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**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C.  20549**

 

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**FORM 10-K/A**

**Amendment No. 1**

 

| **(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 29, 2008**                                                           |
| ** **                                                                                                      | ** ** | ** **                                                                                                        |
| **or**                                                                                                          |
| ** **                                                                                                      | ** ** | ** **                                                                                                        |
| **o**                                                                                                           | ** ** | **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 333-118829**

 

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**Cellu TissueHoldings, Inc.**

(Exact name of registrant as specified in its charter)

 

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

 

**(678) 393-2651**

(Registrant’s telephone number,including area code)

 

**Not Applicable**

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

 

                   Securities registered pursuant to Section 12(b) ofthe Act:       **None**

 

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

 

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Indicate by check mark if the registrant is awell-known seasoned issuer, as defined in Rule 405 of the SecuritiesAct.  Yes o No x

 

Indicate by check mark if the registrant isnot required to file reports pursuant to Section 13 or Section 15(d) ofthe Exchange Act.  Yes x  No o

 

Indicate by check mark whether theregistrant: (1) has filed all reports required to be filed by Section 13or 15(d) of the Securities Exchange Act of 1934 during the preceding12 months (or for such shorter period that the registrant was required tofile such reports) and (2) has been subject to such filing requirements forthe past 90 days. Yes x No o

 

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

 

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

 

| Large accelerated filer o |   | Accelerated filer o          |
|---------------------------|--------|-----------------------------------|
| Non-accelerated filer x   |   | Smaller reporting  company o |

 

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

 

There is no market for the Registrant’sequity.  The number of shares of issuer’sCommon Stock, $.01 par value, outstanding on May 2, 2008 was 100 shares.

 

Documents incorporated by reference:  None

 

 

 

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**ExplanatoryNote**

 

This Amendment No. 1 on Form10-K/A (this “Amendment”) amends the Annual Report of Cellu Tissue Holdings,Inc. (the “Company”) on Form 10-K for the fiscal year ended February 29, 2008,as filed with the Securities and Exchange Commission on May 19, 2008 (the“Original Filing”).  This Amendment isbeing filed for the purpose of restatement to correct errors in (i) accountingfor deferred income taxes in connection with purchase accounting applied infiscal 2007, (ii) classification of borrowings and repayments on the revolvingcredit facility in the statement of cash flows, (iii) classification of the equityinvestment by Weston Presidio/Other Stockholders in the period June 13, 2006-February28, 2007 in the statement of cash flows in said period, and certain otheradjustments that were initially deemed to be not material by management, including(a) classification of shipping and handling costs in accordance with EITF00-10, *Accounting for Shipping and Handling Fees and Costs*(EITF 00-10),**(b) accountingfor derivative instruments, (c) accounting for foreign exchange gains andlosses in fiscal 2008 and 2007, and (d) certain other miscellaneous adjustmentsas described in Note 2 and 15 to the consolidated financial statements.

 

All applicable amounts relatingto this restatement have been reflected in the consolidated financialstatements and disclosed in the notes to the consolidated financial statementsin this amended Form 10-K/A. For discussion of the individual restatementadjustments, see Note 2 and 15 to the consolidated financial statements.Additionally, see Item 7. Management’s Discussion and Analysis of FinancialCondition and Results of Operations.

 

For the convenience of thereader, this Form 10-K/A sets forth the 2008 Form 10-K in its entirety.However, this Form 10-K/A only amends and restates certain information in Items1 and 1A of Part I, Items 6, 7, 8 and 9A(T) of Part II and Item 15 of Part IVof the Original Filing, and no other items in the Original Filing are amendedhereby. Except for the amended and restated information described above, theforegoing items have not been updated to reflect events subsequent to May 19,2008, the filing date of the Original Filing. Accordingly, this Form 10-K/Ashould be read in conjunction with our filings made with the Securities andExchange Commission (SEC) on and after the filing of the Original Filing.Pursuant to the rules of the SEC, Item 15 of Part IV of the Original Filing hasbeen amended to contain currently-dated certifications from our chief executiveofficer and chief financial officer, as required by Section 302 of the Sarbanes-OxleyAct of 2002.

 

Except as expressly stated orwhere the context requires otherwise, the information in this amended Form 10-K/Agenerally speaks as of May 19, 2008, the date on which the Original Filing wasfiled with the SEC.

 

**Background**

 

On January 8, 2009, weannounced that we were reviewing (i) accounting for deferred income taxes inconnection with purchase accounting in fiscal year 2007 and other purchaseaccounting items from that fiscal year, (ii) classification of shipping andhandling fees and costs under EITF 00-10 and (iii) accounting treatment ofother selected accounts.  On January 20, 2009,our management and the audit committee of our Board of Directors havedetermined that our consolidated financial statements for fiscal years 2007 and2008 and the first two quarters of fiscal 2009 should no longer be reliedupon.  In addition to this Form 10-K/A,we are amending our Quarterly Reports on Form 10-Q for the first two quartersof fiscal 2009 to reflect the restatements described above.

 

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**TABLE OF CONTENTS**

 
| PART 1   |                                                                                                                |   |
|---------------|---------------------------------------------------------------------------------------------------------------------|--------|
|          |                                                                                                                |   |
| ITEM 1.       | BUSINESS                                                                                                            |   |
|          |                                                                                                                |   |
| ITEM 1A.      | RISK FACTORS                                                                                                        |   |
|          |                                                                                                                |   |
| ITEM  1B.     | UNRESOLVED  STAFF COMMENTS                                                                                          |   |
|          |                                                                                                                |   |
| ITEM 2.       | PROPERTIES                                                                                                          |   |
|          |                                                                                                                |   |
| ITEM 3.       | LEGAL  PROCEEDINGS                                                                                                  |   |
|          |                                                                                                                |   |
| ITEM  4.      | SUBMISSION  OF MATTERS TO A VOTE OF SECURITY HOLDERS                                                                |   |
|          |                                                                                                                |   |
| PART II  |                                                                                                                |   |
|          |                                                                                                                |   |
| ITEM  5.      | MARKET  FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES  OF EQUITY SECURITIES |   |
|          |                                                                                                                |   |
| ITEM  6.      | SELECTED  FINANCIAL DATA                                                                                            |   |
|          |                                                                                                                |   |
| ITEM  7.      | MANAGEMENT’S  DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS                         |   |
|          |                                                                                                                |   |
| ITEM  7A.     | QUANTITATIVE  AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                                                         |   |
|          |                                                                                                                |   |
| ITEM  8.      | FINANCIAL  STATEMENTS AND SUPPLEMENTARY DATA                                                                        |   |
|          |                                                                                                                |   |
| ITEM  9.      | CHANGES  IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE                               |   |
|          |                                                                                                                |   |
| ITEM  9A(T).  | CONTROLS  AND PROCEDURES                                                                                            |   |
|          |                                                                                                                |   |
| ITEM 9B.      | OTHER  INFORMATION                                                                                                  |   |
|          |                                                                                                                |   |
| PART III |                                                                                                                |   |
|          |                                                                                                                |   |
| ITEM  10.     | DIRECTORS,  EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE                                                             |   |
|          |                                                                                                                |   |
| ITEM  11.     | EXECUTIVE  COMPENSATION                                                                                             |   |
|          |                                                                                                                |   |
| ITEM  12.     | SECURITY  OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER  MATTERS                    |   |
|          |                                                                                                                |   |
| ITEM  13.     | CERTAIN  RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE                                           |   |
|          |                                                                                                                |   |
| ITEM  14.     | PRINCIPAL  ACCOUNTANT FEES AND SERVICES                                                                             |   |

 

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

 

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**PART I**

 

**ITEM 1.  BUSINESS**

 

Cellu Tissue Holdings, Inc. (“we”, “us” or “theCompany”) was incorporated in Delaware in 1984. At the time of our incorporation, we acquired the assets of ourConnecticut facility and, in 1995, we purchased our Mississippi facility.  Throughout 1998, we acquired the assets ofeach of our Michigan, New York and Ontario facilities and, in 2002 we purchasedour Neenah Wisconsin facility.   In March 2007,we acquired our Ladysmith Wisconsin facility.

 

OnJune 12, 2006, Cellu Paper Holdings, Inc., our parent, entered intoan Agreement and Plan of Merger with Cellu Parent Corporation (referred toherein as Cellu Parent), a corporation organized and controlled by WestonPresidio V, L.P. (referred to herein as Weston Presidio), and Cellu AcquisitionCorporation, a newly formed wholly owned subsidiary of Cellu Parent, or MergerSub.  Pursuant to the agreement, on June 12,2006, Merger Sub was merged with and into our parent, with our parent survivingand becoming a wholly owned subsidiary of Cellu Parent, or the Merger.   The aggregate merger consideration to bepaid to shareholders of our parent was $207.8 million, including assumption of$162.0 million in aggregate principal amount of our outstanding 9.75% seniorsecured notes.  In addition, during theearn-out period beginning on March 1, 2006 and ending on February 28,2010, the merger consideration is subject to an increase for certain contingentearn-out consideration of up to $35 million in the aggregate, not to exceed $15million for any fiscal year, payable within six months of the end of the priorfiscal year.  Weston Presidio willguaranty payment of any earn-out consideration. For the fiscal year ended February 28,2007, or fiscal year 2007, no payment was required.   For the fiscal year ended February 29,2008, or fiscal year 2008, $15.0 million payment will be required to be paid inthe fiscal year ending February 28, 2009, or fiscal year 2009.

 

Anyreferences to fiscal year 2007 operating results in the remainder of Item 1Business, combines our operating results for the period March 1, 2006 to June 12,2006 (pre-merger) and June 13, 2006 to February 28, 2007(post-merger).  See Item 7. MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS forfurther analysis thereof.

