                                                                                         |  |                  | 2,788,118   |                  |   | 174,084     |  
|Deferred income taxes                                                                                                                                                                                                                                         |  |                  | 1,180,866   |                  |   | 3,515,295   |  
|                                                                                                                                                                                                                                                              |  |                  |             |                  |   |             |  
|Total current assets                                                                                                                                                                                                                                          |  |                  | 117,325,397 |                  |   | 107,418,136 |  
|Property, plant and equipment, net                                                                                                                                                                                                                            |  |                  | 307,635,021 |                  |   | 301,987,941 |  
|Goodwill                                                                                                                                                                                                                                                      |  |                  | 41,020,138  |                  |   | 41,020,138  |  
|Other intangibles, net                                                                                                                                                                                                                                        |  |                  | 27,339,953  |                  |   | 31,672,477  |  
|Other assets                                                                                                                                                                                                                                                  |  |                  | 9,385,877   |                  |   | 1,948,108   |  
|                                                                                                                                                                                                                                                              |  |                  |             |                  |   |             |  
|Total assets                                                                                                                                                                                                                                                  |  | $                | 502,706,386 |                  | $ | 484,046,800 |  
|                                                                                                                                                                                                                                                              |  |                  |             |                  |   |             |  
|Liabilities and stockholders equity                                                                                                                                                                                                                          |  |                  |             |                  |   |             |  
|Current liabilities:                                                                                                                                                                                                                                          |  |                  |             |                  |   |             |  
|Bank overdrafts                                                                                                                                                                                                                                               |  | $                |            |                  | $ | 3,285,420   |  
|Revolving line of credit                                                                                                                                                                                                                                      |  |                  | 1,000,750   |                  |   | 18,530,824  |  
|Accounts payable                                                                                                                                                                                                                                              |  |                  | 34,275,598  |                  |   | 16,726,143  |  
|Accrued expenses                                                                                                                                                                                                                                              |  |                  | 27,820,255  |                  |   | 26,548,639  |  
|Accrued interest                                                                                                                                                                                                                                              |  |                  | 6,721,143   |                  |   | 10,160,124  |  
|Other current liabilities                                                                                                                                                                                                                                     |  |                  | 623,653     |                  |   | 17,448,707  |  
|Current portion of long-term debt                                                                                                                                                                                                                             |  |                  | 760,000     |                  |   | 760,000     |  
|                                                                                                                                                                                                                                                              |  |                  |             |                  |   |             |  
|Total current liabilities                                                                                                                                                                                                                                     |  |                  | 71,201,399  |                  |   | 93,459,857  |  
|Long-term debt, less current portion                                                                                                                                                                                                                          |  |                  | 242,538,125 |                  |   | 242,361,944 |  
|Deferred income taxes                                                                                                                                                                                                                                         |  |                  | 77,178,393  |                  |   | 75,110,277  |  
|Other liabilities                                                                                                                                                                                                                                             |  |                  | 956,444     |                  |   | 5,378,059   |  
|Stockholders equity:                                                                                                                                                                                                                                         |  |                  |             |                  |   |             |  
|Common stock, $.01 par value, 23,715,470 shares authorized, 20,145,176 shares issued and outstanding as of February 28, 2010 and
Common Stock, $.01 par value, 18,245,459 shares authorized, 17,447,971 shares issued and outstanding as of February 28, 2009 |  |                  | 201,452     |                  |   | 174,480     |  
|Capital in excess of par value                                                                                                                                                                                                                                |  |                  | 103,076,890 |                  |   | 70,774,381  |  
|Accumulated earnings                                                                                                                                                                                                                                          |  |                  | 7,460,692   |                  |   | 3,698,071   |  
|Accumulated other comprehensive income (loss)                                                                                                                                                                                                                 |  |                  | 92,991      |                  |   | (6,910,269  | )
|                                                                                                                                                                                                                                                              |  |                  |             |                  |   |             |  
|Total stockholders equity                                                                                                                                                                                                                                    |  |                  | 110,832,025 |                  |   | 67,736,663  |  
|                                                                                                                                                                                                                                                              |  |                  |             |                  |   |             |  
|Total liabilities and stockholders equity                                                                                                                                                                                                                    |  | $                | 502,706,386 |                  | $ | 484,046,800 |  
|                                                                                                                                                                                                                                                              |  |                  |             |                  |   |             |  

See accompanying notes to consolidated financial statements.



F-4



---

##### Table of Contents

##### Index to Financial Statements

Cellu Tissue Holdings, Inc. and Subsidiaries

Consolidated Statements of Operations



|                                                 |  |                   |             |   |                  |   |             |                  |  |   |             |  
|------------------------------------------------ |  | ----------------- | ----------- | - | ---------------- | - | ----------- | ---------------- |  | - | ----------- | -
|                                                 |  | Fiscal Year Ended |            
|                                                 |  | February 28,2010  |             |   | February 28,2009 |   |             | February 29,2008 | 
|Net sales                                        |  | $                 | 511,280,798 |   |                  | $ | 519,022,843 |                  |  | $ | 443,081,130 |  
|Cost of goods sold                               |  |                   | 432,220,266 |   |                  |   | 464,118,066 |                  |  |   | 401,352,016 |  
|                                                 |  |                   |             |   |                  |   |             |                  |  |   |             |  
|Gross profit                                     |  |                   | 79,060,532  |   |                  |   | 54,904,777  |                  |  |   | 41,729,114  |  
|Selling, general and administrative expenses     |  |                   | 22,552,055  |   |                  |   | 21,868,989  |                  |  |   | 20,020,819  |  
|Terminated acquisition-related transaction costs |  |                   |            |   |                  |   |            |                  |  |   | 2,078,212   |  
|Amortization expense                             |  |                   | 4,332,524   |   |                  |   | 2,872,523   |                  |  |   |            |  
|                                                 |  |                   |             |   |                  |   |             |                  |  |   |             |  
|Income from operations                           |  |                   | 52,175,953  |   |                  |   | 30,163,265  |                  |  |   | 19,630,083  |  
|Interest expense, net                            |  |                   | 39,593,747  |   |                  |   | 24,709,461  |                  |  |   | 19,870,029  |  
|Foreign currency (gain) loss                     |  |                   | 1,282,228   |   |                  |   | (562,232    | )                |  |   | 100,335     |  
|Other expense (income)                           |  |                   | (8,273      | ) |                  |   | 67,123      |                  |  |   | (132,623    | )
|                                                 |  |                   |             |   |                  |   |             |                  |  |   |             |  
|Income (loss) before income tax benefit          |  |                   | 11,308,251  |   |                  |   | 5,948,913   |                  |  |   | (207,658    | )
|Income tax expense (benefit)                     |  |                   | 7,545,630   |   |                  |   | (611,275    | )                |  |   | (3,909,414  | )
|                                                 |  |                   |             |   |                  |   |             |                  |  |   |             |  
|Net income                                       |  | $                 | 3,762,621   |   |                  | $ | 6,560,188   |                  |  | $ | 3,701,756   |  
|                                                 |  |                   |             |   |                  |   |             |                  |  |   |             |  
|Basic and diluted net income per share           |  | $                 | 0.21        |   |                  | $ | 0.38        |                  |  | $ | 0.21        |  
|                                                 |  |                   |             |   |                  |   |             |                  |  |   |             |  
|Basic shares outstanding                         |  |                   | 17,684,134  |   |                  |   | 17,447,971  |                  |  |   | 17,447,971  |  
|                                                 |  |                   |             |   |                  |   |             |                  |  |   |             |  
|Diluted shares outstanding                       |  |                   | 17,713,863  |   |                  |   | 17,447,971  |                  |  |   | 17,447,971  |  
|                                                 |  |                   |             |   |                  |   |             |                  |  |   |             |  

See accompanying notes to consolidated financial statements.



F-5



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##### Table of Contents

##### Index to Financial Statements

Cellu Tissue Holdings, Inc. and Subsidiaries

Consolidated Statements of Changes in Stockholders Equity



|                                                                        |  |                   |  |                      |         |                              |   |             |                              |  |   |                                            |   |  |                          |            |   |  |   |             |  
|----------------------------------------------------------------------- |  | ----------------- |  | -------------------- | ------- | ---------------------------- | - | ----------- | ---------------------------- |  | - | ------------------------------------------ | - |  | ------------------------ | ---------- | - |  | - | ----------- | -
|                                                                        |  | SharesOutstanding |  | Par ValueCommonStock |         | Capital inExcess of ParValue |   |             | AccumulatedEarnings(Deficit) |  |   | AccumulatedOtherComprehensiveIncome (Loss) |   |  | TotalStockholdersEquity |           
|Balance, February 28, 2007                                              |  | 17,447,971        |  | $                    | 174,480 |                              | $ | 46,084,622  |                              |  | $ | (6,563,873                                 | ) |  | $                        | (942,732   | ) |  | $ | 38,752,497  |  
|Stock-based compensation                                                |  |                   |  |                      |         |                              |   | 776,113     |                              |  |   |                                            |   |  |                          |            |   |  |   | 776,113     |  
|Net income                                                              |  |                   |  |                      |         |                              |   |             |                              |  |   | 3,701,756                                  |   |  |                          |            |   |  |   | 3,701,756   |  
|Foreign currency translation                                            |  |                   |  |                      |         |                              |   |             |                              |  |   |                                            |   |  |                          | 2,855,088  |   |  |   | 2,855,088   |  
|                                                                        |  |                   |  |                      |         |                              |   |             |                              |  |   |                                            |   |  |                          |            |   |  |   |             |  
|Comprehensive income                                                    |  |                   |  |                      |         |                              |   |             |                              |  |   |                                            |   |  |                          |            |   |  |   | 6,556,844   |  
|                                                                        |  |                   |  |                      |         |                              |   |             |                              |  |   |                                            |   |  |                          |            |   |  |   |             |  
|Balance, February 29, 2008                                              |  | 17,447,971        |  |                      | 174,480 |                              |   | 46,860,735  |                              |  |   | (2,862,117                                 | ) |  |                          | 1,912,356  |   |  |   | 46,085,454  |  
|Stock-based compensation                                                |  |                   |  |                      |         |                              |   | 939,530     |                              |  |   |                                            |   |  |                          |            |   |  |   | 939,530     |  
|Equity investment                                                       |  |                   |  |                      |         |                              |   | 21,701,819  |                              |  |   |                                            |   |  |                          |            |   |  |   | 21,701,819  |  
|Earnout payment                                                         |  |                   |  |                      |         |                              |   | 1,272,297   |                              |  |   |                                            |   |  |                          |            |   |  |   | 1,272,297   |  
|Net income                                                              |  |                   |  |                      |         |                              |   |             |                              |  |   | 6,560,188                                  |   |  |                          |            |   |  |   | 6,560,188   |  
|Foreign currency translation                                            |  |                   |  |                      |         |                              |   |             |                              |  |   |                                            |   |  |                          | (6,105,161 | ) |  |   | (6,105,161  | )
|Derivative-unrealized loss                                              |  |                   |  |                      |         |                              |   |             |                              |  |   |                                            |   |  |                          | (2,717,464 | ) |  |   | (2,717,464  | )
|                                                                        |  |                   |  |                      |         |                              |   |             |                              |  |   |                                            |   |  |                          |            |   |  |   |             |  
|Comprehensive loss                                                      |  |                   |  |                      |         |                              |   |             |                              |  |   |                                            |   |  |                          |            |   |  |   | (2,262,437  | )
|                                                                        |  |                   |  |                      |         |                              |   |             |                              |  |   |                                            |   |  |                          |            |   |  |   |             |  
|Balance, February 28, 2009                                              |  | 17,447,971        |  |                      | 174,480 |                              |   | 70,774,381  |                              |  |   | 3,698,071                                  |   |  |                          | (6,910,269 | ) |  |   | 67,736,663  |  
|Proceeds from common stock sold in initial public offering              |  | 2,675,000         |  |                      | 26,750  |                              |   | 28,944,663  |                              |  |   |                                            |   |  |                          |            |   |  |   | 28,971,413  |  
|Earnout payment                                                         |  |                   |  |                      |         |                              |   | 1,698,755   |                              |  |   |                                            |   |  |                          |            |   |  |   | 1,698,755   |  
|Stock issued upon exercise of stock options                             |  | 22,205            |  |                      | 222     |                              |   | 63,135      |                              |  |   |                                            |   |  |                          |            |   |  |   | 63,357      |  
|Repurchase and cancellation of options in connection with IPO put right |  |                   |  |                      |         |                              |   | (332,603    | )                            |  |   |                                            |   |  |                          |            |   |  |   | (332,603    | )
|Stock-based compensation                                                |  |                   |  |                      |         |                              |   | 1,928,559   |                              |  |   |                                            |   |  |                          |            |   |  |   | 1,928,559   |  
|Net income                                                              |  |                   |  |                      |         |                              |   |             |                              |  |   | 3,762,621                                  |   |  |                          |            |   |  |   | 3,762,621   |  
|Foreign currency translation                                            |  |                   |  |                      |         |                              |   |             |                              |  |   |                                            |   |  |                          | 4,909,448  |   |  |   | 4,909,448   |  
|Derivative-unrealized gain                                              |  |                   |  |                      |         |                              |   |             |                              |  |   |                                            |   |  |                          | 2,093,812  |   |  |   | 2,093,812   |  
|                                                                        |  |                   |  |                      |         |                              |   |             |                              |  |   |                                            |   |  |                          |            |   |  |   |             |  
|Comprehensive income                                                    |  |                   |  |                      |         |                              |   |             |                              |  |   |                                            |   |  |                          |            |   |  |   | 10,765,881  |  
|                                                                        |  |                   |  |                      |         |                              |   |             |                              |  |   |                                            |   |  |                          |            |   |  |   |             |  
|Balance, February 28, 2010                                              |  | 20,145,176        |  | $                    | 201,452 |                              | $ | 103,076,890 |                              |  | $ | 7,460,692                                  |   |  | $                        | 92,991     |   |  | $ | 110,832,025 |  
|                                                                        |  |                   |  |                      |         |                              |   |             |                              |  |   |                                            |   |  |                          |            |   |  |   |             |  

See accompanying notes to consolidated financial statements.