 

TheCompany has restated its consolidated financial statements as of February 29,2008 and February 28, 2007 and for the fiscal year ended February 29,2008, the period from June 13, 2006 through February 28, 2007(post-merger), the period from March 1, 2006 through June 12, 2006 (pre-merger),and its unaudited quarterly financial data for each of the interim periods offiscal 2008 and fiscal 2007.  Thisrestatement corrects errors in (i) accounting for deferred income taxes inconnection with purchase accounting applied in fiscal 2007, (ii) classificationof borrowings and repayments on the revolving credit facility in the statementof cash flows, (iii) classification of the equity investment by Weston Presidio/OtherStockholders in the period June 13, 2006-February 28, 2007 in the statement ofcash flows in said period, and certain other adjustments that wereinitially deemed to be not material by management, including (a) classificationof shipping and handling costs in accordance with EITF 00-10, *Accounting for Shipping and Handling Fees and Costs*(EITF00-10),**(b) accounting for derivativeinstruments, (c) accounting for foreign exchange gains and losses in fiscal2008 and 2007, and (d) certain other miscellaneous adjustments.  SeeNote 2 — Restatement of Financial Statements and Note 15 QuarterlyResults of Operations in the accompanying consolidated and combined financialstatements for further information.

 

We manufacture and market a variety of specialtytissue hard rolls and machine-glazed paper used in the manufacture of variousend products, including diapers, facial and bath tissue, assorted paper towelsand food wraps.  In addition, we producea variety of converted tissue products. Our customers include major North American producers of branded andunbranded disposable consumer absorbent and tissue products for the personaland health care markets; consumer and away-from-home tissue products companies;national and regional tissue products distributors; and third-party converterswho sell their products to food, bakery and confections companies.  We service a diverse group of high-qualitycustomers, with three of our top 10 customers belonging to the Fortune 150group of companies. For fiscal year 2008, we sold 317,080 tons of tissue andmachine-glazed paper products, generating net sales of $443.1 million.

 

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Our business is comprised of two segments: tissue andmachine-glazed paper.  We currently ownand operate seven strategically located manufacturing facilities with anaggregate annual production capacity of approximately 315,000 tons of tissueand machine-glazed paper hard rolls, currently consisting of approximately236,000 tons of tissue hard roll production capacity and approximately 79,000tons of machine-glazed paper hard roll production capacity.  In addition, our tissue converting equipmentand machine-glazed paper converting equipment currently have annual convertingproduction capacities of approximately 90,000 and 29,000 tons, respectively.See Item 8. Financial Statements and Supplementary Data, specifically Footnote12. Business Segments for additional information regarding our segments.

 

***Tissue***.  Our tissue segment consists of two productlines: (1) hard roll tissue and (2) consumer and away-from-homeconverted tissue products.    For fiscalyear 2008, our tissue segment sold 235,395 tons of tissue, generating net salesof $333.4 million, or approximately 75.2% of our net sales, and 84.0****% of our gross margin.

 

*Hard roll tissue*.  We produce tissue hard rolls at all of ourfacilities other than our Michigan facility. Our hard roll tissue is sold as facial and bath tissue, specialtymedical tissue, industrial wipers, napkin and paper towel stock, as well asabsorbent cover stock.  We manufactureour hard roll tissue with a variety of pulps and recycled fibers and producehard roll tissue to our customers’ specifications by controlling suchattributes as brightness, absorbency, bulk, strength, porosity and color.  In addition, we produce our absorbent coverstock in a variety of weights and widths for sale to consumer productscompanies or third-party converters.  Ourcustomers then print, cut and process our absorbent cover stock hard rolls tobe used in the manufacture of a variety of disposable absorbent products in thepersonal and health care markets, such as diapers, adult incontinence and femininecare products, surgical waddings and other medical and sanitary disposableproducts.  We also sell our absorbentcover stock to manufacturers of absorbent bed pads, disposable infant bibs anddisposable absorbent pet products.

 

*Consumer and away-from-home converted tissue*.  We convert consumer and away-from-home tissueproducts at our Neenah Wisconsin facility. Our converted tissue products include a variety of private labelconsumer and away-from-home bath and facial tissue, napkins and folded androlled towels.  We manufacture ourconverted tissue products according to our customers’ specifications forweight, softness, size, color, prints, embossing patterns, grade, fold, packageconfiguration and price.  We believe thatall of our products are recognized for their softness, strength andabsorbency.  We offer a complete range ofconverted facial tissue products as well as dispenser, dinner, cocktail andluncheon napkins.  In addition, we ship afull line of bath tissue products, in both jumbo and standard roll bath sizes,and a full line of consumer and away-from-home towel formats.  We sell our converted tissue products throughvarious channels that serve the consumer and away-from-home markets.

 

We entered the consumer and away-from-home convertedtissue products market following our August 2002 acquisition of apreviously idle manufacturing and converting facility in Neenah Wisconsin.  We began manufacturing at our NeenahWisconsin facility in August 2002 and began producing our full line ofconverted tissue products by March 2003. We have significantly increased the sales of products from the NeenahWisconsin facility since its acquisition to in excess of $140 million in fiscalyear 2008.

 

OnMarch 21, 2007, we consummated a definitive merger agreement, or theCityForest Merger Agreement, with CityForest Corporation, or CityForest, CelluCity Acquisition Corporation, our wholly owned subsidiary, or Cellu City MergerSub, and Wayne Gullstad as the shareholders’ representative.  Pursuant to the CityForest Merger Agreementand subject to the terms and conditions therein, Cellu City Merger Sub mergedwith and into CityForest, with CityForest surviving and becoming our whollyowned subsidiary.  The aggregate mergerconsideration paid (including assumption of $18.5 million in aggregateprincipal amount of industrial revenue bonds) was approximately $61.0 millionsubject to certain working capital and net cash adjustments.   CityForest is a Ladysmith, Wisconsin-basedmanufacturer of tissue hard rolls for third-party converters that resize andconvert the rolls into napkins, towels, bath tissue, specialty medical tissue,industrial wipers and facial tissue. The majority of CityForest’s sales are tothird-party converters serving the away-from-home market, the consumer market,as well as state and federal government agencies and the medical industry.  CityForest is solely focused on manufacturingtissue hard rolls and does not currently convert rolls into finished products.   However, a portion of CityForest productionis transferred to our Neenah facility to be converted to finished product.

 

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***Machine-glazed paper***.  We produce machine-glazed paper hard rolls atour Michigan, Mississippi and Ontario facilities in a variety of weights,widths and surface characteristics. Machine-glazed paper is tissue paper with a glazed coating and, in somecases, other moisture and grease-resistant coatings.  We sell our machine-glazed paper hard rollsto third-party converters that manufacture fast food and commercial food wrap,as well as niche market products such as gum wrappers, coffee filters, tobaccopapers, wax paper and butter wraps.  Weuse the balance of our machine-glazed paper hard rolls at our Michigan facilityto produce 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 ourMichigan facility is sold as branded products to a single customer.  For fiscal year 2008, our machine-glazedpaper segment sold 81,685 tons of machine-glazed paper hard rolls and convertedwax paper products, generating net sales of $109.7 million, or approximately24.8****% of our net sales, and 16.0****% of our gross margin.

 

**Businessstrengths**

 

Someof our key business strengths are as follows:

 

***Increased net sales andprofitability potential in our converting business***.  We entered into the consumer andaway-from-home converted tissue products market following the August 2002acquisition of our Neenah Wisconsin manufacturing and converting facility andrelated equipment for approximately $30.0 million.  We believe that the Neenah Wisconsin facilityis an efficient, low-cost producer of converted tissue products such as bathand facial tissue, napkins and folded and rolled towels.  The facility includes five light dry crepepaper machines with approximately 85,000 tons of annual tissue productioncapacity and 14 converting lines with approximately 90,000 tons of annualconverting capacity.  In addition, thefacility includes a complete distribution center with fully automated unitizingand wrapping capacities.  Sales of ourconverted tissue products in the consumer and away-from-home converted tissueproducts market generate significantly greater revenue per ton than sales ofhard roll tissue.  We believe that, as wecontinue to increase the utilization of our converting capacity, we will increaseour profits and generate higher margins on our consumer and away-from-homeconverted tissue products.

 

***Low- cost manufacturingoperations***.  Ourstrategic manufacturing facility locations and flexible production capacity,combined with our relatively low overhead costs, contribute to our competitiveposition in the marketplace.  We believethat our Neenah Wisconsin facility is a low- cost tissue production facilityand has helped us continue to improve our competitive position.  In addition, we have established ongoingcost-saving investments and productivity improvement initiatives.

 

***Diversified and high-qualitycustomer base***.  Wesell to a highly diversified customer base, thereby reducing our dependence onany single customer, with only one customer representing more than 10% of ournet sales for fiscal year 2008.  Ourcustomers include leading branded and private label tissue products companies,tissue and machine-glazed paper converters, distributors of tissue products,fast food restaurants, third-party converters who sell their products to food,bakery and confections companies and third-party converters serving state andfederal government agencies and the medical industry.   Notably, our customers include all of themajor producers in North America of branded and unbranded disposable consumerabsorbent and tissue products for the personal and health care markets andthree of our top 10 customers are Fortune 150 companies.  Our customer base has become increasinglydiversified with our 10 largest customers accounting for approximately 51.3% ofgross sales for fiscal year 2008, down from 54.9% in the fiscal year ended February 28,2007, or fiscal year 2007.

 

***Experienced and incentivizedmanagement team***. We are managed by an experienced team of executive officers that have anaverage of over 20 years of experience in the paper products industry.  Russell C. Taylor has been our president andchief executive officer since 2001 and has over 25 years of industry experience.  Prior to coming to our company, he was asenior executive at Kimberly-Clark Corporation, a leading personal careconsumer products company.  Mr. Taylorleads a team of senior executives with expertise in the paper and paperproducts industry with proven management and strategic experience.

 

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**Businessstrategy**

 

Our overall strategy is to increase revenues, optimizeour product mix and lower costs to enhance our position within the paperindustry.  We intend to implement thisstrategy through our key initiatives set forth below:

 

***Maximize utilization of ourconverting capacity***. Our Neenah Wisconsin facility began producing our full line of consumerand away-from-home converted tissue products in March 2003.    As part of our growth strategy, we continueto increase the production of converted tissue products across our 14converting lines by expanding our customer base for our consumer and away-from-homeconverted tissue products.  Toward thatend, we continue to promote our “customer delight” program, producing qualityproducts at competitive prices and providing customers with what managementbelieves to be among the industry’s best on-time delivery rates and completeshipment performance as well as building on past relationships with customersin our hard roll tissue products line. We have expanded our dedicated sales force in the consumer andaway-from-home converted tissue products market to capitalize on theseopportunities.  As a result, we believethat we can continue to increase the utilization of the converting capacity atour Neenah Wisconsin facility and are adding retail-focused convertingequipment.

 

***Continue to develop our “customerdelight” program***. We continually strive to establish and maintain excellent relationshipswith our customers by providing a high level of customer service and technicalsupport.  We focus on critical factorssuch as competitive pricing, product quality, on-time deliveries and completeshipments.  In addition, we provide afull line of products designed to meet the various needs of each of ourcustomers, including the unique capability to produce premium-quality level productswith a recycled cost and fiber base.  Ourmanufacturing process is tailored to our customers’ specifications and allowsus to offer them flexibility in price, grade, softness, package configurationand size.  For example, our products canbe manufactured completely with virgin pulp (for premium products) or recycledfiber (for value products) or any combination thereof.  We believe that our high-quality customerservice and technical support have helped us develop and maintain long-termrelationships with our customers that represent a majority of our sales.

 

***Continue to reduce manufacturingcosts***.  Wecontinually seek out opportunities to contain and reduce our costs moreeffectively.  As part of our costmanagement strategy, we benchmark our machines and manufacturing operationsagainst certain world class levels, including those of leading papermanufacturers.  Our benchmarking isapplied by business sector and by type of machine on a monthly and year-to-datebasis.  We review metrics such as totalmachine efficiency, fiber loss and waste percentage, tons produced per machineper person per year, fixed and variable costs per ton produced and total energyper ton produced.  We use ourbenchmarking analyses to help us allocate our strategic capital and non-capitalinvestments in order to reduce our manufacturing costs most effectively.  In addition, our cost management strategyfocuses on reducing variable costs through increased operating efficiencies andreduced energy consumption, and allows us to better manage our costs and lessenthe impact of fiber price cyclicality.  In an effort to reduce manufacturing costs, we have initiated a projectto install a combined heat and power system at our East Hartford facility.   Furthermore, we intend to fully utilize thethird-party gasification steam project at our Wiggins facility to reducenatural gas consumption that was started up in the fourth quarter of fiscalyear 2008.

 

***Deliver greater earningsstability through enhanced fiber and energy cost management***.We have developed and implemented a pulp cost management strategy that has beenhighly effective in reducing our pulp costs.   Our supply agreements with various pulp suppliers enable us to purchasea majority of our anticipated total pulp requirements for a given year atprices below published list prices. These agreements further allow us to shift a portion of our pulppurchases to the spot market to take advantage of more favorable spot marketprices when such prices fall.  We believethese supply agreements provide us with significant protection against the riskof fluctuating pulp costs and offer a substantial savings from purchasing pulpon the spot market during periods of tight supply.  Furthermore, approximately 50% of our salesare to customers with pulp price pass-through contracts.  These contracts track a published pulpbenchmark price index and have various triggers and timing clauses that dictatethe price customers pay for our products. We also continue to capitalize upon opportunities to establish greaterfiber cost stability throughout our plants. We are actively expanding our capability to replace virgin fiber withrecycled fiber

 

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at several of our mill sites in order to continuemanufacturing premium quality level products with a more stable and competitivecost position.  Additionally, we have atargeted strategy in place that is designed to yield greater energy costscontrol, which includes utilizing gas strips or hedges to minimize pricevolatility, deploy capital to reduce consumption and implement alternativeenergy sources.

 

**Manufacturing**

 

We currently own and operate six manufacturingfacilities located in the United States and one manufacturing facility locatedin Ontario, Canada.  We produce hard rolltissue at our Connecticut, Mississippi, New York, Ontario and both Wisconsinfacilities for sale to consumer products companies and third-party convertersand for use in the production of converted tissue products at our NeenahWisconsin facility.  We producemachine-glazed paper at our Michigan, Mississippi and Ontario facilities in avariety of specialty hard rolls.  We alsoproduce converted wax paper products at our Michigan facility.

 

Our hard roll tissue manufacturing process begins withwood pulp or recycled fiber.  These rawmaterials typically are pulped in large blenders or pulpers and moved vianetworks of pipes and pumps to a tissue machine where sheets of tissue paper areformed according to customer or grade specifications.  The tissue paper is then drawn through themachine and formed on wires as it travels through various press rolls.  Once the sheets are formed, they aretransferred to a dryer section of the machine that dries the tissue.  Following the drying process, the tissuepaper is removed from the drying cylinders and wound into hard rolltissue.  Hard roll tissue is either usedinternally for our converting operations at our Neenah Wisconsin facility orsold to consumer products companies and third-party converters.  We undergo a similar process at each of ourMichigan, Mississippi and Ontario facilities in our machine-glazed paperoperations, which are designed to produce machine-glazed paper hard rolls. Also,at our Ladysmith, Wisconsin facility, we process the majority of fiber used inour products.  The fiber processing areaconsists of a new state-of-the art de-inking plant that is directly linked tothe paper machines.  Raw material isreceived in the form of bales of recycled paper (mostly office paper).  The de-inking process removes contaminantssuch as ink, staples, paper clips, plastic and paper coatings.  Non-chlorine whiteners are used to brightenthe fiber and strip colors.  The endproduct is clean, bright fiber pulp.

 

Our converting process at our Neenah Wisconsinfacility involves loading hard roll tissue onto converting machines whichunwind, perforate, emboss and print tissue as needed.  The converting machines then roll or fold theprocessed tissue into converted tissue products, such as bath or facial tissue,napkins or paper towels.  Similarly, ourconverting operations at our Michigan facility are designed to convert ourmachine-glazed paper hard rolls into converted wax paper products.

 

The following table illustrates the annual hard rollproduction capacity at each of our manufacturing facilities based on currentutilization and the type of products produced at each of such facilities:

 
| ** **            | ** ** | **Total hard roll  capacity  (tons per year)** | ** ** | **Hard roll********tissue** | ** ** | **Hard roll  machine-  glazed paper** | ** ** | **Tissue  converting** | ** ** | **Machine-  glazed paper  converting** | ** ** |
|-----------------------|------------|--------------------------------------------------------------------|------------|----------------------------------|------------|-------------------------------------------------|------------|------------------------|------------|---------------------------------------------|------------|
| Connecticut           |       | 29,000                                                             |       | X                                |       |                                            |       |                   |       |                                        |       |
| Michigan              |       | 33,000                                                             |       |                             |       | X                                               |       |                   |       | X                                           |       |
| Mississippi           |       | 48,000                                                             |       | X                                |       | X                                               |       |                   |       |                                        |       |
| New York              |       | 31,000                                                             |       | X                                |       |                                            |       |                   |       |                                        |       |
| Ontario               |       | 41,000                                                             |       | X                                |       | X                                               |       |                   |       |                                        |       |
| Wisconsin (Neenah)    |       | 85,000                                                             |       | X                                |       |                                            |       | X                      |       |                                        |       |
| Wisconsin (Ladysmith) |       | 48,000                                                             |       | X                                |       |                                            |       |                   |       |                                        |       |

 

***Connecticutfacility***

 

Our Connecticut facility is a 59,000 square footfacility located in East Hartford, Connecticut. The facility consists of two paper machines, each of which produces drycreped tissue that is used by consumer products companies and third-partyconverters in the manufacture of disposable baby diapers, adult

 

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incontinence products, surgical waddings anddisposable bibs.   In addition, ourConnecticut facility has the capacity to produce base sheets for facial andbath tissue, napkins and paper towel products.

 

***Michiganfacility***

*** ***

Our Michigan facility is a 397,000 square foot complexlocated along Lake Michigan’s Bay of Green Bay in the City of Menominee.  The facility consists of a paper machine forthe manufacture of machine-glazed paper hard rolls and 20 converting lineoperations for both wet and dry wax papers. We believe that this facility is a highly efficient, low-cost producerof machine-glazed paper hard rolls which are used by third-party converters tomake food packaging, wrapping, laminating and moisture -resistant and grease-resistant paper products.  A portion ofthe machine-glazed paper hard rolls produced at the Michigan facility isconverted 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 paperproducts manufactured at the Michigan facility is sold as branded products tothe facility’s largest customer.