F-6



---

##### Table of Contents

##### Index to Financial Statements

Cellu Tissue Holdings, Inc. and Subsidiaries

Consolidated Statements of Cash Flows



|                                                                                     |  |                   |              |   |                  |   |             |                  |  |   |             |  
|------------------------------------------------------------------------------------ |  | ----------------- | ------------ | - | ---------------- | - | ----------- | ---------------- |  | - | ----------- | -
|                                                                                     |  | Fiscal Year Ended |             
|                                                                                     |  | February 28,2010  |              |   | February 28,2009 |   |             | February 29,2008 | 
|Cash flows from operating activities                                                 |  |                   |              |   |                  |   |             |                  |  |   |             |  
|Net income                                                                           |  | $                 | 3,762,621    |   |                  | $ | 6,560,188   |                  |  | $ | 3,701,756   |  
|Adjustments to reconcile net income to net cash provided by operating activities:    |  |                   |              |   |                  |   |             |                  |  |   |             |  
|Depreciation                                                                         |  |                   | 24,889,714   |   |                  |   | 23,656,245  |                  |  |   | 24,146,137  |  
|Amortization of intangibles                                                          |  |                   | 4,332,524    |   |                  |   | 2,872,523   |                  |  |   |            |  
|Amortization and write-off of debt issuance costs                                    |  |                   | 2,288,072    |   |                  |   | 306,668     |                  |  |   |            |  
|Accretion and write-off of debt discount                                             |  |                   | 4,269,352    |   |                  |   | 1,835,001   |                  |  |   | 616,437     |  
|Stock-based compensation                                                             |  |                   | 1,928,559    |   |                  |   | 939,530     |                  |  |   | 808,111     |  
|Deferred income taxes                                                                |  |                   | 4,403,542    |   |                  |   | (2,232,976  | )                |  |   | (6,964,358  | )
|Loss (gain) from natural gas swaps                                                   |  |                   |             |   |                  |   | 242,686     |                  |  |   | (170,564    | )
|Loss on disposal of fixed assets                                                     |  |                   | 812,876      |   |                  |   |            |                  |  |   |            |  
|Changes in operating assets and liabilities net of effects of business acquisitions: |  |                   |              |   |                  |   |             |                  |  |   |             |  
|Receivables                                                                          |  |                   | 5,396,260    |   |                  |   | (3,017,970  | )                |  |   | (4,829,995  | )
|Inventories                                                                          |  |                   | (8,506,452   | ) |                  |   | (6,702,780  | )                |  |   | (3,696,311  | )
|Prepaid expenses and other current assets                                            |  |                   | (4,277,911   | ) |                  |   | 1,782,185   |                  |  |   | 1,363,243   |  
|Other assets                                                                         |  |                   | 324,635      |   |                  |   | (123,460    | )                |  |   | 552,555     |  
|Accounts payable, accrued expenses, accrued interest and other liabilities           |  |                   | 15,568,373   |   |                  |   | (2,057,997  | )                |  |   | 4,268,868   |  
|                                                                                     |  |                   |              |   |                  |   |             |                  |  |   |             |  
|Total adjustments                                                                    |  |                   | 51,429,544   |   |                  |   | 17,499,655  |                  |  |   | 16,094,123  |  
|                                                                                     |  |                   |              |   |                  |   |             |                  |  |   |             |  
|Net cash provided by operating activities                                            |  |                   | 55,192,165   |   |                  |   | 24,059,843  |                  |  |   | 19,795,879  |  
|Cash flows from investing activities                                                 |  |                   |              |   |                  |   |             |                  |  |   |             |  
|Cash paid for acquisition, net of cash received                                      |  |                   |             |   |                  |   | (64,154,906 | )                |  |   | (43,663,270 | )
|Capital expenditures                                                                 |  |                   | (26,993,044  | ) |                  |   | (16,401,848 | )                |  |   | (20,477,426 | )
|                                                                                     |  |                   |              |   |                  |   |             |                  |  |   |             |  
|Net cash used in investing activities                                                |  |                   | (26,993,044  | ) |                  |   | (80,556,754 | )                |  |   | (64,140,696 | )
|Cash flows from financing activities                                                 |  |                   |              |   |                  |   |             |                  |  |   |             |  
|Proceeds from note offering                                                          |  |                   | 245,738,400  |   |                  |   | 36,900,000  |                  |  |   | 20,000,000  |  
|Proceeds from initial public offering                                                |  |                   | 28,971,413   |   |                  |   |            |                  |  |   |            |  
|Proceeds from stock options exercised                                                |  |                   | 100,904      |   |                  |   |            |                  |  |   |            |  
|Purchases of employee stock options                                                  |  |                   | (450,988     | ) |                  |   |            |                  |  |   |            |  
|Excess tax benefits from stock-based compensation programs                           |  |                   | 80,838       |   |                  |   |            |                  |  |   |            |  
|Payments of long-term debt                                                           |  |                   | (249,831,572 | ) |                  |   | (760,000    | )                |  |   | (575,000    | )
|Borrowings on revolving credit facility                                              |  |                   | 36,453,125   |   |                  |   | 85,448,141  |                  |  |   | 69,600,000  |  
|Repayments on revolving credit facility                                              |  |                   | (53,983,199  | ) |                  |   | (76,717,317 | )                |  |   | (59,800,000 | )
|Cash portion of earnout payment                                                      |  |                   | (18,301,245  | ) |                  |   | (7,027,346  | )                |  |   |            |  
|Bank overdrafts                                                                      |  |                   | (3,285,420   | ) |                  |   | 3,285,420   |                  |  |   |            |  
|Equity investment by shareholders                                                    |  |                   |             |   |                  |   | 15,001,463  |                  |  |   | (32,000     | )
|Payment of deferred financing fees                                                   |  |                   | (9,739,269   | ) |                  |   | (885,958    | )                |  |   |            |  
|                                                                                     |  |                   |              |   |                  |   |             |                  |  |   |             |  
|Net cash provided by (used in) financing activities                                  |  |                   | (24,247,013  | ) |                  |   | 55,244,403  |                  |  |   | 29,193,000  |  
|Effect of foreign currency                                                           |  |                   | (1,014,110   | ) |                  |   | 730,155     |                  |  |   | (225,396    | )
|                                                                                     |  |                   |              |   |                  |   |             |                  |  |   |             |  
|Net (decrease) increase in cash and cash equivalents                                 |  |                   | 2,937,998    |   |                  |   | (522,353    | )                |  |   | (15,377,213 | )
|Cash and cash equivalents at beginning of period                                     |  |                   | 361,035      |   |                  |   | 883,388     |                  |  |   | 16,260,601  |  
|                                                                                     |  |                   |              |   |                  |   |             |                  |  |   |             |  
|Cash and cash equivalents at end of period                                           |  | $                 | 3,299,033    |   |                  | $ | 361,035     |                  |  | $ | 883,388     |  
|                                                                                     |  |                   |              |   |                  |   |             |                  |  |   |             |  
|Supplemental disclosure of cash flow information                                     |  |                   |              |   |                  |   |             |                  |  |   |             |  
|Cash paid during the year for Interest                                               |  | $                 | 35,422,773   |   |                  | $ | 18,939,787  |                  |  | $ | 18,397,690  |  
|Cash paid during the year for Income taxes                                           |  | $                 | 6,233,069    |   |                  | $ | 2,373,871   |                  |  | $ | 2,828,444   |  

See accompanying notes to consolidated
financial statements.



F-7



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##### Table of Contents

##### Index to Financial Statements

Cellu Tissue Holdings, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

Note 1. Basis of Presentation

Cellu
Tissue Holdings, Inc., (the Company or Cellu Tissue), a Delaware corporation, together with its consolidated subsidiaries, primarily produces converted tissue products, tissue hard rolls and machine-glazed tissue that
are sold to leading consumer retailers and away-from-home distributors of tissue products, vertically integrated manufacturers and third-party converters serving the tissue and machine-glazed tissue segments.

On June 12, 2006, Weston Presidio V, L.P. (Weston Presidio) acquired the Company through a series of acquisitions and
mergers. The Company accounted for this as a purchase, which resulted in a new valuation for the assets and liabilities of the Company based upon fair values as of the date of the acquisition. The Company has reflected all applicable purchase
accounting adjustments in the Companys consolidated financial statements for all periods subsequent to the acquisition date.

In
connection with the Companys initial public offering of equity securities, which closed on January 27, 2010 (IPO), Cellu Paper Holdings, Inc., the Companys direct parent, which had no operating activities, merged with
and into Cellu Tissue, with Cellu Tissue surviving the merger. Immediately following this merger, Cellu Parent Corporation, which then became our direct parent, merged with and into Cellu Tissue, with Cellu Tissue surviving this second merger. In
connection with these reorganization transactions, the holders of Cellu Parent Corporations outstanding Series A preferred stock ultimately received an aggregate of 13,528,287 shares of our common stock, the holders of Cellu Parent
Corporations outstanding Series B preferred stock ultimately received an aggregate of 2,836,771 shares of our common stock, and the holders of Cellu Parent Corporations common stock received an aggregate of 1,082,913 shares of our common
stock.

Note 2. Summary of Significant Accounting Policies

Principles of Consolidation

The accompanying
financial statements include the accounts of the Company and its wholly-owned subsidiaries. All intercompany transactions and balances are eliminated in consolidation.

Cash Equivalents

The Company considers all
investments with an original maturity of three months or less at the date of purchase cash equivalents.

Revenue Recognition

The Company recognizes revenue when persuasive evidence of an arrangement exists, delivery has occurred, the fee is fixed and determinable and
collection is reasonably assured. Typically, revenue is recognized from product sales when title and risk of loss has passed to the customer in accordance with the related shipping terms, which is generally at the time products are shipped. Certain
sales have freight-on-board destination terms, in which case, revenue is recognized when the product is received by the customer. The Company records a provision for estimated sales returns and other allowances as a reduction of revenue at the time
of revenue recognition.

Trade Receivables and Allowance for Doubtful Accounts

Trade receivables are stated at gross invoice amount, less discounts and provision for uncollectible accounts. The Company performs periodic credit
evaluations of its customers financial



F-8



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##### Table of Contents

##### Index to Financial Statements

Cellu Tissue Holdings, Inc. and Subsidiaries

Notes to Consolidated Financial Statements



condition and generally does not require collateral. The Company estimates its allowance for doubtful accounts using two methods. First, the Company determines a specific reserve for individual
accounts where information is available that the customer may have an inability to meet its financial obligation. Second, the Company estimates additional reserves for all customers based on historical write-offs. Accounts are charged-off against
the allowance for doubtful accounts when the Company has exhausted all collection efforts and has deemed the accounts uncollectible.

Inventories

Inventories are stated at the lower of cost (average cost method) or market. The Company provides allowances for materials or
products that are determined to be obsolete, or for quantities on hand in excess of expected normal, future requirements. Included in packaging materials and supplies are felts and wires. These component parts are kept in inventory until they are
installed on the machines. Once installed, felts and wires are amortized over their estimated useful lives of approximately three months.

Maintenance and Repairs

Maintenance and
repair expenditures that do not qualify to be capitalized are expensed as incurred.

Property, Plant and Equipment

Property, plant and equipment acquired is stated at cost. Depreciation of equipment and amortization of leasehold improvements are computed using
the straight-line method over the estimated useful lives of the related assets or the life of the lease term, whichever is shorter. The estimated useful lives of the principal classifications of depreciable assets are as follows:



|                           |  |             
|-------------------------- |  | ------------
|                           |  | Life inYears
|Buildings and improvements |  | 20-30       
|Machinery and equipment    |  | 15-30       
|Furniture and fixtures     |  | 10          
|Land improvements          |  | 5           
|Computer software          |  | 5           

Asset Impairment

The Company evaluates the appropriateness of the carrying amounts of its long-lived assets whenever indicators of impairment are deemed to exist.
The Company believes that, as of February 28, 2010, there are no impairments of the carrying amounts of such assets and no reduction in their estimated useful lives is warranted.