 

***Mississippifacility***

*** ***

Our Mississippi facility is located in Wiggins,Mississippi.  Our facility complexconsists of a 163,200 square foot manufacturing and warehousing facility inaddition to a 6,800 square foot office. The facility is in close proximity to major interstate highways and arailroad, with a rail spur that runs directly to the facility.  In addition, the facility is strategicallylocated near the Mississippi gulf coast and three major seaports, including thePort of Gulfport, through which we ship our exports.  Our Mississippi facility is centrally locatedbetween Atlanta and Dallas, thereby allowing for optimal service to many of ourkey customers.

 

Our manufacturing facilities at the Mississippifacility consists of two paper machines. One machine produces machine-glazed paper hard rolls for food packaging,wrapping, laminating and moisture-resistant and grease-resistant paperproducts.  The second machine producesdry creped paper that is used in the diaper and hygiene products market.  In addition, it produces tissue, napkin andtowel roll stock.

 

***NewYork facility***

*** ***

Our New York facility is a 242,000 square foot complexlocated in Gouverneur, New York.  Itconsists of two light dry creped paper machines, each of which produces avariety of specialty tissue products, such as personal hygiene grades, medicaland surgical drapes, face mask wadding, filtration grades and tissues used inthe personal care markets.  In addition,the facility produces flexographic printed (a lower-cost, lower resolutiongraphic) colored napkins for the party goods industry and premium facial tissue.  The facility is in close proximity to majorinterstate highways and a railroad, with a rail spur that runs directly to thefacility.

 

***Ontariofacility***

*** ***

Our Ontario facility is a 256,000 square foot complexlocated in St. Catharines, Ontario, Canada. The facility currently consists 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 basisweights from nine to 25 pounds used in the manufacture of folded and rolledtowels, facial and bath tissue, napkins and absorbent tissues. Ourmachine-finished machine produces wax paper base stock and wet creped tissueused in the manufacture of coffee filters, masking tape and washroom towel basepapers.  All of the products manufacturedat our Ontario facility are produced in jumbo rolls and sold to North Americanconverters for further processing.

 

In November 2005, we made the decision toindefinitely idle our machine-glazed machine at our Ontario facility and in thefourth quarter of fiscal year 2007, we decided to shut down the machine-glazedmachine permanently.

 

***Neenah Wisconsin facility***

 

Our Neenah Wisconsin facility is a 1.2 million squarefoot facility located in Neenah, Wisconsin. We acquired this facility in August 2002 and added convertingcapacity to the facility subsequent to its

 

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acquisition. The facility currently consists of five light dry creped paper machineswith up to 85,000 tons of annual hard roll tissue production capacity and 14converting lines with approximately 90,000 tons of annual converting capacity.  A complete distribution center with fullyautomated unitizing and wrapping capabilities is located adjacent to thefacility.  This facility producesconverted tissue products such as facial and bath tissue, napkins and papertowels, as well as unconverted hard roll tissue, and enables us to offer ourcustomers flexibility in the price, grade, softness, package configuration andsize of our products.  For example, ourproducts 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-plycapacity.  The facility containsfull-width Bretting M-fold towel, kitchen roll towel and napkin machines.  We also utilize a multi-fold facial line.

 

The facility is in close proximity to major interstatehighways and supports a rail spur that runs directly to the facility.  In addition, the facility enjoys a strategicgeographic advantage in servicing the midwestern U.S. markets.

 

***Ladysmith Wisconsin facility***

 

OurLadysmith Wisconsin facility is a 259,000 square foot facility located inLadysmith, Wisconsin. We acquired this facility in March 2007.  CityForest is a Ladysmith, Wisconsin-basedmanufacturer of tissue hard rolls for third-party converters that resize andconvert the rolls into napkins, towels, bath tissue, specialty medical tissue,industrial wipers and facial tissue. The majority of CityForest’s sales are tothird-party converters serving the away-from-home market, the consumer market,as well as state and federal government agencies and the medical industry.  CityForest is solely focused on manufacturingtissue hard rolls and does not currently convert rolls into finished products.   CityForest’s manufacturing process includesa de-inking facility, two light dry crepe paper machines with a combined annualcapacity of over 48,000 tons used to manufacture tissue hard rolls and waterand wastewater treatment capabilities. The facility processes over 98% of the fiber used in its product.  This pulp can be used to make 100 percentrecycled tissue or can be combined with other fiber, such as virgin pulp, atthe paper machine,   The ability tocombine fibers of different types allows the facility to precisely match thespecific requirements for a customer’s existing or new products.

 

**Rawmaterial and energy sources and supply**

 

The primary raw material used in our variousfacilities is wood pulp (both virgin pulp and recycled fiber).  Other costs include natural gas, electricity,fuel oil and, in our Michigan facility, coal.  We have developed and implemented a pulp cost management strategy thathas been highly effective in controlling our pulp costs.    Our supply agreements with various pulpsuppliers enable us to purchase a majority of our anticipated total pulprequirements for a given year at prices below published list prices.  These agreements further allow us to shift aportion of our pulp purchases to the spot market to take advantage of morefavorable spot market prices when such prices fall.  We believe these supply agreements provide uswith significant protection against the risk of fluctuating pulp costs andoffer a substantial savings from purchasing pulp on the spot market duringperiods of tight supply.  In addition,our Ladysmith, Wisconsin facility processes over 98% of the fiber used in itsproduct.  We satisfy all of our energyrequirements through purchases of natural gas (other than for our Michiganfacility) and electricity from local utility companies.   At our Michigan facility, our power boilersgenerate most of our energy requirements through the use of coal, with thebalance being supplied through the purchase of natural gas by contract.

 

**Salesand customer support**

 

***Tissue***

 

*Hard roll tissue*.  Our hard roll sales group markets and sellsour tissue hard rolls and specialty products to consumer and away-from-homeproducts companies and third-party converters.

 

*Consumer and away-from-home converted tissue*.  Our converted products sales group marketsand sells our converted tissue products to a variety of retail andaway-from-home customers, directly to retailers or to distributors, which inturn sell to end-users.

 

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***Machine-glazedpaper***

*** ***

Our machine-glazed sales group markets and sells ourmachine-glazed paper in a variety of specialty hard rolls from each of ourMichigan, Mississippi and Ontario facilities. In addition, at our Michigan facility, our machine-glazed sales groupmarkets and sells converted wax paper products. The products manufactured in our machine-glazed paper segment are soldto third-party converters, consumer products companies and, in certaininstances, directly to distributors.

 

**Competition**

 

The hard roll tissue market and consumer andaway-from-home converted tissue products market are highly competitive and aredominated by a number of large, international corporations, as well as smaller,regional corporations.  Among the largercorporations, there is a growing trend to engage in contract manufacturing withsmaller, more cost-effective manufacturers, such as ourselves.  In such instances, major corporations find itmore cost-effective to outsource their manufacturing needs rather than build orrebuild paper and converting machines or increase their productioncapacity.  We believe that we offer analternative to various major corporations by producing quality hard roll tissueand converted tissue products at attractive prices.

 

We also compete in the machine-glazed papermarket.  Our primary competitors in themachine-glazed paper market are medium-sized North American-based independentorganizations.

 

In all areas, we believe that we compete on the basisof product quality and performance, price, service, sales anddistribution.  See “Item 1A. RiskFactors-”Excess supply in the markets we serve may reduce the prices we areable to charge for our products.”

 

**Majorcustomers**

 

Our customer base is comprised of leading tissueconsumer products companies, tissue and machine-glazed paper converters,manufacturers of private label products and distributors of tissueproducts.  Three of our top 10 customersare Fortune 150 companies.  Our 10largest customers represented 56.8% of sales for the fiscal year ended February28, 2006, or fiscal year 2006, 54.9% of sales for fiscal year 2007 and 51.3% ofsales for fiscal year 2008.  Kimberly-Clark Corporation, our current largest single customer,represented 13.4% and 12.3% of sales in fiscal year 2008 and fiscal year 2006,respectively.  No customer accounted formore than 10% of our sales in fiscal year 2007 and no other customer accountedfor more than 10% of our sales in fiscal year 2008 or fiscal year 2006.

 

**Employeesand labor relations**

 

As of February 29, 2008, we employed approximately****942 active full-time employees, consisting of****784****hourlyemployees and 158 salaried employees.  Wehave collective bargaining agreements with the UnitedSteelworkers of America, referred to as USW covering approximately 473of our hourly employees in our Michigan, New York and Wisconsin facilities,collectively.  In addition, we have acollective bargaining agreement with Independent Paperworkers of Canadacovering approximately 77****employees inour Ontario facility.  Our collectivebargaining agreements expire between June 2008 and June 2012.

 

In July 2005, the USW was elected to represent 76hourly employees at our Mississippi facility and was certified by the NationalLabor Relations Board as the exclusive collective bargaining representative ofsuch employees.  On June 29, 2007, acollective bargaining agreement with USW was ratified.

 

Our facilities have active health and safety programsin place.  We have not experienced anywork stoppages or significant labor disputes and we consider relations with ouremployees to be satisfactory.  All of ourfacilities are situated in areas where adequate labor pools exist.

 

**Intellectualproperty**

 

We are the owner of certain trademarks relating to ourproducts.  We are not aware of anyexisting infringing uses that could materially affect our business.  We believe that our trademarks are valuableto

 

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our operations in our tissue and machine-glazed papersegments and are important to our overall business strategy.

 

We own the trademark WaxtexTM which is used inconnection with our machine-glazed paper products brand produced at ourMichigan facility.  We also own thetrademark Magic SoftTM used in association with the converted facial and bathtissue, paper towel and napkin products manufactured at our Wisconsin facilityand the trademarks InterlakeTM and Interlake PaperTM.

 

**Environmentallaws**

 

We are subject to comprehensive and frequentlychanging federal, state, local and foreign environmental, health and safetylaws and regulations, including laws and regulations governing emissions of airpollutants, discharges of wastewater and storm water, storage, treatment anddisposal of materials and waste, site remediation and liability for damage tonatural resources.  We are also subjectto frequent inspections and monitoring by government enforcementauthorities.  Compliance with these lawsand regulations is an important factor in our business.  From time to time, we incur significantcapital and operating expenditures to comply with applicable federal, state andlocal environmental laws and regulations and to meet new statutory andregulatory requirements.  We haveimplemented practices and procedures at our operating facilities that areintended to promote compliance with environmental laws, regulations and permitrequirements.  We believe that ourfacilities and manufacturing operations are currently in material compliancewith such laws, regulations and requirements; however, we may not always be incompliance with all such laws, regulations or requirements.

 

We may be subject to strict liability for theinvestigation and remediation of environmental contamination (includingcontamination that may have been caused by other parties) at properties that weown or operate and at other third-party owned properties where we or ourpredecessors have disposed of or arranged for the disposal of regulatedmaterials.  As a result, we may beinvolved in administrative and judicial proceedings and inquiries in the futurerelating to environmental matters.  Thetotal of such environmental compliance costs and liabilities cannot bedetermined at this time and may be material.

 

**Othergovernmental regulation**

 

We are also regulated by the U.S. Food and DrugAdministration and the U.S. Occupational Safety and Health Administration.  We believe that our manufacturing facilitiesare in compliance, in all material respects, with these laws and regulations.

 

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

 

**Forward-lookingstatements**

 

ThisAnnual Report on Form 10-K/A includes “forward-looking statements” within themeaning of the Private Securities Litigation Reform Act of 1995.  Forward-looking statements are those that donot 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 orevents.  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 othervariable circumstances, including those discussed in this Annual Report underthe heading “Item 1A. Risk Factors,” many of which are outside of our control,that could cause our actual results and experience to differ materially fromthose we thought would occur.  Otherrisks besides those listed in “Item 1A. Risk Factors” can adversely affectus.  New risk factors can emerge fromtime to time.  It is not possible for usto predict all of these risks, nor can we assess the extent to which anyfactor, or combination of factors, may cause actual results to differ fromthose contained in the forward-looking statements.  Given these risks and uncertainties, we urgeyou to read this Annual Report completely and with the understanding thatactual future results may be materially different from what we plan orexpect.  We will not update theseforward-looking statements even if our situation changes in the future.

 

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Thefollowing listing represents some, but not necessarily all, of the factors thatmay cause actual results to differ from those anticipated or predicted:

 

·                  the cyclicalityof the paper industry;

 

·                  changes in thecost and availability of raw materials, including future demand for pulp indomestic and export markets;

 

·                  the effects onus from competition;

 

·                  increases in ourenergy costs;

 

·                  operational problemsat our facilities causing significant lost production;

 

·                  the maintenanceof relationships with customers;

 

·                  our ability torealize operating improvements and anticipated cost savings;

 

·                  changes in ourregulatory environment, including environmental regulations;

 

·                  a change incontrol relating to us;

 

·                  increases ininterest rates;

 

·                  fluctuations inforeign currency related to our Canadian subsidiary;

 

·                  assessment ofmarket and industry conditions;

 

·                  general economicconditions and their effects on our business;

 

·                  our ability toservice our debt obligations and fund our working capital requirements; and

 

·                  increasedgeneral and administrative costs arising out of or resulting from achievingcompliance with Sarbanes-Oxley.

 

**Item 1A.  Risk Factors**

 

***Thecyclical nature of the specialty paper, packaging and tissue industry couldhave a material adverse effect on our business, financial condition andoperating results.***

* *

The market for specialty paper, packaging andtissue products is highly cyclical and sensitive to changes in general businessconditions, industry capacity, consumer preferences and other factors.  Demandis also influenced by fluctuations in inventory levels held by customers andconsumer preferences.  Supply dependsprimarily on industry capacity and capacity utilization rates.  In periods of economic weakness reducedspending by consumers and businesses results in decreased demand, potentiallycausing downward price pressure. Industry participants may also, at times, add new capacity or increasecapacity utilization rates, potentially causing supply to exceed demand andexerting downward price pressure.  Wehave no control over these factors and they can heavily influence our financialperformance.

 

***Our operating resultsdepend upon our wood pulp costs.***

*** ***

Pulp is the principal raw material used in themanufacture of our specialty paper and tissue products.  It is purchased in highly competitive, pricesensitive markets.  We buy a significantamount of pulp and other raw materials either through supply agreements or onthe spot market.  For fiscal year 2008,we purchased approximately 315,000****metric tons ofpulp and recycled fiber.

 

We have agreements with various pulp vendorsto purchase various amounts of pulp over the next two to three years.  These commitments require purchases of pulp up to approximately 169,000metric tons per year at pulp prices below published list prices and allow us toshift a portion of our pulp purchases to the

 

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spotmarket to take advantage of more favorable spot market prices when such pricesfall.  We believethat our current commitmentunder these arrangements or their equivalent approximates 50% of our currentbudgeted pulp needs.   If upon expirationof these agreements, or upon failure of our suppliers to fulfill theirobligations under these agreements, we are unable to obtain wood pulp on termsas favorable as those contained in these agreements, our cost of goods sold mayincrease and results of operations will be impaired.  As a result, our ability to satisfy customerdemands and to manufacture products in a cost-effective manner may bematerially adversely affected.

 

In addition, the costs and availability ofwood pulp have at times fluctuated greatly because of weather, economic globalbuying behaviors or general industry conditions.  Fromtime to time, timber harvesting may be limited by natural events, such as fire,insect infestation, disease, ice storms, excessive rainfall and wind storms orby harvesting restrictions.  Productionlevels within the forest products industry are also affected by such factors ascurrency fluctuations, duties and finished lumber prices.  These factors can increase the price we mayhave to pay to our existing suppliers or from any new suppliers.  In the presence of oversupply in the marketswe serve, selling prices of our finished products may not increase in responseto raw material price increases.  If weare unable to pass any raw material price increases through to our customers,our business financial condition and operating results may be materiallyadversely affected.

 

***Our energy costs may behigher than we anticipated, which could have a material adverse effect on ourbusiness, financial condition and operating results.***

*** ***

We use energy, mainly natural gas, electricity andfuel oil, to operate machinery and to generate steam, which we use in ourproduction process.  Energy prices,particularly for natural gas and fuel oil, have continued to increase since2000, with a corresponding effect on our production costs.  We spent approximately $50.7 million infiscal year 2008 on electricity, natural gas, oil and coal.    Our Mississippi and Wisconsin facilitiesoperate in regulated electric markets. Our other four facilities operate in deregulated electric markets.  All of our facilities operate in deregulatednatural gas markets.  If our energy costsare greater than anticipated, our business, financial condition and operatingresults may be materially adversely affected.

 

***Unforeseen or recurringoperational problems and maintenance outages at any of our facilities may causesignificant lost production.***

 

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

 

·                  maintenanceoutage to conduct maintenance operations that cannot be performed safely duringoperations;

 

·                  prolonged powerfailures or reductions, including the effect of lightning strikes on ourelectrical supply;

 

·                  breakdown,failure or substandard performance of any of our pulping machines, papermachines, recovery boilers, converting machines, de-inking facility or otherequipment;

 

·                  noncompliancewith material environmental requirements or permits;

 

·                  shortages of rawmaterials, a drought or lower than expected rainfall on our water supply;

 

·                  disruptions inthe transportation infrastructure, including railroad tracks, bridges, tunnelsor roads;

 

·                  fires, floods,tornados, hurricanes, earthquakes or other catastrophic disasters;

 

·                  labordifficulties; or

 

·                  otheroperational problems.

 

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If our facilities are shut down, they may experienceprolonged startup periods, regardless of the reason for the shutdown.  Those startup periods could range fromseveral days to several weeks, depending on the reason for the shutdown andother factors.  Any prolonged disruptionin operations of any of our facilities could cause significant lost production,which would have a material adverse effect on our business, financial conditionand operating results.

 

***Labor disputes orincreased labor costs could disrupt our business and have a material adverseeffect on our financial condition and operating results.***

*** ***

As of February 29, 2008, approximately****66% of our active full-time employees were represented byeither the USW or the Independent Paper Workers of Canada through variouscollective bargaining agreements.

 

InJuly 2005, the USW was elected to represent 76 hourly employees at ourMississippi facility and was certified by the National Labor Relations Board asthe exclusive collective bargaining representative of such employees.  On June 29, 2007, a collective bargainingagreement with USW was ratified.

 

Thecollective bargaining agreements for our facilities expire between June 2008and June 2012.  It is likely that ourworkers will seek an increase in wages and benefits at the expiration of eachof those contracts.

 

Anysignificant work stoppage in the future or any significant increase in laborcosts could have a material adverse effect on our business, financial conditionand operating results.

 

***We are dependent uponcontinued demand from our large customers.***

*** ***

Our largest customers account for a significantportion of our sales.  Our ten largestcustomers represented 56.8% of our sales for fiscal year 2006, 54.9%****of our sales for fiscal year 2007 and 51.3% of our salesfor fiscal year 2008.    Some of ourlarge customers (including four of our 10 largest customers) have thecapability of producing the products that they currently buy from us.  The loss or significant reduction of ordersfrom any of our large customers could have a material adverse effect on ourbusiness, financial condition and operating results.