Goodwill and Trademarks

Goodwill represents
cash paid in excess of fair values assigned to the underlying net assets of acquired businesses. Goodwill is not amortized, but tested for impairment annually at year-end, and at any time when events suggest impairment may have occurred. The
Companys goodwill impairment test is performed by comparing the estimated fair value of the reporting unit to the carrying value of the



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##### Table of Contents

##### Index to Financial Statements

Cellu Tissue Holdings, Inc. and Subsidiaries

Notes to Consolidated Financial Statements



reporting unit. The Company has two reporting units (tissue and machine-glazed paper) to which the goodwill is assigned and tested for impairment. The Company incorporates assumptions involving
future growth rates, discount rates and tax rates in projecting the future cash flows. In the event the carrying value of a reporting unit exceeds its estimated fair value, an impairment loss would be recognized to the extent the carrying amount of
the reporting units goodwill exceeds its implied fair value. Goodwill as of February 28, 2010 was approximately $41.0 million. No goodwill impairment has been recorded during fiscal years 2010, 2009, or 2008.

Trademarks are not amortized, except in connection with the APF Acquisition (see Note 3), but tested for impairment annually at the end of the
Companys second quarter and at any time when events suggest impairment may have occurred. The impairment test is performed by comparing the carrying amount to its estimated fair market value at the time of the assessment. In the event the
carrying value of the trademark exceeds its estimated fair value, an impairment loss would be recognized. No trademark impairments were recorded during fiscal years 2010, 2009 or 2008.

Derivatives and Hedging

The Company uses
derivative financial instruments to offset a portion of its exposure to market risk arising from changes in the price of natural gas. Hedging of this risk is accomplished by entering into forward swap contracts, which are designated as hedges of
specific quantities of natural gas expected to be purchased in future months. These contracts are held for purposes other than trading and are designated as cash flow hedges. The Company measures fair value of its derivative financial instruments
using fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. The Company uses a fair value hierarchy for valuation inputs that gives the highest priority
to quoted prices in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. The fair value hierarchy is as follows: level 1inputs utilize quoted prices (unadjusted) in active markets for
identical assets or liabilities that the Company has the ability to access; level 2inputs utilize data points that are observable such as quoted prices, interest rate and yield curves; level 3inputs are unobservable data points
for the asset or liability, and include situations where there is little, if any, market activity for the asset or liability.

The
Companys natural gas forward contracts are valued using industry-standard models that use observable market inputs (forward market prices for natural gas) as their basis. The Company classifies these instruments within level 2 of the
valuation hierarchy. For level 2 and 3 of the fair value hierarchy, where appropriate, valuations are adjusted for various factors such as liquidity, bid/offer spreads and credit considerations (non performance risk). As of February 28,
2010, the fair value of these cash flow hedging instruments was $0.6 million and is included in other current liabilities. The fair value of cash flow hedges at February 28, 2009 was a liability of $2.7 million, of which
$2.4 million is included in other current liabilities and $0.3 million is included in other liabilities. The notional value of the natural gas forward contracts outstanding is $4.4 million as of February 28, 2010.

Prior to the third quarter of the fiscal year ended February 28, 2009, these contracts were not designated as hedges and accordingly, for the
fiscal year ended February 29, 2008 a $0.2 million gain was recorded to earnings. Hedging activities transacted in fiscal 2010 have been designated as hedges and during the next 12 months, $4.4 million remains to be reclassified to
earnings (cost of goods sold) consistent with the underlying hedging transactions.



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##### Table of Contents

##### Index to Financial Statements

Cellu Tissue Holdings, Inc. and Subsidiaries

Notes to Consolidated Financial Statements



Foreign Currency Translation

All balance sheet accounts are translated at current exchange rates; income and expenses are translated using weighted average exchange rates during
the applicable fiscal year. Resulting translation adjustments are reported in other comprehensive income (loss) with the exception of the remeasurement of the portion of an intercompany loan account functioning as a short-term settlement account and
not deemed to be of a long-term nature, which is recorded to earnings.

Customer Concentrations

For fiscal years 2010 and 2009, no one customer comprised more than 10% of sales. For fiscal year 2008, one customer comprised 13.4% of sales.

Shipping and Handling Costs

The
Company classifies third-party shipping and handling costs as a component of cost of goods sold. Shipping and handling amounts that the Company bills to customers are included in net sales.

Considerations Paid to Resellers

The
Company recognizes consideration paid to a reseller of its products as a reduction of the selling price of its products sold and, therefore, reduces net sales in the Companys statement of operations.

Use of Estimates

The preparation of
financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Financial Instruments

The Company estimates
the fair value of financial instruments for financial statement disclosure. For these purposes, the carrying amounts for cash and cash equivalents, accounts receivable and accounts payable approximate fair value due to their short-term nature. The
carrying amount of the Companys borrowings under its revolving line of credit approximates its fair value due to its varying interest rate. The Companys fair value estimate for the 2014 Notes was based on quoted trade prices. The
estimated fair value as of February 28, 2010 was $250.8 million.

New Accounting Standards

The Financial Accounting Standards Board (FASB) is the authoritative body for financial accounting and reporting in the United States.
On July 31, 2009, the FASB Accounting Standards Codification (the Codification) became the authoritative source of accounting principles to be applied to the financial statements of nongovernmental entities prepared in accordance
with GAAP. The following is a list of recent pronouncements recently issued by the FASB and which were adopted by the Company during the second quarter of fiscal 2010:



| |  |  | Fair Value Measurements and Disclosures: The pronouncements define fair value, establish guidelines for measuring fair value and expand disclosures
regarding fair value measurements. The adoption of fair value measurements and disclosures did not have a material impact on the Companys results of operations and financial position.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



F-11



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##### Table of Contents

##### Index to Financial Statements

Cellu Tissue Holdings, Inc. and Subsidiaries

Notes to Consolidated Financial Statements



| |  |  | Subsequent Events: The pronouncement codifies existing standards of accounting for and disclosures of events that occur after the balance sheet date but
before financial statements are issued or are available to be issued. The adoption of the pronouncement did not have any impact on the Companys Consolidated Financial Statements.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Note 3. Acquisitions

On July 2,
2008, the Company, through two newly created, wholly-owned subsidiaries, Cellu TissueHauppauge, LLC (Cellu Hauppauge) and Cellu TissueThomaston, LLC (Cellu Thomaston), consummated the acquisition of
certain assets and assumption of certain liabilities, from 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 (collectively, the Sellers) pursuant to a definitive asset purchase agreement (the Purchase Agreement) between the Company and the Sellers. The aggregate purchase price paid was
$68.0 million, including a cash payment at closing of $61.7 million and the issuance of a promissory note by the Company to Atlantic Paper & Foil Corp. of N.Y. in the principal amount of $6.3 million (the Seller
Note), plus the assumption of certain liabilities. The Company also incurred $2.5 million of transaction related costs. The purchase price, which was subject to certain post-closing working capital adjustments, was adjusted downward by
approximately $63,000 for the working capital adjustment settlement that was finalized in the third fiscal quarter 2009. The acquisition of these assets and assumption of related liabilities is referred to as the APF Acquisition and the
acquired business is referred to as APF. The Company financed the cash portion of the purchase price with cash on hand, additional borrowings and a $15.0 million equity contribution from its then Parent.

The APF Acquisition has been accounted for as a purchase and, accordingly, the consolidated statement of operations includes the results of APF
from the date of acquisition. The acquisition has resulted in the recognition of goodwill, which is attributable to our tissue segment and will be deductible for tax purposes. Goodwill reflects the future earnings and cash flow potential of the
acquired business in excess of fair values that are assigned to all other identifiable assets and liabilities. Goodwill arises because the purchase price paid reflects factors including the strategic fit and expected synergies this business brings
to existing operations. The Company has allocated the purchase price to the net assets acquired in the acquisition based on its estimates of the fair value of assets and liabilities as follows:



|                                                              |  |                             |            |  
|------------------------------------------------------------- |  | --------------------------- | ---------- | -
|                                                              |  | Purchase priceallocated to: |           
|Current assets, primarily accounts receivable and inventories |  | $                           | 15,241,036 |  
|                                                              | 
|Property, plant and equipment                                 |  |                             | 5,306,225  |  
|Goodwill                                                      |  |                             | 29,685,383 |  
|Noncompete agreements                                         |  |                             | 12,770,000 |  
|Customer lists                                                |  |                             | 12,319,000 |  
|Trademarks                                                    |  |                             | 56,000     |  
|Current liabilities                                           |  |                             | (4,922,736 | )
|                                                              |  |                             |            |  
|Total                                                         |  | $                           | 70,454,908 |  
|                                                              |  |                             |            |  



F-12



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##### Table of Contents

##### Index to Financial Statements

Cellu Tissue Holdings, Inc. and Subsidiaries

Notes to Consolidated Financial Statements



The Company has estimated the fair value of the assets and liabilities of the APF Acquisition,
utilizing information available at the time of acquisition. The Company considered outside third-party appraisals of the tangible and intangible assets to determine the applicable fair market values. Depreciation has been calculated on the fair
value assigned to the tangible fixed assets based on an average remaining useful life. Intangible assets are being amortized on a straight-line basis, assuming no significant residual value, over the following lives: noncompete
agreements5 years, customer lists7 years and trademarks3 years.

The results of APFs operations
from the July 2, 2008 date of acquisition are primarily included in the Companys tissue segment. Part of the acquisition related to the foam business, which the Company reports as a separate segment. Unaudited pro forma results of
operations for the year ended February 28, 2009, are treated as if the Company and APF had been combined at the beginning of the period presented and are presented below. The pro forma results include estimates and assumptions, which the
Companys management believes are reasonable. However, the pro forma results do not include any cost savings or other effects of the planned integration of APF and are not necessarily indicative of the results which would have occurred if the
business combination had been in effect on the dates indicated, or which may result in the future.



|                 |  |                                       |         |                      |   |        
|---------------- |  | ------------------------------------- | ------- | -------------------- | - | -------
|                 |  | Fiscal Year EndedFebruary 28, 2009(1)
|                 |  | Actual                                |         | Pro Forma(unaudited)
|                 |  | (in thousands)                       
|Net sales        |  | $                                     | 519,023 |                      | $ | 551,109
|Operating income |  | $                                     | 30,163  |                      | $ | 33,772 
|Net income       |  | $                                     | 6,560   |                      | $ | 7,344  



|(1) | Pro forma operating results include the operating results for APF for the period March 1, 2008 to June 30, 2008, prior to its acquisition on July 2, 2008. The
actual operating results include the operating results for APF for the period from the acquisition date (July 2, 2008) to February 28, 2009.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

On March 21, 2007, the Company executed a definitive merger agreement (the Acquisition Agreement) with
CityForest Corporation (CityForest), Cellu City Acquisition Corporation (Cellu City Merger Sub) and Wayne Gullstad as the shareholders representative. Pursuant to the Acquisition Agreement, and subject to the terms and
conditions therein, Cellu City Merger Sub, a wholly owned subsidiary of the Company, merged with and into CityForest, with CityForest surviving and becoming a wholly owned subsidiary of the Company (the CityForest Acquisition). The
aggregate merger consideration (including assumption of $18.4 million in aggregate principal amount of industrial revenue bonds) was approximately $61.0 million subject to certain working capital and net cash adjustments. Total cash paid
for the acquisition of $46.8 million (purchase price of $61.0 million less assumed indebtedness of $18.4 million plus restricted cash and other miscellaneous adjustments of $1.6 million and acquisition costs of $2.6 million)
was financed in part by issuance of unregistered 93/4% Senior
Secured Notes due 2010 (the Additional Notes) of approximately $20.0 million, borrowings on a revolving line of credit ($17.4 million) and available cash on hand.