 

***We are subject tosignificant environmental, health and safety laws and regulations andcompliance expenditures.***

*** ***

Our business is subject to a wide range of federal,state, local and foreign general and industry specific environmental, healthand safety laws and regulations, including those relating to air emissions,wastewater discharges, solid and hazardous waste management and disposal andsite remediation.  We are also subject tofrequent inspections and monitoring by government enforcement authorities.  Compliance with these laws and regulations isa significant factor in our business. From time to time, we incur significant capital and operatingexpenditures to achieve and maintain compliance with applicable environmentallaws and regulations.  Our failure tocomply with applicable environmental laws and regulations or permitrequirements could result in substantial civil or criminal fines or penaltiesor enforcement actions, including regulatory or judicial orders enjoining orcurtailing operations or requiring remedial or corrective measures,installation of pollution control equipment or other actions, which could havea material adverse effect on our business, financial condition and operatingresults.

 

Certain of our operations also require environmentalpermits or other approvals from governmental authorities, and certain of thesepermits and approvals are subject to expiration, denial, revocation ormodification under various circumstances. Failure to obtain or comply with these permits and approvals, or withother environmental requirements, may subject us to civil or criminalenforcement proceedings that can lead to substantial fines and penalties beingimposed against us, orders requiring us to take certain actions or temporary orpermanent shutdown of our affected operations. Such enforcement proceedings could also have a material adverse effecton 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 theinvestigation, remediation and monitoring, as well as associated costs,expenses and

 

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third-party damages, including tort liability andnatural resource damages, relating to past or present releases of hazardoussubstances on or from our properties. Liability under these laws may be imposed without regard to whether weknew of, or were responsible for, the presence of those substances on ourproperty, may be joint and several, meaning that the entire liability may beimposed on each party without regard to contribution, and retroactive and maynot be limited to the value of the property. In addition, we or others may discover new material environmentalliabilities, including liabilities related to third-party owned properties thatwe or our predecessors formerly owned or operated, or at which we or ourpredecessors have disposed of, or arranged for the disposal of, certainmaterials.  We may be involved inadministrative or judicial proceedings and inquiries in the future relating tosuch environmental matters which could have a material adverse effect on ourbusiness, financial condition and operating results.

 

New environmental laws or regulations (or changes inexisting laws or regulations or their enforcement) may be enacted that requiresignificant expenditures by us.  If theresulting expenses significantly exceed our expectations, our business,financial condition and operating results could be materially and adverselyaffected.

 

We are also subject to various federal, state, localand foreign requirements concerning safety and health conditions at ourmanufacturing facilities.  We may also besubject to material financial penalties or liabilities for noncompliance withthose safety and health requirements, as well as potential business disruption,if any of our facilities or a portion of any facility is required to betemporarily closed as a result of any noncompliance with thoserequirements.  Such financial penaltiesor liabilities or business disruptions could have a material adverse effect onour business, financial condition and operating results.

 

***If we are unable toimplement our business strategies, our business, financial condition andoperating results could be materially and adversely affected.***

*** ***

Our future operating results will depend in part onthe extent to which we can successfully implement our business strategies on acost-effective basis.  However, ourstrategies are subject to significant business, economic and competitiveuncertainties and contingencies, many of which are beyond our control.  If we are unable to successfully implementour business strategies, our business, financial condition and operatingresults could be materially and adversely affected.

 

***We face many competitors, severalof which have greater financial and other resources.***

 

We face competition in each of our markets fromcompanies that produce the same type of products that we produce or thatproduce alternative products that customers may use instead of ourproducts.  We currently compete in thespecialty paper, packaging, tissue and converted paper markets.  Some of our competitors may be able toproduce certain of our products at lower cost than us.  Additionally, many of our competitors arelarge, vertically integrated companies that are more strongly capitalized thanus or have more financial resources than us. Any of the foregoing factors may enable our competitors to betterwithstand periods of declining process and adverse operating conditions.  In addition, changes within the paperindustry, including the consolidation of our competitors and consolidation ofcompanies in the distribution channels for our products, have occurred and maycontinue to occur and may have a material adverse effect on our business,financial condition and operating results.

 

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

 

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

 

·                  our failure to anticipate and respondto changing customer preferences and demographics;

 

·                  our failure to develop new andimproved products;

 

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

 

·                  consolidation of our customer basethat diminishes our negotiating leverage;

 

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·                  the decision by our large customersto discontinue outsourcing the production of their products to us and toproduce their products themselves;

 

·                  acquisition of a customer by one ofour competitors, who thereafter replaces us as a supplier for that customer;and

 

·                  our failure to control costs.

 

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

 

New machines may be built or idle machines may beactivated, which would add more capacity to the specialty paper, packaging,tissue and converted paper and tissue product markets.  Increased production capacity in any of thesemarkets could cause an oversupply resulting in lower market prices for ourproducts and increased competition, either of which could have a materialadverse effect on our business, financial condition and operating results.

 

***We may lose business tocompetitors who underbid us, and we may be otherwise unable to competefavorably under declining market conditions.***

 

Demand for specialty paper, packaging, tissue andconverted paper and tissue products tends to be more price-sensitive duringdeclining market conditions than during normal market conditions.  When market conditions decline, our competitorsare more likely to try to underbid our prices in markets where we enjoy aleading position to target some of our market share in those markets.  This competitive behavior could drive marketprices down and hinder our ability to pass on increases in raw material coststo our customers.  Because of thefixed-cost nature of our business, our overall profitability is sensitive tominor shifts in the balance between supply and demand.  Competitors having lower operating costs thanwe do will have a competitive advantage over us with respect to products thatare particularly price-sensitive.

 

***The loss of our keymanagers could materially and adversely affect our business, financialcondition and operating results.***

*** ***

Our future success depends, in significant part, uponthe continued services of our management personnel.  Our chief executive officer, Russell C.Taylor, has over 25 years experience in the paper and paper productsindustry.  Our senior executives have anaverage of over 20 years experience in the paper and paper productsindustry.   The market for qualifiedindividuals is highly competitive and we may not be able to attract and retainqualified personnel to replace or succeed members of our senior management orother key employees, should the need arise. Therefore, the loss of services of one or more of our key seniormanagement could materially and adversely affect our business, financialcondition and operating results.

 

***Exposure to interestrate changes and other types of capital market volatility could increase ourfinancing costs.***

*** ***

We require both short-term and long-term financing tofund our operations, including capital expenditures.  We are exposed to changes in interest rateswith respect to our working capital facility and any new debt issues.  Changes in the capital markets, our creditrating or prevailing interest rates can increase or decrease the cost oravailability of financing which may have an adverse effect on our financialcondition and operating results.  Inaddition, because some of our operations and sales are in internationalmarkets, we could be adversely affected by unfavorable fluctuations in foreigncurrency exchange rates.

 

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

*** ***

We sell our products in the United States, Canada,Mexico and South America.  The economicand political climate of each of these regions has a significant impact oncosts, prices and demand for our products in these areas.  Changes in regional economies or politicalstability, including acts of war or terrorism, and changes in traderestrictions or laws (including tax laws and regulations, increased tariffs orother trade

 

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barriers) can affect the cost of manufacturing anddistributing our products and the price and sales volume of our products, whichcould materially and adversely affect our business, financial condition andoperating results.

 

***We may not be able to generate sufficient cashflows to meet our debt service obligations.***

 

Ourability to make scheduled payments on, or to refinance our obligations withrespect to, our indebtedness, including the $162,000,000 aggregate principalamount of our 9 3⁄4% senior secured notes due 2010 that we issued in March 2004,referred to as the Original Notes, and the approximately $20 million aggregateprincipal amount of our 9 3⁄4% senior secured notes in conjunction with theCityForest purchase due 2010 that we issued in March 2007, referred to as theAdditional Notes (and together with the Original Notes, referred to herein asthe Notes), or to fund our other liquidity needs will depend on our financialand operational performance which in turn will be affected by general economicconditions and by financial, competitive, regulatory and other factors beyondour control.  If we are unable togenerate sufficient cash flow to satisfy our debt obligations, we may have toundertake alternative financing plans, such as refinancing or restructuring ourdebt, selling assets, reducing or delaying capital investments or seeking toraise additional capital.  We cannotassure you that any refinancing would be possible, that any assets could besold, or, if sold, of the timing of sales and the amount of proceeds that maybe realized from those sales, or that additional financing could be obtained onacceptable terms, if at all.  Ourinability to generate sufficient cash flows to satisfy our debt obligations, orto refinance our indebtedness on commercially reasonable terms, wouldmaterially and adversely affect our financial condition and results ofoperations and our ability to satisfy our obligations under the Notes.

 

***Our significant debt obligationscould limit our flexibility in managing our business and expose us to certainrisks***.

 

Weare highly leveraged.  As of February 29,2008, we had $198.8 million of indebtedness outstanding, which includes theNotes and $17.9 million of industrial revenue bonds assumption in connectionwith the acquisition of CityForest.  Inaddition, we are permitted under our working capital facility and the indenturegoverning the Notes to incur additional debt, subject to certainlimitations.  Furthermore, we borrowed$9.8 million under our working capital facility.  Our high degree of leverage may haveimportant consequences to investors, including the following:

 

·                  we may have difficulty satisfying ourobligations under the Notes or other indebtedness and, if we fail to complywith these requirements, an event of default could result;

 

·                  we may be required to dedicate a substantialportion of our cash flow from operations to required payments on indebtedness,thereby reducing the availability of cash flow for working capital, capitalexpenditures and other general corporate activities;

 

·                  covenants relating to our debt may limit ourability to obtain additional financing for working capital, capitalexpenditures and other general corporate activities;

 

·                  covenants relating to our debt may limit ourflexibility in planning for, or reacting to, changes in our business and theindustry in which we operate;

 

·                  we may be more vulnerable than ourcompetitors to the impact of economic downturns and adverse developments in ourbusiness; and

 

·                  we may be placed at a competitivedisadvantage against any less leveraged competitors.