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##### Table of Contents

##### Index to Financial Statements

Cellu Tissue Holdings, Inc. and Subsidiaries

Notes to Consolidated Financial Statements



The CityForest Acquisition has been accounted for as a purchase and, accordingly, the consolidated
statements of operations includes the results of CityForest for fiscal year 2009 and for fiscal year 2008 from the date of acquisition. The Company has allocated the excess of purchase price to the net assets acquired in the acquisition based on its
estimates of the fair value of assets and liabilities as follows:



|                              |  |                                   |             |  
|----------------------------- |  | --------------------------------- | ----------- | -
|                              |  | Excess PurchasePriceAllocated to: |            
|Property, plant and equipment |  | $                                 | 32,854,514  |  
|Trademarks                    |  |                                   | 2,200,000   |  
|Goodwill                      |  |                                   | 6,970,001   |  
|Long-term debt                |  |                                   | (1,724,684  | )
|Deferred income taxes         |  |                                   | (17,238,509 | )
|                              |  |                                   |             |  
|Total                         |  | $                                 | 23,061,322  |  
|                              |  |                                   |             |  

The results of CityForests operations from the date of acquisition (March 21, 2007) are included in the
Companys tissue segment. Unaudited pro forma results of operations for fiscal year 2008, as if the Company and CityForest had been combined at the beginning of the period presented, are presented below. The pro forma results include estimates
and assumptions, which the Companys management believes are reasonable. However, the pro forma results do not include any cost savings or other effects of the planned integration of CityForest and are not necessarily indicative of the results
which would have occurred if the business combination had been in effect on the dates indicated, or which may result in the future.



|                 |  |                                |         |                      |   |        
|---------------- |  | ------------------------------ | ------- | -------------------- | - | -------
|                 |  | Year EndedFebruary 29, 2008(1)
|                 |  | Actual                         |         | Pro Forma(Unaudited)
|                 |  | (in thousands)                
|Net sales        |  | $                              | 443,081 |                      | $ | 445,792
|Operating income |  | $                              | 19,630  |                      | $ | 20,216 
|Net income       |  | $                              | 3,702   |                      | $ | 4,262  



|(1) | Pro forma operating results include the operating results for CityForest for fiscal year 2008. The actual operating results include the operating results for CityForest for the
period from the acquisition date (March 21, 2007) to February 29, 2008.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Note 4. Stock-Based Compensation

The Company accounts for stock based compensation using the fair value-based method and the recording of such expense in the Companys consolidated statements
of operations. The Company provides stock-based compensation under the 2006 Stock Option and Restricted Stock Plan (the 2006 Plan) and the 2010 Equity Compensation Plan (the 2010 Plan). Under each plan, the administrator of
the plan (the Plan Administrator) may make awards of options to purchase shares of common stock of the Company and/or awards of shares of common stock of the Company and, under the 2010 Plan, stock appreciation rights with respect to
common stock of the Company. No additional awards will be made under the 2006 Plan. A maximum of 2,795,000 shares of common stock of the Company may be delivered in satisfaction of awards under the 2010 Plan and a maximum of 797,499 shares of common
stock of the Company may be delivered in satisfaction of awards under the 2006 Plan. Key



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##### Table of Contents

##### Index to Financial Statements

Cellu Tissue Holdings, Inc. and Subsidiaries

Notes to Consolidated Financial Statements



employees and directors of the Company or its affiliates of the Company are eligible to participate in the plans. Stock options and stock appreciation rights are granted at a strike price at
least equal to the fair value of the Companys stock on the date of grant.

In conjunction with the Companys initial public
offering, the Company modified all equity awards outstanding at January 22, 2010. This modification was structured to maintain the intrinsic value for each employee, such that the intrinsic value after the initial public offering was identical
to the intrinsic value immediately prior to the initial public offering. These modifications did not yield any incremental compensation cost.

Stock options granted prior to the Companys initial public offering were granted with a strike price at the estimated fair value of the
Companys stock on the date of grant. Stock options subsequent to the initial public offering were granted with a strike price equal to the closing price on grant date. The Company uses a risk-free interest rate based on the U.S. Treasury yield
in effect at the time of grant with a term equal to the expected life. The Company does not pay a dividend, so accordingly, the dividend yield is zero. The expected term of the options represents the period of time the options are expected to be
outstanding. Prior to the initial public offering, expected volatility is based on the historical market value of the Companys stock. For the January 27, 2010 grant, volatility was determined using volatility of comparable companies.

Upon exercise of stock options, the Company issues new shares to fulfill its obligation to the option holder.

April 13, 2009 Stock Option Awards

Non-executive employees: On April 13, 2009, the Company granted 267,611 stock options to non-executive employees whereby 35% of each
individuals stock options vest ratably over 4 years and 65% are earned only upon attainment of certain market conditions relative to a change in ownership of the Company. The fair value of the stock option grants related to service that
vest ratably over 4 years was estimated on the date of grant using the Black-Scholes option pricing model. The assumptions used to value the stock options were: no dividend yield; 40% volatility; 1.4% risk free interest rate; and 10-year expected
life. The fair value of the option awards was $5.28 per share.

Executive employees: The Company granted 355,601 stock options which are
earned only upon attainment of certain market conditions relative to a change in ownership of the Company. To determine fair value the stock options at the date of grant, the Company used the Monte-Carlo model and included the followings
assumptions: no dividend yield; 40% volatility; 1.4% risk-free interest rate; and 3.5 year expected term. The fair value of the option awards was $5.28 per share.

In January 2010, in conjunction with the Companys initial public offering, it was determined that the conditions relative to a change in
ownership had been attained with respect to a portion of each non-executive and executive employee stock option award. The Company vested the stock option awards that are subject to the change in ownership condition in their entirety for certain
non-executive employees. The stock option awards with time based vesting were not vested in connection with the initial public offering. Additionally, 32.4% of the executive employee stock option awards were immediately vested in connection with the
initial public offering and that the vesting period for the remaining options would be three years. As a result, the Company recorded $0.4 million of stock-based compensation expense.



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##### Table of Contents

##### Index to Financial Statements

Cellu Tissue Holdings, Inc. and Subsidiaries

Notes to Consolidated Financial Statements



January 27, 2010 Equity Awards

On January 27, 2010, the Company granted the following equity awards: 292,754 options to its employees that vest ratably over 4 years; 23,270
options to its outside directors that vest on the first anniversary of the grant date; and 9,615 shares of restricted stock to its outside directors that vest on the first anniversary of the grant date.

The Company used a Black-Sholes option pricing model to fair value the January 27, 2010 option awards. The assumptions used to value the
January 27, 2010 equity awards were: no dividend yield; 60% volatility; 3.0% risk free interest rate; and 6-year expected life. The fair value of the option awards was $6.62 per share.

Accelerated Vesting of Restricted Stock

In January 2010, as a result of the Companys initial public offering, restricted stock that was previously granted to certain employees was
immediately vested. Total stock compensation expense for this restricted stock grant for fiscal years 2010, 2009 and 2008 was $1.4 million, $0.6 million and $0.7 million respectively.

Put Right

In conjunction
with the Companys initial public offering, the Company granted a put right to certain option holders on January 27, 2010 whereby they could sell 32.4% of their vested options to the Company at the initial public offering price of $13.00.
The put right expired on February 1, 2010. Option holders exercising their put right sold 71,611 shares to the Company for $0.6 million, of which $0.5 million was recorded as a reduction to additional paid-in-capital and $0.1 million was
recorded as stock-based compensation expense. The shares sold to the Company were immediately cancelled.

Section 83(b)
Elections under the Internal Revenue Code of 1986, as Amended

The Company has previously entered into Restricted Stock Agreements
with certain employees and outside directors. The Company agreed to pay an amount to the named individual equal to the amount that would be included in such individuals gross income and payable as income tax as a result of making a
Section 83(b) election under the Internal Revenue Code of 1986, as amended. As a result of these elections, the Company has recorded stock-based compensation expense of $0.1 million, $0.2 million and $0.5 million in fiscal 2010, 2009 and 2008,
respectively.

Other

The weighted average fair value of stock options granted during the fiscal year 2010, 2009 and 2008 was $2.75, $4.21 and $3.62 per share,
respectively.



F-16



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##### Table of Contents

##### Index to Financial Statements

Cellu Tissue Holdings, Inc. and Subsidiaries

Notes to Consolidated Financial Statements



Unrecognized compensation costs related for stock-based compensation arrangements granted under
the plans were $2.8 million as of February 28, 2010. A summary of the outstanding options as of February 28, 2010 and for the fiscal year then ended is as follows:



|                               |  |           |   |  |                               |      |                                          |           
|------------------------------ |  | --------- | - |  | ----------------------------- | ---- | ---------------------------------------- | ----------
|                               |  | Options   |   |  | WeightedAverageExercise Price |      | WeightedAverageRemainingContractual Life
|Outstanding, beginning of year |  | 241,507   |   |  | $                             | 4.70 |                                          | 6.99 Years
|Exercised                      |  | (22,205   | ) |  | $                             | 4.54 |                                          | 8.21 Years
|Cancelled                      |  | (71,611   | ) |  | $                             | 4.77 |                                          | 8.31 Years
|Forfeited                      |  | (67,231   | ) |  | $                             | 4.83 |                                          | 7.30 Years
|Granted                        |  | 939,236   |   |  | $                             | 7.36 |                                          | 9.39 Years
|                               |  |           |   |  |                               |      |                                          |           
|Outstanding, end of year       |  | 1,019,696 |   |  | $                             | 7.14 |                                          | 9.05 Years
|                               |  |           |   |  |                               |      |                                          |           
|Exercisable, end of year       |  | 281,419   |   |  | $                             | 5.04 |                                          | 7.14 Years
|                               |  |           |   |  |                               |      |                                          |           

For fiscal year 2010, 2009 and 2008, the Company has recorded $2,138,420, $753,350 and $685,100,
respectively, of stock-based compensation expense recorded in selling, general and administrative expense.

Note 5. Capital Stock

On January 27, 2010, the Company completed a primary and secondary IPO. In the primary IPO, the Company sold 2,675,000 shares
of common stock at an offering price of $13.00 per share. The gross proceeds of $34.8 million were reduced by $2.4 million in underwriter fees and $3.4 million of other costs associated with the IPO. The net proceeds from the primary IPO were used
to pay down a portion of the Companys existing debtsee Note 6. The secondary IPO sold 5,625,000 shares of common stock owned by existing shareholders at an offering price of $13.00 per share. The proceeds from the secondary offering were
retained by the existing shareholders.

Note 6. Long-Term Debt

During June 2009, through a series of transactions, the Company refinanced its debt, which resulted in higher overall interest
rates and extended the overall maturity of its long-term debt. The new
111/2% Senior Secured Notes due in 2014 (2014
Notes) generated cash proceeds of $245,738,400. These proceeds were used to retire all of the
93/4% Senior Secured Notes due in 2010 (2010
Notes). In connection with the refinancing, the Company recorded a loss of $2,211,274 on the early extinguishment of debt as a component of interest expense.

In February 2010, the Company used IPO net proceeds and cash on-hand to retire a portion of outstanding long-term indebtedness. The Company repaid
in full the $6.3 million Seller Note Payable. In addition, the Company paid $22.9 million to repurchase a portion of the 2014 Notes, comprising of $20,516,000 of principle amounts outstanding and $2,337,608 in premiums. In connection with the
partial repurchase of the 2014 Notes, the Company recorded a loss of $1,375,450 on the early extinguishment of debt. Both the premium and loss were recorded as a component of interest expense.



F-17



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##### Table of Contents

##### Index to Financial Statements

Cellu Tissue Holdings, Inc. and Subsidiaries

Notes to Consolidated Financial Statements



Long-term debt consists of the following:



|                             |  |                  |             |                  |   |            
|---------------------------- |  | ---------------- | ----------- | ---------------- | - | -----------
|                             |  | February 28,2010 |             | February 28,2009
|2014 Notes                   |  | $                | 226,943,125 |                  | $ |           
|2010 Notes                   |  |                  |            |                  |   | 219,706,944
|City Forest Industrial Bonds |  |                  | 16,355,000  |                  |   | 17,115,000 
|Seller Note Payable          |  |                  |            |                  |   | 6,300,000  
|                             |  |                  |             |                  |   |            
|                             |  |                  | 243,298,125 |                  |   | 243,121,944
|Less current portion of debt |  |                  | 760,000     |                  |   | 760,000    
|                             |  |                  |             |                  |   |            
|                             |  | $                | 242,538,125 |                  | $ | 242,361,944
|                             |  |                  |             |                  |   |            

The maturities of long-term debt for the next five years are as
follows: 2011$760,000; 2012$760,000; 2013$760,000; 2014$760,000 and thereafter$247.8 million.

2014
Notes: In June 2009, the Company completed a private placement of $255 million principal face amount (2014 Notes), which have an effective interest rate of 12.48%. The 2014 Notes pay interest in arrears on June 1 and December 1 of
each year. The 2014 Notes are secured by liens on substantially all of the Companys assets. The Indenture in connection with the 2014 Notes contains customary covenants and events of default, including limitations on certain restricted
payments, the incurrence of additional indebtedness and the sale of certain assets. The Company is compliant with these covenants as of February 28, 2010. All of the Companys subsidiaries guarantee the 2014 Notes. During the third quarter
of fiscal year 2010, the Company exchanged all of the original 2014 Notes for new 2014 Notes substantially identical to the old notes, except that the new 2014 Notes are registered with the Securities and Exchange Commission. Cellu Tissue has no
independent assets or operations and the 2014 Notes are fully and unconditionally guaranteed jointly and severally by all of the Companys subsidiaries.

2010 Notes: In March 2004, the Company completed a private offering of $162.0 million aggregate principal amount of
93/4% senior secured notes due 2010 pursuant to and governed
by an Indenture, dated as of March 12, 2004. Subsequently, in fiscal year 2008 and fiscal 2009, in connection with the acquisition of CityForest Corporation and APF, the Company issued and sold $60.3 million aggregate principal amount of
the 2010 Notes for $56.9 million, which is equal to 94.3615% of the aggregate principal amount. The Company redeemed the entire $222.3 million principal amount outstanding of these notes in July 2009. In connection with this redemption,
the company recorded a loss on early extinguishment totaling $2.2 million, which includes $1.9 million for the unaccreted effective discount and $0.3 million related to the unamortized deferred financing fees.

2006 Credit Agreement: In June 2006, the Company entered into a Credit Agreement (the Credit Agreement), that currently provides
for a $60.0 million working capital facility, including a letter of credit sub-facility and swing-line loan sub-facility. The Credit Agreement provides that amounts under the facility may be borrowed, repaid and re-borrowed, subject to a
borrowing base test, until the maturity date, which is June 12, 2011. Of the $60.0 million of total borrowings available, an amount up to $55.0 million is available, in U.S. dollars, to the U.S. Borrower under the facility and an amount up
to $5.0 million is available, in U.S. or Canadian dollars, to the Canadian Borrower under the facility. Borrowings under the working capital facility are secured by substantially all of the Companys assets and guaranteed by the
Companys subsidiaries. As of February 28, 2010 and 2009, $1.0 million and $18.5 million, respectively, of borrowings were outstanding under this working capital facility. The



F-18



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##### Table of Contents

##### Index to Financial Statements

Cellu Tissue Holdings, Inc. and Subsidiaries

Notes to Consolidated Financial Statements



Company has the option of using an interest rate that is either Prime or LIBOR, plus an incremental rate determined by the borrowing agreement. At February 28, 2010, the Companys interest
rate was prime plus an incremental rate of 0.25%, totaling 3.5%.

Effective upon closing of the January 2010 initial public offering,
the Company obtained an amendment to the Credit Agreement to:,



| |  |  | remove Parent from relevant provisions of the Credit Agreement;
| | - |  | ---------------------------------------------------------------



| |  |  | revise the definition of the term change in control to include, among other items, any person becoming the beneficial owner of more than 50% of the
total voting power of Cellu Tissue (other than Weston Presidio V, L.P. and its co-investors) or a change in the majority of our board of directors;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | revise the definition of the term prepayment event to exclude from this definition the issuance of common stock in the offering;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------



| |  |  | revise the definition of the term swap agreement to include energy hedging contracts, which we may enter into from time to time to hedge or mitigate
risks to which we have actual exposure;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | permit the reorganization transactions and the IPO under the Credit Agreements covenants prohibiting certain structural changes and changes to our
organizational documents; and
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | permit the payment, redemption or repurchase of any portion of our 2014 Notes, our indebtedness related to our CityForest industrial revenue bonds and our $6.3
million promissory note issued in the APF Acquisition with the proceeds from the IPO.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

CityForest Industrial Bonds:Cellu Tissue CityForest LLC (CityForest) is party to a loan agreement, dated March 1, 1998, with the City of Ladysmith, Wisconsin, pursuant to which the City of Ladysmith loaned the proceeds of its Variable Rate Demand Solid
Waste Disposal Facility Revenue Bonds, Series 1998, to CityForest to finance the construction by CityForest of a solid waste disposal facility. Approximately $18.4 million in aggregate principal face amount was outstanding as of the date of the
Companys acquisition of CityForest. The municipal bonds have scheduled semi-annual payments of principal equal to approximately 2.00% of the principal amount outstanding as of the date of the acquisition of CityForest (CityForest
Acquisition). The balance is payable at maturity of the municipal bonds on March 1, 2028. The bonds are guaranteed by the Company and contain various customary covenants and events of default.

In connection with this borrowing, CityForest entered into an Amended and Restated Reimbursement Agreement (the Reimbursement
Agreement) pursuant to which Associated Bank has provided a letter of credit and a revolving credit facility in an aggregate principal amount of up to $3.5 million. The letter of credit and revolving credit facility can be used by the
bond trustee to pay principal and interest due on the Bonds, and to provide liquidity to purchase bonds put to CityForest by bondholders and not remarketed; and CityForest is obligated to repay any such draws. CityForest is also obligated to pay a
fee in respect of the aggregate amount available to be drawn at a rate per annum initially equal to 1.25%, subject to adjustment on a quarterly basis based on CityForests leverage. The expiration date of the letter of credit is
February 15, 2011.



F-19



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##### Table of Contents

##### Index to Financial Statements

Cellu Tissue Holdings, Inc. and Subsidiaries

Notes to Consolidated Financial Statements



The Company obtained an amendment to the Reimbursement Agreement, effective upon closing of the
initial public offering on January 27, 2010, which:



| |  |  | increased the annual letter of credit fee to 2.5%;
| | - |  | --------------------------------------------------



| |  |  | revised the definition of the term change of control to include, among other items, any person becoming the beneficial owner of more than 50% of the
total voting power of Cellu Tissue (other than Weston Presidio V, L.P. and its co-investors) or a change in the majority of our board of directors;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | decreased the maximum leverage ratio for CityForest from a ratio of 3.5 to 1.0 to a ratio of 2.5 to 1.0; and
| | - |  | ------------------------------------------------------------------------------------------------------------



| |  |  | increased the minimum fixed charge coverage ratio for CityForest from a ratio of 1.0 to 1.0 to a ratio of 1.2 to 1.0.
| | - |  | ---------------------------------------------------------------------------------------------------------------------

Amounts borrowed by CityForest under the revolving credit facility bear interest at a rate per annum equal to the LIBOR Rate (as defined in the
Reimbursement Agreement), plus an applicable margin. The applicable margin percentage initially is 1.75%, subject to adjustment on a quarterly basis based upon CityForests leverage. The interest rate was 1.98% and 2.25% at February 28,
2010 and 2009, respectively. CityForest is also obligated to pay a commitment fee with respect to any unused commitment under the revolving credit facility in an amount equal to 0.50% per annum. The maturity date of the revolving credit
facility is February 15, 2011. The revolving credit facility is secured by the assets of CityForest.

In connection with these
CityForest credit facilities, the Company has $1.2 million of restricted cash as of February 28, 2010 and 2009, which is included in other assets on the balance sheet. In addition, the Reimbursement Agreement provides that in certain
circumstances where the Company incurs indebtedness, as defined, in excess of amounts currently permitted under the CityForest Indenture or refinances the indebtedness issued under the CityForest Indenture, CityForest may be required to repay all of
its obligations under the revolving line of credit and either cause the bonds to be redeemed or to replace the revolving credit facility and provide a new letter of credit from another lender.

Seller Note Payable: As part of the financing of the APF Acquisition, the Company entered into a Seller Note in the principal amount of
$6,300,000. In January 2010, using proceeds from IPO, the Company repaid the Seller Note Payable which was initially due in quarterly installments with the principal on July 2, 2011. The interest rate on this note was 12%.

Note 7. Deferred Financing Fees

In
connection with the debt refinancing discussed in Note 5, the Company capitalized deferred financing fees of $9.7 million related to the 2014 Notes which are being amortized using the effective interest method over their five year life. In
addition, in connection with the APF Acquisition, the Company incurred approximately $0.2 million of costs related to the amendment to the Credit Agreement and $0.7 million of costs related to an additional issuance of 2010 Notes.

As a result of the debt refinancing, the Company wrote off the remaining unamortized 2010 Notes deferred financing fees of
$0.3 million during the three months ended August 27, 2009.



F-20



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##### Table of Contents

##### Index to Financial Statements

Cellu Tissue Holdings, Inc. and Subsidiaries

Notes to Consolidated Financial Statements



In the fourth quarter of fiscal 2010, the Company repurchased a portion of its 2014 Notes using
proceeds from the January 2010 initial public offering and reduced deferred financing fees by $0.8 million which is reflected as a component of interest expense.

The deferred financing fees and related accumulated amortization balances as of February 28, 2010 and 2009 are as follows:



|                         |  |                  |            |   |                  |   |          |  
|------------------------ |  | ---------------- | ---------- | - | ---------------- | - | -------- | -
|                         |  | February 28,2010 |            |   | February 28,2009 |  
|2014 Notes               |  | $                | 8,955,677  |   |                  | $ |         |  
|Credit agreement         |  |                  | 231,651    |   |                  |   | 231,651  |  
|2010 Notes               |  |                  |           |   |                  |   | 654,307  |  
|                         |  |                  |            |   |                  |   |          |  
|                         |  |                  | 9,187,328  |   |                  |   | 885,958  |  
|Accumulated amortization |  |                  | (1,156,843 | ) |                  |   | (306,668 | )
|                         |  |                  |            |   |                  |   |          |  
|                         |  | $                | 8,030,485  |   |                  | $ | 579,290  |  
|                         |  |                  |            |   |                  |   |          |  

These fees, net of accumulated amortization, are included in other assets on the balance sheet as of February 28,
2010 and 2009.

Note 8. Income Taxes

The components of pretax income (loss) consist of the following:



|                           |  |                            |            |   |                            |   |                            |  |   |            |  
|-------------------------- |  | -------------------------- | ---------- | - | -------------------------- | - | -------------------------- |  | - | ---------- | -
|                           |  | Year EndedFebruary 28,2010 |            |   | Year EndedFebruary 28,2009 |   | Year EndedFebruary 29,2008 | 
|United States              |  | $                          | 12,675,647 |   |                            | $ | 3,998,310                  |  | $ | (2,750,715 | )
|Foreign                    |  |                            | (1,367,396 | ) |                            |   | 1,950,603                  |  |   | 2,543,057  |  
|                           |  |                            |            |   |                            |   |                            |  |   |            |  
|Total pretax income (loss) |  | $                          | 11,308,251 |   |                            | $ | 5,948,913                  |  | $ | (207,658   | )
|                           |  |                            |            |   |                            |   |                            |  |   |            |  

The provision for income tax expense (benefit) consisted of the following:



|          |  |                            |            |   |                            |   |            |                            |  |   |            |  
|--------- |  | -------------------------- | ---------- | - | -------------------------- | - | ---------- | -------------------------- |  | - | ---------- | -
|          |  | Year EndedFebruary 28,2010 |            |   | Year EndedFebruary 28,2009 |   |            | Year EndedFebruary 29,2008 | 
|Current:  |  |                            |            |   |                            |   |            |                            |  |   |            |  
|Federal   |  | $                          | 2,675,655  |   |                            | $ | (28,473    | )                          |  | $ | 1,753,405  |  
|State     |  |                            | 614,806    |   |                            |   | 468,503    |                            |  |   | 49,000     |  
|Foreign   |  |                            | 99,903     |   |                            |   | 1,181,671  |                            |  |   | 1,282,657  |  
|          |  |                            |            |   |                            |   |            |                            |  |   |            |  
|          |  |                            | 3,390,364  |   |                            |   | 1,621,701  |                            |  |   | 3,085,062  |  
|          |  |                            |           
|Deferred: |  |                            |            |   |                            |   |            |                            |  |   |            |  
|Federal   |  |                            | 4,621,593  |   |                            |   | 1,132,974  |                            |  |   | (3,183,542 | )
|State     |  |                            | 620,833    |   |                            |   | (2,883,138 | )                          |  |   | (2,053,590 | )
|Foreign   |  |                            | (1,087,160 | ) |                            |   | (482,812   | )                          |  |   | (1,757,344 | )
|          |  |                            |            |   |                            |   |            |                            |  |   |            |  
|          |  |                            | 4,155,266  |   |                            |   | (2,232,976 | )                          |  |   | (6,994,476 | )
|          |  |                            |            |   |                            |   |            |                            |  |   |            |  
|          |  | $                          | 7,545,630  |   |                            | $ | (611,275   | )                          |  | $ | (3,909,414 | )
|          |  |                            |            |   |                            |   |            |                            |  |   |            |  