 

Theoccurrence of any one of these events could have a material adverse effect onour business, financial condition, results of operations, prospects and abilityto satisfy our obligations under the Notes.

 

***If we fail to establish and maintaineffective internal control over financial reporting, we may have materialmisstatements in our financial statements and we may not be able to report ourfinancial results in a timely manner (Restated).***

 

In conjunction with this amended Annual Report on Form 10-K/A for theyear ended February 29, 2008 and under the authorization and direction of ourAudit Committee, management has reassessed the effectiveness of the Company’sinternal control over financial reporting and determined that a materialweakness exists relating to the Company’s GAAP expertise in properly assessingand recording complex accounting matters, specifically (i) deferred incometaxes associated with purchase accounting; (ii) shipping and handling fees andcosts; (iii) foreign exchange gains and losses; and (iv) derivatives.

 

This material weakness in our internalcontrol over financial reporting led to the restatement of our consolidatedfinancial statements for the fiscal years ended February 29, 2008 andFebruary 28, 2007 and interim financial statements for the periodsended August 28, 2008 and May 29, 2008. We cannot be certain that any remedialmeasures we take will ensure that we implement and maintain effective internalcontrol over financial reporting in the future. Any failure to implement new orimproved controls or difficulties encountered in their implementation couldcause us to fail to meet our reporting obligations. In particular, if thematerial weakness described above is not remediated, it could result in amisstatement of our accounts and disclosures that could result in a materialmisstatement to our annual or interim consolidated financial statements infuture periods that would not be prevented or detected. For further discussionof our disclosure controls and procedures and internal control over financialreporting, see “Item 9A(T). Controls and Procedures.”

 

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**ITEM 1B.    UNRESOLVED STAFF COMMENTS**

 

None.

 

**ITEM 2.  PROPERTIES**

 

**Properties**

 

We own and operate seven facilities located in EastHartford, Connecticut; Menominee, Michigan; Wiggins, Mississippi; Governeur,New York; St. Catharines, Ontario, Canada; Neenah, Wisconsin; and Ladysmith,Wisconsin.  In addition, we maintain ourcorporate headquarters in Alpharetta, Georgia.

 

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

 
| **Facility**                   | ** ** | **Location**       | ** ** | **Use**                                                   | ** ** | **Approximate  square  footage** | ** ** | **Owned or  leased** | ** ** |
|--------------------------------|------------|--------------------|------------|-----------------------------------------------------------|------------|----------------------------------|------------|---------------------------|------------|
| Connecticut facility           |       | East  Hartford, CT |       | Tissue  manufacturing                                     |       | 59,000                           |       | Owned                     |       |
| Georgia administrative offices |       | Alpharetta,  GA    |       | Corporate  Headquarters Administrative offices            |       | 5,000                            |       | Leased                    |       |
| Michigan facility              |       | Menominee,  MI     |       | Machine-glazed  paper manufacturing and converting        |       | 397,000                          |       | Owned                     |       |
| Mississippi facility           |       | Wiggin, MS         |       | Tissue and  machine-glazed paper manufacturing            |       | 170,000                          |       | Owned                     |       |
| New York facility              |       | Gouverneur,  NY    |       | Tissue  manufacturing                                     |       | 242,000                          |       | Owned                     |       |
| Ontario facility               |       | Ontario,  Canada   |       | Tissue and  machine-glazed paper manufacturing            |       | 256,000                          |       | Owned                     |       |
| Wisconsin facility             |       | Neenah, WI         |       | Tissue  manufacturing, converting and distribution center |       | 1,200,000                        |       | Owned                     |       |
| Wisconsin facility             |       | Ladysmith,  WI     |       | Tissue  manufacturing, de-inking facility                 |       | 259,000                          |       | Owned                     |       |

 

**ITEM 3. LEGAL PROCEEDINGS**

 

Weare, from time to time, party to various routine legal proceedings arising outof our business.  These proceedings,primarily involve commercial claims, personal injury claims and workers’compensation claims.  We cannot predictthe outcome of these lawsuits, legal proceedings and claims withcertainty.  Nevertheless, we believe thatthe outcome of any currently existing proceedings, even if determinedadversely, would not have a material adverse effect on our business, financialcondition and operating results.

 

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

 

Notapplicable.

 

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** **

**PART II**

 

**ITEM 5. MARKET FOR THE REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERSAND ISSUER PURCHASES OF EQUITY SECURITIES.**

 

Notapplicable.

 

**ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA**

 

Thefollowing table contains our selected consolidated financial data for fiscalyear 2008, 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 for the fiscal year ended February 28, 2005,or fiscal year 2005 (pre-merger), and the fiscal year ended February 29,2004, or fiscal year 2004 (pre-merger). Our selected consolidated results of operations and other data forfiscal year 2008, for the period from March 1, 2006 to June 12, 2006(pre-merger) and for the period from June 13, 2006 to February 28,2007 (post-merger) and fiscal year 2006, and our selected consolidated balancesheet data at February 29, 2008 and February 28, 2007 have beenderived from audited consolidated financial statements included elsewhere inthis Annual Report.  Our selectedconsolidated results of operations and other data for fiscal year 2005 andfiscal year 2004 and our selected consolidated balance sheet data at February 28,2006, February 28, 2005 and February 29, 2004 have been derived fromaudited consolidated financial statements not included in this AnnualReport.  You should read the informationset forth below in conjunction with our “Management’s Discussion and Analysisof Financial Condition and Results of Operations” and our consolidatedfinancial statements and related notes included elsewhere in this AnnualReport.

 

TheCompany has restated its consolidated financial statements as of February 29,2008 and February 28, 2007 and for the fiscal year ended February 29,2008, the period from June 13, 2006 through February 28, 2007(post-merger), the period from March 1, 2006 through June 12, 2006(pre-merger), and its unaudited quarterly financial data for each of theinterim periods of fiscal 2008 and fiscal 2007. This restatement corrects errors in (i) accounting for deferred incometaxes in connection with purchase accounting applied in fiscal 2007, (ii)classification of borrowings and repayments on the revolving credit facility inthe statement of cash flows, (iii) classification of the equity investment byWeston Presidio/Other Stockholders in the period June 13, 2006-February 28,2007 in the statement of cash flows in said period, and certain otheradjustments that were initially deemed to be not material by management,including (a) classification of shipping and handling costs in accordance withEITF 00-10, *Accounting for Shipping and Handling Fees and Costs*(EITF 00-10), (b) accounting for derivative instruments, (c)accounting for foreign exchange gains and losses in fiscal 2008 and 2007, and(d) certain other miscellaneous adjustments. See Note 2 — Restatementof Financial Statements and Note 15 Quarterly Results of Operations in theaccompanying consolidated and combined financial statements for furtherinformation.

** **
| **(Dollars in thousands)**                 | ** ** | **Feb. 29,  2004  (1)** | ** ** | **Feb. 28,  2005  (1)** | ** **        | **Feb. 28,  2006  (1)** | ** ** | **March 1,  2006-  June 12,  2006** | ** ** | ** ** | **June 13,  2006-  February  28, 2007** | ** ** | **Feb. 29,  2008** | ** ** |
|------------------------------------------------------|------------|------------------------------|------------|------------------------------|-------------------|------------------------------|------------|-----------------------------------------------|------------|------------|---------------------------------------------------|------------|-------------------------|------------|
| ** **                                           | ** ** | ** **                   | ** ** | ** **                   | ** **        | ** **                   | ** ** | **(Restated)**                                | ** ** | ** ** | **(Restated)**                                    | ** ** | **(Restated)**          | ** ** |
|                                                 |       | **(Pre-merger)**             |       |                         | **(Post-merger)** |                         |
| Statement of operations data:                        |       |                         |       |                         |              |                         |       |                                          |       |       |                                              |       |                    |       |
| Net sales:                                           |       |                         |       |                         |              |                         |       |                                          |       |       |                                              |       |                    |       |
| Tissue segment                                       |       | $                            | 192,910    |                         | $                 | 233,710                      |       | $                                             | 237,998    |       | $                                                 | 68,715     |                    |       | $ | 174,074 |   | $ | 333,342 |   |
| Machine-glazed paper segment                         |       | 104,113                      |       | 106,023                      |              | 99,365                       |       | 28,029                                        |       |       | 73,338                                            |       | 109,739                 |       |
| Total net sales                                      |       | 297,023                      |       | 339,733                      |              | 337,363                      |       | 96,744                                        |       |       | 247,412                                           |       | 443,081                 |       |
| Cost of goods sold                                   |       | 263,690                      |       | 298,891                      |              | 309,641                      |       | 88,556                                        |       |       | 234,897                                           |       | 401,352                 |       |
| Gross profit                                         |       | 33,333                       |       | 40,842                       |              | 27,722                       |       | 8,188                                         |       |       | 12,515                                            |       | 41,729                  |       |
| Income (loss) from operations                        |       | 19,948                       |       | 21,955                       |              | 11,433                       |       | (3,330                                        | )          |       | 611                                               |       | 19,630                  |       |
| Net income (loss)                                    |       | $                            | 7,147      |                         | $                 | 3,096                        |       | $                                             | (2,569     | )          | $                                                 | (6,439     | )                       |       | $ | (6,660 | ) | $ | 3,702 |   |
|                                                 |       |                         |       |                         |              |                         |       |                                          |       |       |                                              |       |                    |       |
| Other financial data:                                |       |                         |       |                         |              |                         |       |                                          |       |       |                                              |       |                    |       |
| Net cash provided by (used in) operating  activities |       | $                            | 20,259     |                         | $                 | 32,235                       |       | $                                             | 8,600      |       | $                                                 | (6,384     | )                       |       | $ | 9,785 |   | $ | 19,796 |   |
| Net cash (used in) investing activities              |       | (10,547                      | )          | (7,416                       | )                 | (13,050                      | )          | (1,938                                        | )          |       | (7,677                                            | )          | (64,141                 | )          |
|                                                 |       |                         |       |                         |              |                         |       |                                          |       |       |                                              |       |                    |       |
| Net cash (used in) provided by financing  activities |       | (10,241                      | )          | 1,437                        |              | (282                         | )          | (290                                          | )          |       | —                                            |       | 29,193                  |       |
| Depreciation and amortization                        |       | 14,935                       |       | 16,264                       |              | 16,277                       |       | 4,633                                         |       |       | 16,759                                            |       | 24,146                  |       |
| Capital expenditures                                 |       | 10,547                       |       | 11,419                       |              | 13,050                       |       | 1,938                                         |       |       | 7,677                                             |       | 20,477                  |       |
| EBITDA (2)                                           |       | 33,341                       |       | 35,387                       |              | 26,077                       |       | 895                                           |       |       | 17,605                                            |       | 43,996                  |       |
|                                                 |       |                         |       |                         |              |                         |       |                                          |       |       |                                              |       |                    |       |
| Balance sheet data:                                  |       |                         |       |                         |              |                         |       |                                          |       |       |                                              |       |                    |       |
| Cash and cash equivalents                            |       | $                            | —     |                         | $                 | 26,959                       |       | $                                             | 22,824     |       | N/A                                               |       |                    | $          | 16,261 |   | $ | 883 |   |
|                                                 |       |                         |       |                         |              |                         |       |                                          |       |       |                                              |       |                    |       |
| Total assets                                         |       | 186,943                      |       | 210,843                      |              | 210,232                      |       | N/A                                           |       |       | 345,343                                           |       | 423,217                 |       |
| Total debt                                           |       | 55,787                       |       | 161,060                      |              | 161,080                      |       | N/A                                           |       |       | 160,356                                           |       | 208,647                 |       |
| Stockholders’ equity (deficit)                  |       | 84,482                       |       | (7,586                       | )                 | (6,906                       | )          | N/A                                           |       |       | 38,752                                            |       | 46,085                  |       |