F-21



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##### Table of Contents

##### Index to Financial Statements

Cellu Tissue Holdings, Inc. and Subsidiaries

Notes to Consolidated Financial Statements



The foreign portion of the provision for income taxes is a result of operations at one of the
Companys subsidiaries, Interlake Acquisition Corporation Limited (Interlake), in Canada. The Company provides for U.S. income tax and foreign withholding tax on the undistributed earnings of Interlake, as these earnings are not
considered permanently reinvested outside the U.S. The reconciliation of income tax benefit on income (loss) at the U.S. federal statutory tax rates to the effective income tax rates is as follows:



|                                    |  |                            |           |   |                            |   |            |                            |  |   |            |  
|----------------------------------- |  | -------------------------- | --------- | - | -------------------------- | - | ---------- | -------------------------- |  | - | ---------- | -
|                                    |  | Year EndedFebruary 28,2010 |           |   | Year EndedFebruary 28,2009 |   |            | Year EndedFebruary 29,2008 | 
|Tax at U.S. statutory rate          |  | $                          | 4,435,780 |   |                            | $ | 1,359,425  |                            |  | $ | (955,416   | )
|Tax at foreign statutory rate       |  |                            | (423,893  | ) |                            |   | 663,205    |                            |  |   | 867,691    |  
|State taxes, net of federal benefit |  |                            | 709,830   |   |                            |   | 323,534    |                            |  |   | (521,065   | )
|Foreign non-deductible expense      |  |                            | 568       |   |                            |   | 1,260      |                            |  |   | 1,024      |  
|U.S. non-deductible items           |  |                            | 115,942   |   |                            |   | 698,542    |                            |  |   | (148,240   | )
|Provision to return changes         |  |                            | 1,320,528 |   |                            |   | (64,443    | )                          |  |   | (867,460   | )
|AMT credit                          |  |                            |          |   |                            |   |           |                            |  |   | (290,979   | )
|Foreign tax credit                  |  |                            |          |   |                            |   | (1,103,183 | )                          |  |   |           |  
|Federal rate change                 |  |                            | 1,835,972 |   |                            |   |           |                            |  |   |           |  
|Reserve for uncertain tax positions |  |                            | 24,134    |   |                            |   | 232,279    |                            |  |   | 845,668    |  
|State deferred rate change          |  |                            | 120,824   |   |                            |   | (2,864,838 | )                          |  |   | (1,500,184 | )
|Canadian deferred rate change       |  |                            | (460,316  | ) |                            |   |           |                            |  |   | (1,383,386 | )
|Other                               |  |                            | (133,739  | ) |                            |   | 142,944    |                            |  |   | 42,933     |  
|                                    |  |                            |           |   |                            |   |            |                            |  |   |            |  
|Income tax expense (benefit)        |  | $                          | 7,545,630 |   |                            | $ | (611,275   | )                          |  | $ | (3,909,414 | )
|                                    |  |                            |           |   |                            |   |            |                            |  |   |            |  

Included in the income tax expense for fiscal year 2010 is $1.8 million expense associated with a change in the
Companys effective federal tax rate which is expected to be realized in the future and $1.3 million expense associated with the filing of the Companys 2009 federal and state income tax returns. The difference primarily related to
estimates used to calculate foreign subsidiary deemed dividends and estimates affecting the generation and utilization of alternative minimum tax credits. Included in the income tax benefit for fiscal year 2009 is $1.1 million benefit related
to foreign tax credits generated in the current year and $2.9 million benefit associated with changes in the Companys effective state tax rates which are expected to be realized in the future. Included in the income tax benefit for fiscal
year 2008 is $1.4 million and $1.5 million, respectively, of benefit associated with future changes in Canadian tax rates due to legislative changes and changes in the Companys effective state tax rates which are expected to be
realized in the future.



F-22



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##### Table of Contents

##### Index to Financial Statements

Cellu Tissue Holdings, Inc. and Subsidiaries

Notes to Consolidated Financial Statements



Significant components of the Companys deferred tax assets and liabilities are as follows:



|                                           |  |                  |             |   |                  |   |             |  
|------------------------------------------ |  | ---------------- | ----------- | - | ---------------- | - | ----------- | -
|                                           |  | February 28,2010 |             |   | February 28,2009 |  
|Deferred tax assets:                       |  |                  |             |   |                  |   |             |  
|Compensation and benefits                  |  | $                | 1,170,803   |   |                  | $ | 1,199,632   |  
|NOL carryforward                           |  |                  | 1,924,188   |   |                  |   | 784,625     |  
|Accounts receivable                        |  |                  | 73,620      |   |                  |   | 140,536     |  
|Refinancing costs                          |  |                  | 413,945     |   |                  |   | 1,677,092   |  
|Capitalized transaction costs              |  |                  | (686,264    | ) |                  |   | (336,038    | )
|AMT credit                                 |  |                  |            |   |                  |   | 25,831      |  
|Deferred revenue                           |  |                  | 438,663     |   |                  |   |            |  
|Foreign tax credit                         |  |                  | 3,248,256   |   |                  |   | 3,612,331   |  
|Other                                      |  |                  | 570,849     |   |                  |   | 552,632     |  
|                                           |  |                  |             |   |                  |   |             |  
|                                           |  |                  | 7,154,060   |   |                  |   | 7,656,641   |  
|Valuation allowance                        |  |                  | (1,690,722  | ) |                  |   | (730,778    | )
|                                           |  |                  |             |   |                  |   |             |  
|Total deferred tax assets                  |  |                  | 5,463,338   |   |                  |   | 6,925,863   |  
|Deferred tax liabilities:                  |  |                  |             |   |                  |   |             |  
|Goodwill/trademarks                        |  |                  | (3,807,476  | ) |                  |   | (290,882    | )
|Restricted stock                           |  |                  | (32,129     | ) |                  |   | (1,412,035  | )
|Interest                                   |  |                  | (1,602,072  | ) |                  |   | (514,530    | )
|Property, plant and equipment              |  |                  | (75,495,530 | ) |                  |   | (75,662,864 | )
|Other                                      |  |                  | (523,658    | ) |                  |   | (640,534    | )
|                                           |  |                  |             |   |                  |   |             |  
|Total deferred tax liabilities             |  |                  | (81,460,865 | ) |                  |   | (78,520,845 | )
|                                           |  |                  |             |   |                  |   |             |  
|Net deferred tax liability                 |  | $                | (75,997,527 | ) |                  | $ | (71,594,982 | )
|                                           |  |                  |             |   |                  |   |             |  
|                                           |  |                 
|                                           |  | February 28,2010 |             |   | February 28,2009 |  
|As presented on the balance sheet:         |  |                  |             |   |                  |   |             |  
|Current deferred income tax assets         |  | $                | 1,180,866   |   |                  | $ | 3,515,295   |  
|Noncurrent deferred income tax liabilities |  |                  | (77,178,393 | ) |                  |   | (75,110,277 | )
|                                           |  |                  |             |   |                  |   |             |  
|                                           |  | $                | (75,977,527 | ) |                  | $ | (71,594,982 | )
|                                           |  |                  |             |   |                  |   |             |  

The temporary differences that give rise to significant portions of the deferred tax assets and deferred tax
liabilities are net operating loss carryforwards, differences between financial statement and tax bases of property, plant and equipment, foreign tax credit carryforwards and other miscellaneous accruals and reserves.

As of February 28, 2010, the Company had state NOLs of approximately $37 million and state tax credits of approximately $1 million which begin
to expire in 2019 and foreign tax credit carryforwards of approximately $3 million which begin to expire in 2017. We currently anticipate utilizing the majority of the recorded state tax credits and foreign tax credits prior to their expiration. We
currently believe that it is more likely than not that we will not realize the benefits of the majority of our state net operating losses prior to their expiration.



F-23



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##### Table of Contents

##### Index to Financial Statements

Cellu Tissue Holdings, Inc. and Subsidiaries

Notes to Consolidated Financial Statements



In assessing the realizability of deferred tax assets, we consider whether it is more likely than
not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become
deductible. We consider the scheduled reversal of deferred tax liabilities, projected future taxable income and tax planning strategies in making this assessment. Based on the level of historical taxable income and projections for future taxable
income over the periods in which the deferred tax assets are deductible, we believe it is more likely than not that we will realize the benefits of the majority of the foreign tax credit and state tax credit deductible differences. We believe that
it is more likely than not that we will not realize the benefits of the state net operating losses prior to the expiration. We have recorded a valuation allowance on the majority of our state net operating losses and a portion of our state tax
credits and foreign tax credits.

The Company believes that all of its current and prior tax filing positions have substantial merit and intends to
defend vigorously any tax claims asserted. The Company believes that it has sufficient accruals to address any claims, including interest and penalties. A reconciliation of the beginning and ending balances of the total amounts of gross unrecognized
tax benefits is as follows:



|                                                      |  |                            |           |   |                            |   |           |                            |  |   |          
|----------------------------------------------------- |  | -------------------------- | --------- | - | -------------------------- | - | --------- | -------------------------- |  | - | ---------
|                                                      |  | Year EndedFebruary 28,2010 |           |   | Year EndedFebruary 28,2009 |   |           | Year EndedFebruary 29,2008
|Beginning of year                                     |  | $                          | 1,686,565 |   |                            | $ | 1,509,000 |                            |  | $ | 706,000  
|Increase in unrecognized tax benefits resulting from: |  |                            |           |   |                            |   |           |                            |  |   |          
|Positions taken in current period                     |  |                            | 167,572   |   |                            |   | 132,198   |                            |  |   |         
|Decrease in unrecognized tax benefits resulting from: |  |                            |           |   |                            |   |           |                            |  |   |          
|Positions taken in current period                     |  |                            |          |   |                            |   | 104,279   |                            |  |   |         
|Statute of limitations expiration                     |  |                            | (163,196  | ) |                            |   | (58,912   | )                          |  |   |         
|Positions taken in the prior period                   |  |                            | (153,014  | ) |                            |   |          |                            |  |   | 803,000  
|                                                      |  |                            |           |   |                            |   |           |                            |  |   |          
|End of year                                           |  | $                          | 1,537,927 |   |                            | $ | 1,686,565 |                            |  | $ | 1,509,000
|                                                      |  |                            |           |   |                            |   |           |                            |  |   |          

We recognize interest and penalties accrued related to
unrecognized tax benefits as components of income tax expense (benefit). The interest and penalties accrued in income tax expense for fiscal years 2010, 2009 and 2008 was approximately $173,000, $55,000 and $43,000, respectively. The Company has
$0.3 million and $0.1 million of accrued interest and penalties related to uncertain tax positions at February 28, 2010 and 2009, respectively. The total amount of unrecognized tax benefits that, if recognized, would affect the effective tax rate is
$1.8 million. If recognized, these items would impact the consolidated statement of operations and the effective tax rate. The Company does not anticipate that the total amount of unrecognized tax benefits will materially change during the next
twelve months due to certain U.S. federal and state statute of limitations expiring. The fiscal tax years 2006 through 2010 remain open to examination by the major taxing jurisdictions to which the Company is subject.

Note 9. Retirement Plan

The Company has a
Savings Incentive and Profit-Sharing Plan (the Plan) qualified under Section 401(k) of the Code. The Plan covers all employees who are 21 years of age or older with one



F-24



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##### Table of Contents

##### Index to Financial Statements

Cellu Tissue Holdings, Inc. and Subsidiaries

Notes to Consolidated Financial Statements



or more years of service. Employees may contribute up to 20% of their annual compensation (subject to certain statutory limitations) to the Plan through voluntary salary deferred payments. The
Company matches 100% of the employees contribution up to 2% of the employees salary and 70% of the remaining employees contribution up to 6% of the employees salary. The Company contributed $1,927,146, $1,685,643, $1,620,998,
to the Plan for fiscal years 2010, 2009 and 2008, respectively.

Note 10. Commitments and Contingencies

The Company leases certain warehouses, vehicles and equipment under noncancelable operating leases, which expire at varying times through February
2018. Future minimum lease obligations at February 28, 2009 are as follows:



|                    |  |   |           
|------------------- |  | - | ----------
|Year ending:        |  |   |           
|2011                |  | $ | 4,132,718 
|2012                |  |   | 3,868,143 
|2013                |  |   | 3,521,355 
|2014                |  |   | 2,679,875 
|2014 and thereafter |  |   | 3,950,426 
|                    |  |   |           
|                    |  | $ | 18,152,517
|                    |  |   |           

Operating lease and rental expenses aggregated $3,491,376,
$2,885,145, and $2,667,485, for fiscal years 2010, 2009, and 2008, respectively.

In the normal course of business, the Company is
involved in various claims. The Companys policy is to accrue environmental investigatory and remediation costs for identified sites when it is probable that a liability has been incurred and the amount of the loss can be reasonably estimated.
The amount recorded for identified contingent liabilities is based on estimates and is not material.

The Company enters into agreements
with various pulp vendors to purchase various amounts of pulp over the next two to three years. These commitments require purchases of pulp up to approximately 178,000 metric tons per year, at pulp prices below published list prices and allow the
Company to shift a portion of its pulp purchases to the spot market to take advantage of more favorable spot market prices when such prices fall. The Company believes that its current commitment under these arrangements or their equivalent
approximates 70% of its annual budgeted pulp needs. The future purchase value of the contracts valued at the February 28, 2010 price is $117 million.

Investment in Converting Capacity

To satisfy increased customer demand and to further expand our geographic reach, we have accelerated our growth strategy and committed to a program
to invest approximately $30 million to increase our retail converting capacity by 50,000 tons. As of February 28, 2010, $7.6 million had been spent and this program is expected to be substantially complete by March 2011. It is anticipated that
a portion of this investment will be used to add converting capacity to a new 323,000 square foot facility in Oklahoma City, Oklahoma. The balance of this investment is expected to be used to add converting capacity to our three established
facilities in Neenah, Wisconsin, Thomaston, Georgia and Long Island, New York.



F-25



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##### Table of Contents

##### Index to Financial Statements

Cellu Tissue Holdings, Inc. and Subsidiaries

Notes to Consolidated Financial Statements



Note 11. Related Party Transactions

On June 12, 2006, the Company, Cellu Parent and Merger Sub entered into a Management Agreement with Weston Presidio Service Company, LLC
(Weston Presidio Service Company) pursuant to which Weston Presidio Service Company agreed to provide the Company with certain management, consulting and financial and other advisory services. Weston Presidio Service Company is an
affiliate of Weston Presidio, which was the controlling shareholder of Cellu Parent, which was the sole shareholder of the Parent. In consideration for such services, the Company and Cellu Parent jointly and severally agreed to pay Weston Presidio
Service Company an annual fee of $450,000, to be paid in equal quarterly installments, and to reimburse out-of-pocket expenses of Weston Presidio Service Company and its affiliates. In addition, in connection with the consummation of the Merger and
as required by the Management Agreement, the Company paid Weston Presidio Service Company a fee in the amount of $2,000,000. This amount has been capitalized through purchase accounting as part of total merger consideration. The Management Agreement
was terminated in conjunction with the January 2010 IPO.

Management fees paid to Weston Presidio Service Company of $412,500 for fiscal
2010 and $450,000 for fiscal years 2009 and 2008 are recorded in selling, general and administrative expenses.

Note 12. Business Segments

The Company operates in three business segments: tissue, machine-glazed tissue and foam. The foam business segment was added in
connection with the APF Acquisition (see Note 3). The Company assesses the performance of its business segments using income from operations. Income from operations excludes interest income, interest expense, other income (expense), income tax
expense (benefit) and the impact of foreign currency gains and losses. Corporate and shared expenses are allocated to each segment.

Included in income from operations for fiscal year 2010 is $2,138,420 of compensation expense primarily related to vesting of restricted stock and
stock option awards, of which $1,582,431 and $555,989 relate to the tissue segment and machine-glazed paper segment, respectively.

Included in income from operations for fiscal year 2008 is $2,078,212 of terminated acquisition related costs, of which $1,350,838 impacts the
tissue segment and $727,374 impacts the machine-glazed paper segment. Also, included in income from operations for fiscal year 2008 is $808,111 of non-cash compensation expense related to the vesting of restricted stock and stock option awards, of
which $525,272 and $282,839 relate to the tissue segment and machine-glazed paper segment, respectively.



F-26



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##### Table of Contents

##### Index to Financial Statements

Cellu Tissue Holdings, Inc. and Subsidiaries

Notes to Consolidated Financial Statements



|                                             |  |                            |             |   |                            |   |             |                            |  |   |             |  
|-------------------------------------------- |  | -------------------------- | ----------- | - | -------------------------- | - | ----------- | -------------------------- |  | - | ----------- | -
|                                             |  | Year EndedFebruary 28,2010 |             |   | Year EndedFebruary 28,2009 |   |             | Year EndedFebruary 29,2008 | 
|Net Sales                                    |  |                            |             |   |                            |   |             |                            |  |   |             |  
|Tissue                                       |  | $                          | 394,241,039 |   |                            | $ | 400,640,192 |                            |  | $ | 333,341,679 |  
|Machine-glazed paper                         |  |                            | 109,051,301 |   |                            |   | 114,376,045 |                            |  |   | 109,739,451 |  
|Foam                                         |  |                            | 7,988,458   |   |                            |   | 4,006,606   |                            |  |   |            |  
|                                             |  |                            |             |   |                            |   |             |                            |  |   |             |  
|Consolidated                                 |  |                            | 511,280,798 |   |                            |   | 519,022,843 |                            |  |   | 443,081,130 |  
|Segment Income from Operations               |  |                            |             |   |                            |   |             |                            |  |   |             |  
|Tissue                                       |  | $                          | 49,164,001  |   |                            | $ | 29,423,668  |                            |  | $ | 19,775,402  |  
|Machine-glazed paper                         |  |                            | 4,688,001   |   |                            |   | 3,114,212   |                            |  |   | (145,319    | )
|Foam                                         |  |                            | 2,656,475   |   |                            |   | 497,908     |                            |  |   |            |  
|                                             |  |                            |             |   |                            |   |             |                            |  |   |             |  
|Total segment income from operations         |  |                            | 56,508,477  |   |                            |   | 33,035,788  |                            |  |   | 19,630,083  |  
|Amortization expense                         |  |                            | 4,332,524   |   |                            |   | 2,872,523   |                            |  |   |            |  
|                                             |  |                            |             |   |                            |   |             |                            |  |   |             |  
|Consolidated income from operations          |  |                            | 52,175,953  |   |                            |   | 30,163,265  |                            |  |   | 19,630,083  |  
|Interest expense, net                        |  |                            | 39,593,747  |   |                            |   | 24,709,461  |                            |  |   | 19,870,029  |  
|Net foreign currency transaction (gain) loss |  |                            | 1,282,228   |   |                            |   | (562,232    | )                          |  |   | 100,335     |  
|Other expense (income)                       |  |                            | (8,273      | ) |                            |   | 67,123      |                            |  |   | (132,623    | )
|                                             |  |                            |             |   |                            |   |             |                            |  |   |             |  
|Pretax income (loss)                         |  | $                          | 11,308,251  |   |                            | $ | 5,948,913   |                            |  | $ | (207,658    | )
|                                             |  |                            |             |   |                            |   |             |                            |  |   |             |  
|                                             |  |                            |            
|                                             |  | Year EndedFebruary 28,2010 |             |   | Year EndedFebruary 28,2009 |   |             | Year EndedFebruary 29,2008 | 
|Capital Expenditures                         |  |                            |             |   |                            |   |             |                            |  |   |             |  
|Tissue                                       |  | $                          | 23,796,601  |   |                            | $ | 13,683,190  |                            |  | $ | 17,797,901  |  
|Machine-glazed paper                         |  |                            | 1,475,599   |   |                            |   | 1,348,695   |                            |  |   | 1,729,662   |  
|Foam                                         |  |                            |            |   |                            |   |            |                            |  |   |            |  
|Corporate                                    |  |                            | 1,720,844   |   |                            |   | 1,369,963   |                            |  |   | 949,863     |  
|                                             |  |                            |             |   |                            |   |             |                            |  |   |             |  
|Consolidated                                 |  | $                          | 26,993,044  |   |                            | $ | 16,401,848  |                            |  | $ | 20,477,426  |  
|                                             |  |                            |             |   |                            |   |             |                            |  |   |             |  
|Depreciation                                 |  |                            |             |   |                            |   |             |                            |  |   |             |  
|Tissue                                       |  | $                          | 18,167,367  |   |                            | $ | 17,035,344  |                            |  | $ | 17,512,477  |  
|Machine-glazed paper                         |  |                            | 5,741,072   |   |                            |   | 5,694,571   |                            |  |   | 5,977,162   |  
|Foam                                         |  |                            | 90,274      |   |                            |   | 56,769      |                            |  |   |            |  
|Corporate                                    |  |                            | 891,001     |   |                            |   | 869,561     |                            |  |   | 656,498     |  
|                                             |  |                            |             |   |                            |   |             |                            |  |   |             |  
|Consolidated                                 |  | $                          | 24,889,714  |   |                            | $ | 23,656,245  |                            |  | $ | 24,146,137  |  
|                                             |  |                            |             |   |                            |   |             |                            |  |   |             |  



F-27



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##### Table of Contents

##### Index to Financial Statements

Cellu Tissue Holdings, Inc. and Subsidiaries

Notes to Consolidated Financial Statements



|                     |  |                  |             |                  |   |            
|-------------------- |  | ---------------- | ----------- | ---------------- | - | -----------
|                     |  | February 28,2010 |             | February 28,2009
|Segment assets       |  |                  |             |                  |   |            
|Tissue               |  | $                | 400,022,672 |                  | $ | 390,692,040
|Machine-glazed paper |  |                  | 86,267,328  |                  |   | 88,130,140 
|Foam                 |  |                  | 2,697,232   |                  |   | 2,268,112  
|Corporate assets     |  |                  | 13,719,154  |                  |   | 2,956,508  
|                     |  |                  |             |                  |   |            
|Consolidated         |  | $                | 502,706,386 |                  | $ | 484,046,800
|                     |  |                  |             |                  |   |            
|Goodwill             |  |                  |             |                  |   |            
|Tissue               |  | $                | 39,935,135  |                  | $ | 39,935,135 
|Machine-glazed paper |  |                  | 1,085,003   |                  |   | 1,085,003  
|Foam                 |  |                  |            |                  |   |           
|                     |  |                  |             |                  |   |            
|Consolidated         |  | $                | 41,020,138  |                  | $ | 41,020,138 
|                     |  |                  |             |                  |   |            

Note 13. Geographic Data

Net sales and long-lived assets by geographic area are as follows:



|                        |  |                            |             |                            |   |                            |  |   |            
|----------------------- |  | -------------------------- | ----------- | -------------------------- | - | -------------------------- |  | - | -----------
|                        |  | Year EndedFebruary 28,2010 |             | Year EndedFebruary 28,2009 |   | Year EndedFebruary 29,2008
|Net Sales               |  |                            |             |                            |   |                            |  |   |            
|United States           |  | $                          | 465,945,406 |                            | $ | 469,072,849                |  | $ | 394,019,201
|Other, primarily Canada |  |                            | 54,500,437  |                            |   | 57,730,655                 |  |   | 56,994,578 
|                        |  |                            |             |                            |   |                            |  |   |            
|Sub-total               |  |                            | 520,445,843 |                            |   | 526,803,504                |  |   | 451,013,779
|Sales deductions        |  |                            | 9,165,045   |                            |   | 7,780,661                  |  |   | 7,932,649  
|                        |  |                            |             |                            |   |                            |  |   |            
|Consolidated            |  | $                          | 511,280,798 |                            | $ | 519,022,843                |  | $ | 443,081,130
|                        |  |                            |             |                            |   |                            |  |   |            



|                              |  |                  |             |                  |   |            
|----------------------------- |  | ---------------- | ----------- | ---------------- | - | -----------
|                              |  | February 28,2010 |             | February 28,2009
|Property, Plant and Equipment |  |                  |             |                  |   |            
|United States                 |  | $                | 284,023,447 |                  | $ | 280,596,007
|Canada                        |  |                  | 23,611,574  |                  |   | 21,391,934 
|                              |  |                  |             |                  |   |            
|Consolidated                  |  | $                | 307,635,021 |                  | $ | 301,987,941
|                              |  |                  |             |                  |   |            

Note 14. Goodwill and Other Intangibles, Net

Goodwill, trademarks and other intangibles and related accumulated amortization are as follows:



|                         |  |                  |            |   |                  |   |            |  
|------------------------ |  | ---------------- | ---------- | - | ---------------- | - | ---------- | -
|                         |  | February 28,2010 |            |   | February 28,2009 |  
|Goodwill                 |  | $                | 41,020,138 |   |                  | $ | 41,020,138 |  
|                         |  |                  |            |   |                  |   |            |  
|Trademarks               |  |                  | 9,456,000  |   |                  |   | 9,456,000  |  
|Noncompete agreements    |  |                  | 12,770,000 |   |                  |   | 12,770,000 |  
|Customer lists           |  |                  | 12,319,000 |   |                  |   | 12,319,000 |  
|                         |  |                  |            |   |                  |   |            |  
|                         |  |                  | 34,545,000 |   |                  |   | 34,545,000 |  
|Accumulated amortization |  |                  | (7,205,047 | ) |                  |   | (2,872,523 | )
|                         |  |                  |            |   |                  |   |            |  
|Other Intangibles, Net   |  | $                | 27,339,953 |   |                  | $ | 31,672,477 |  
|                         |  |                  |            |   |                  |   |            |  



F-28



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##### Table of Contents

##### Index to Financial Statements

Cellu Tissue Holdings, Inc. and Subsidiaries

Notes to Consolidated Financial Statements



Intangible assets, except for certain trademarks which have an indefinite life, are being
amortized on a straight-line basis, assuming no significant residual value, over the following lives: non-compete agreements-5 years, customer lists-7 years and trademarks with a definite life-3 years. Annual aggregate amortization
expense estimated for each of the 3 succeeding years is approximately $4.3 million for fiscal year 2011-2013 and $2.6 million for fiscal year 2014. Amortization expense for the fiscal year ended February 28, 2010 and 2009 was
$4,332,524 and $2,872,523, respectively.

Note 15. Earnout Payment

In connection with the acquisition of the Company by Weston Presidio in 2006, the Company was required to pay contingent consideration totaling
$35.0 million, consisting of cash and shares of Cellu Parents Series A preferred stock, to the former owners and advisors of Cellu Parent in the event certain financial targets were met. Those financial targets were met and the
Company recorded a liability for $35.0 million. All amounts associated with the earnout were paid as of November 24, 2009 and are listed below:



| |  |  | On August 29, 2008, a $15.0 million contingent consideration payment was made to the former owners and advisors of Cellu Parent, consisting of
$13.7 million in cash and 1,274 shares of Cellu Parents Series A preferred stock valued at approximately $1.3 million.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | On August 28, 2009, a $15.0 million contingent consideration payment was made to the former owners and advisors of Cellu Parent, consisting of
$13.7 million in cash and 1,274 shares of Cellu Parents Series A preferred stock valued at approximately $1.3 million.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | On November 24, 2009, the remaining payment of $5.0 million was paid to the former owners and advisors of Cellu Parent, consisting of $4.6 million in cash
and 425 shares of Cellu Parents Series A preferred stock valued at approximately $0.4 million.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

The contingent consideration was
paid out due to the achievement of certain financial targets. The shares of Class A Preferred Stock of Cellu Parent issued in connection with the earnout were converted into shares of the Companys common stock as a result of the IPO and
the related reorganization transactions.

Note 16. Derivatives and Hedging

The effects of the Companys natural gas swap contracts on the consolidated statements of operations are presented below.



|                                                                        |  |                    |            |   |                  |   |            |  
|----------------------------------------------------------------------- |  | ------------------ | ---------- | - | ---------------- | - | ---------- | -
|                                                                        |  | For the year ended |           
|                                                                        |  | February 28,2010   |            |   | February 28,2009 |  
|Gain (loss) recognized in comprehensive income/loss                     |  | $                  | 2,093,812  |   |                  | $ | (2,717,464 | )
|Loss reclassified from accumulated other comprehensive loss into income |  | $                  | (3,177,287 | ) |                  | $ |           |  



F-29



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##### Table of Contents

##### Index to Financial Statements

Cellu Tissue Holdings, Inc. and Subsidiaries

Notes to Consolidated Financial Statements



Note 17. Fair Value of Financial Instruments

The following methods and assumptions, including those discussed in Note 2, were used to estimate fair value for purposes of disclosure:

The Companys 2014 Notes are treated as level 1 instruments and are recorded at cost which was $226.9 million at
February 28, 2010. The estimated fair value of these notes was $250.8 million at February 28, 2010 based on the quoted market price of this debt.

The Companys City Forest Industrial Revenue Bonds in the amount of $16.4 million at February 28, 2010 and $17.1 million at
February 28, 2009 are carried at cost. These bonds are determined to be level 1 instruments. These bonds always trade at par value, with adjustments to the variable interest rate by our independent third party market maker. The estimated
fair value of these bonds was $16.4 million at February 28, 2010 and $17.1 million at February 28, 2009.

The
Companys Seller Note Payable, which was repaid in fiscal 2010, was carried at cost. The estimated fair value of this note was zero and $6.3 million at February 28, 2010 and 2009, respectively based on the discounted cash flows of
this instrument. This note has been determined to be a level 3 instrument. The note payable was between the Company and a private party and had no observable data points to determine fair value.

Note 18. Supplemental Balance Sheet Information

Selected supplemental balance sheet information is presented below.



|                                    |  |                  |             |   |                  |   |             |  
|----------------------------------- |  | ---------------- | ----------- | - | ---------------- | - | ----------- | -
|                                    |  | February 28,2010 |             |   | February 28,2009 |  
|Finished goods                      |  | $                | 41,828,086  |   |                  | $ | 30,608,649  |  
|Raw materials                       |  |                  | 3,608,559   |   |                  |   | 5,133,206   |  
|Packaging materials and supplies    |  |                  | 13,658,588  |   |                  |   | 12,326,731  |  
|Inventory reserves                  |  |                  | (2,508,251  | ) |                  |   | (852,537    | )
|                                    |  |                  |             |   |                  |   |             |  
|                                    |  | $                | 56,586,982  |   |                  | $ | 47,216,049  |  
|                                    |  |                  |             |   |                  |   |             |  
|Property, plant and equipment, net: |  |                  |             |   |                  |   |             |  
|Land                                |  | $                | 4,565,674   |   |                  | $ | 4,307,317   |  
|Buildings                           |  |                  | 39,509,533  |   |                  |   | 35,907,105  |  
|Machinery and equipment             |  |                  | 336,966,732 |   |                  |   | 312,775,269 |  
|Other                               |  |                  | 6,871,243   |   |                  |   | 4,970,279   |  
|Construction in progress            |  |                  | 9,429,569   |   |                  |   | 7,867,380   |  
|                                    |  |                  |             |   |                  |   |             |  
|                                    |  |                  | 397,342,751 |   |                  |   | 365,827,350 |  
|Accumulated depreciation            |  |                  | (89,707,730 | ) |                  |   | (63,839,409 | )
|                                    |  |                  |             |   |                  |   |             |  
|                                    |  | $                | 307,635,021 |   |                  | $ | 301,987,941 |  
|                                    |  |                  |             |   |                  |   |             |  



F-30



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##### Table of Contents

##### Index to Financial Statements

Cellu Tissue Holdings, Inc. and Subsidiaries

Notes to Consolidated Financial Statements



Note 19. Income Per Share

Basic earnings per share is based on the weighted-average effect of all common shares issued and outstanding and is calculated by dividing net
income by the weighted-average shares outstanding during the period. Diluted earnings per share is calculated by dividing net income by the weighted-average number of common share used in the basic earnings per share calculation plus the number of
common shares that would be issued assuming exercise or conversion of all potentially dilutive shares outstanding. The following presents basic net income per share and diluted net income per share:



|                                                     |  |                    |            |                   |   |                   |  |         |            |       |   |            |  |   |            |  |   |           
|---------------------------------------------------- |  | ------------------ | ---------- | ----------------- | - | ----------------- |  | ------- | ---------- | ----- | - | ---------- |  | - | ---------- |  | - | ----------
|                                                     |  | For the year ended
|                                                     |  | February 28, 2010  |            | February 28, 2009 |   | February 29, 2008
|                                                     |  | Basic              |            | Diluted           |   | Basic             |  | Diluted |            | Basic |   | Diluted   
|Numerator:                                           |  |                    |            |                   |   |                   |  |         |            |       |   |            |  |   |            |  |   |           
|Net income                                           |  | $                  | 3,762,621  |                   | $ | 3,762,621         |  | $       | 6,560,188  |       | $ | 6,560,188  |  | $ | 3,701,756  |  | $ | 3,701,756 
|                                                     |  |                    |            |                   |   |                   |  |         |            |       |   |            |  |   |            |  |   |           
|Denominator:                                         |  |                    |            |                   |   |                   |  |         |            |       |   |            |  |   |            |  |   |           
|Weighted average number of common shares outstanding |  |                    | 17,684,134 |                   |   | 17,684,134        |  |         | 17,447,971 |       |   | 17,447,971 |  |   | 17,447,971 |  |   | 17,447,971
|Effect of dilutive securities Stock Awards (a)       |  |                    |           |                   |   | 29,729            |  |         |           |       |   |           |  |   |           |  |   |          
|                                                     |  |                    |            |                   |   |                   |  |         |            |       |   |            |  |   |            |  |   |           
|                                                     |  |                    | 17,684,134 |                   |   | 17,713,863        |  |         | 17,447,971 |       |   | 17,447,971 |  |   | 17,447,971 |  |   | 17,447,971
|Net income per share                                 |  | $                  | 0.21       |                   | $ | 0.21              |  | $       | 0.38       |       | $ | 0.38       |  | $ | 0.21       |  | $ | 0.21      
|                                                     |  |                    |            |                   |   |                   |  |         |            |       |   |            |  |   |            |  |   |           



|(a) | Represents the weighted average number of shares of common stock issuable on the exercise of diluted employee stock option awards and restricted stock less the number of shares
of common stock which could have been purchased with the proceeds from the exercise of such awards. These purchases were assumed to have been made at the average market price of the common stock for the period. Stock options outstanding for the year
ended February 28, 2010 of 316,024 were excluded because their effect would have been anti-dilutive.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



F-31



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##### Table of Contents

##### Index to Financial Statements

Cellu Tissue Holdings, Inc. and Subsidiaries

Notes to Consolidated Financial Statements



Note 20. Quarterly Results of Operations (Unaudited)



|                                     |  |               |             |                |   |             |               |  |                |             |  |      |             |   |  |   |            
|------------------------------------ |  | ------------- | ----------- | -------------- | - | ----------- | ------------- |  | -------------- | ----------- |  | ---- | ----------- | - |  | - | -----------
|Year Ended
February 28, 2010         |  | First Quarter |             | Second Quarter |   |             | Third Quarter |  | Fourth Quarter |             |  | Year
|Net sales                            |  | $             | 118,928,222 |                | $ | 137,796,650 |               |  | $              | 130,147,065 |  | $    | 124,408,861 |   |  | $ | 511,280,798
|Gross profit                         |  |               | 19,813,312  |                |   | 22,642,179  |               |  |                | 20,273,256  |  |      | 16,331,785  |   |  |   | 79,060,532 
|Income from operations               |  |               | 13,255,734  |                |   | 16,207,163  |               |  |                | 14,178,615  |  |      | 8,534,441   |   |  |   | 52,175,953 
|Net income (loss)                    |  |               | 2,310,865   |                |   | 2,717,474   |               |  |                | 2,000,011   |  |      | (3,265,729  | ) |  |   | 3,762,621  
|Basic and diluted earnings per share |  | $             | 0.13        |                | $ | 0.16        |               |  | $              | 0.11        |  | $    | (0.18       | ) |  | $ | 0.21       
|Basic shares outstanding             |  |               | 17,447,971  |                |   | 17,447,971  |               |  |                | 17,447,971  |  |      | 18,364,987  |   |  |   | 17,684,134 
|Diluted shares outstanding           |  |               | 17,447,971  |                |   | 17,447,971  |               |  |                | 17,447,971  |  |      | 18,364,987  |   |  |   | 17,713,863 
|                                     |  |               |             |                |  
|Year Ended
February 28, 2009         |  | First Quarter |             | Second Quarter |   |             | Third Quarter |  | Fourth Quarter |             |  | Year
|Net sales                            |  | $             | 114,527,561 |                | $ | 133,012,856 |               |  | $              | 143,042,017 |  | $    | 128,440,409 |   |  | $ | 519,022,843
|Gross profit                         |  |               | 11,787,904  |                |   | 10,999,929  |               |  |                | 16,100,895  |  |      | 16,016,049  |   |  |   | 54,904,777 
|Income from operations               |  |               | 6,534,556   |                |   | 5,742,113   |               |  |                | 9,372,342   |  |      | 8,514,254   |   |  |   | 30,163,265 
|Net income (loss)                    |  |               | 992,470     |                |   | (247,083    | )             |  |                | 1,838,748   |  |      | 3,976,053   |   |  |   | 6,560,188  
|Basic and diluted earnings per share |  | $             | 0.06        |                | $ | (0.01       | )             |  | $              | 0.11        |  | $    | 0.23        |   |  | $ | 0.38       
|Basic and diluted shares outstanding |  |               | 17,447,971  |                |   | 17,447,971  |               |  |                | 17,447,971  |  |      | 17,447,971  |   |  |   | 17,447,971 



F-32



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##### Table of Contents

##### Index to Financial Statements

Schedule IIValuation and Qualifying Accounts

Cellu Tissue Holdings, Inc.

Fiscal years ended February 28, 2010, February 28, 2009, and February 29, 2008



|                                 |  |                            |         |                            |   |           |            |  |                      |         |  |   |          
|-------------------------------- |  | -------------------------- | ------- | -------------------------- | - | --------- | ---------- |  | -------------------- | ------- |  | - | ---------
|Description                      |  | Balance atBeginningof Year |         | Chargedto CostsandExpenses |   |           | Deductions |  | Balance atEnd ofYear
|Allowance for Doubtful Accounts: |  |                            |         |                            |   |           |            |  |                      |         |  |   |          
|February 28, 2010                |  | $                          | 385,323 |                            | $ | (164,978  | )          |  | $                    | 25,345  |  | $ | 195,000  
|February 28, 2009                |  |                            | 169,811 |                            |   | 857,021   |            |  |                      | 641,509 |  |   | 385,323  
|February 29, 2008                |  |                            | 408,314 |                            |   | 202,064   |            |  |                      | 440,567 |  |   | 169,811  
|Inventory Obsolescence Reserve:  |  |                            |         |                            |   |           |            |  |                      |         |  |   |          
|February 28, 2010                |  | $                          | 852,537 |                            | $ | 1,998,915 |            |  | $                    | 343,201 |  | $ | 2,508,251
|February 28, 2009                |  |                            | 121,086 |                            |   | 762,054   |            |  |                      | 30,603  |  |   | 852,537  
|February 29, 2008                |  |                            | 133,588 |                            |   | 113,996   |            |  |                      | 126,498 |  |   | 121,086  
|Income Tax Valuation Allowance:  |  |                            |         |                            |   |           |            |  |                      |         |  |   |          
|February 28, 2010                |  | $                          | 730,778 |                            | $ | 959,944   |            |  | $                    |        |  | $ | 1,690,722
|February 28, 2009                |  |                            |        |                            |   | 730,778   |            |  |                      |        |  |   | 730,778  
|February 29, 2008                |  |                            |        |                            |   |          |            |  |                      |        |  |   |         



F-33