 

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(1) Theerrors in presentation of shipping and handling costs in fiscal year 2004 ,2005 and 2006 of $6.8 million, $6.8 million and $8.5 million, respectively havebeen corrected by reclassifying such costs from net sales (reduction thereof)to cost of goods sold.

 

(2)  EBITDA represents earnings before interestexpense, income taxes and depreciation and amortization.  EBITDA does not represent and should not beconsidered as an alternative to net income or cash flow from operations, asdetermined by U.S. generally accepted accounting principles, or U.S. GAAP, andour calculation thereof may not be comparable to that reported by othercompanies.  We present EBITDA because webelieve that it is widely accepted that EBITDA provides useful informationregarding a company’s ability to service and/or incur indebtedness.   EBITDA has limitations as an analytical tool,and you should not consider it in isolation, or as a substitute for analysis ofour results as reported under U.S. GAAP. Some of the limitations are:

 

·                  EBITDA does not reflect our cashexpenditures, or future requirements for capital expenditures or contractualcommitments;

 

·                  EBITDA does not reflect changes in,or cash requirements for, our working capital needs;

 

·                  EBITDA does not reflect thesignificant interest expense, or the cash requirements necessary to serviceinterest or principal payments, on our debts;

 

·                  although depreciation andamortization are non-cash charges, the assets being depreciated and amortizedwill often have to be replaced in the future, and EBITDA does not reflect anycash requirements for such replacements; and

 

·                  other companies in our industry maycalculate EBITDA differently than we do, limiting its usefulness as acomparative measure.

 

Because of these limitations, EBITDA should not be considered as ameasure of discretionary cash available to us to invest in the growth of ourbusiness.  We compensate for theselimitations by relying primarily on our U.S. GAAP results and using EBITDA onlysupplementally.  See the consolidatedstatements of cash flow included in our financial statements included elsewherein this Annual Report.  The following isa reconciliation of EBITDA to net income (loss) and net cash provided byoperating activities:

 
| **(Dollars in thousands)**                       | ** ** | **Feb. 29,  2004** | ** ** | **Feb. 28,  2005** | ** **        | **Feb. 28,  2006** | ** ** | **March 1, 2006-  June 12, 2006** | ** ** | ** ** | **June 13, 2006-  February 28, 2007** | ** ** | **Feb. 29,  2008** | ** ** |
|------------------------------------------------------------|------------|-------------------------|------------|-------------------------|-------------------|-------------------------|------------|-------------------------------------------------------|------------|------------|-----------------------------------------------------------|------------|-------------------------|------------|
| ** **                                                 | ** ** | ** **              | ** ** | ** **              | ** **        | ** **              | ** ** | **(Restated)**                                        | ** ** | ** ** | **(Restated)**                                            | ** ** | **(Restated)**          | ** ** |
| ** **                                                 | ** ** | **(Pre-merger)**        | ** ** | ** **              | **(Post-merger)** | ** **              |
| EBITDA                                                     |       | $                       | 33,341     |                    | $                 | 35,387                  |       | $                                                     | 26,077     |       | $                                                         | 895        |                    |       | $ | 17,605 |   | $ | 43,996 |   |
| (Add) subtract:                                            |       |                    |       |                    |              |                    |       |                                                  |       |       |                                                      |       |                    |       |
| Interest expense                                           |       | 7,085                   |       | 17,507                  |              | 17,367                  |       | 5,001                                                 |       |       | 11,685                                                    |       | 20,057                  |       |
| Provision for (benefit from) income taxes                  |       | 5,151                   |       | (74                     | )                 | (3,575                  | )          | (1,894                                                | )          |       | (4,179                                                    | )          | (3,909                  | )          |
| Depreciation                                               |       | 13,958                  |       | 14,858                  |              | 14,854                  |       | 4,227                                                 |       |       | 16,759                                                    |       | 24,146                  |       |
| Net income (loss)                                          |       | $                       | 7,147      |                    | $                 | 3,096                   |       | $                                                     | (2,569     | )          | $                                                         | (6,439     | )                       |       | $ | (6,660 | ) | $ | 3,702 |   |
| Add (subtract):                                            |       |                    |       |                    |              |                    |       |                                                  |       |       |                                                      |       |                    |       |
| Depreciation and amortization                              |       | 14,935                  |       | 16,264                  |              | 16,277                  |       | 4,633                                                 |       |       | 16,759                                                    |       | 24,146                  |       |
| Write-off of debt issuance costs and  prepayment penalties |       | —                  |       | 2,895                   |              | —                  |       | —                                                |       |       | —                                                    |       | —                  |       |
| Stock-based compensation                                   |       | —                  |       | 922                     |              | 82                      |       | 924                                                   |       |       | 497                                                       |       | 808                     |       |
| Provision for deferred income taxes                        |       | 2,821                   |       | 1,431                   |              | (2,955                  | )          | (396                                                  | )          |       | (6,891                                                    | )          | (6,964                  | )          |
| Other non-cash charges                                     |       | 667                     |       | (2,074                  | )                 | 290                     |       | 85                                                    |       |       | 1,712                                                     |       | 456                     |       |
| Net changes in working capital                             |       | (5,311                  | )          | 9,701                   |              | (2,525                  | )          | (5,191                                                | )          |       | 4,368                                                     |       | (2,352                  | )          |
| Net cash provided by (used in) operating  activities       |       | $                       | 20,259     |                    | $                 | 32,235                  |       | $                                                     | 8,600      |       | $                                                         | (6,384     | )                       |       | $ | 9,785 |   | $ | 19,796 |   |

 

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**ITEM7.  MANAGEMENT’S DISCUSSION AND ANALYSISOF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

 

The financial and business analysis below providesinformation which we believe is relevant to an assessment and understanding ofour consolidated financial position, results of operations and cash flows.  This financial and business analysis shouldbe read in conjunction with the consolidated financial statements and relatednotes.

 

# **Overview**

# ** **

The Company has restated its consolidatedfinancial statements as of February 29, 2008 and February 28, 2007and for the fiscal year ended February 29, 2008, the period from June 13,2006 through February 28, 2007 (post-merger), the period from March 1,2006 through June 12, 2006 (pre-merger), and its unaudited quarterlyfinancial data for each of the interim periods of fiscal 2008 and fiscal2007.  This restatement corrects errorsin (i) accounting for deferred income taxes in connection with purchaseaccounting applied in fiscal 2007, (ii) classification of borrowings andrepayments on the revolving credit facility in the statement of cash flows,(iii) classification of the equity investment by Weston Presidio/OtherStockholders in the period June 13, 2006-February 28, 2007 in the statement ofcash flows in said period, and certain other adjustments that were initiallydeemed to be not material by management, including (a) classification ofshipping and handling costs in accordance with EITF 00-10, *Accountingfor Shipping and Handling Fees and Costs*(EITF 00-10), (b)accounting for derivative instruments, (c) accounting for foreign exchangegains and losses in fiscal 2008 and 2007, and (d) certain other miscellaneousadjustments. See Note 2 — Restatement of Financial Statements andNote 15 Quarterly Results of Operations in the accompanying consolidated andcombined financial statements for further information.

 

Wemanufacture and market specialty tissue and machine-glazed paper used in themanufacture of various end products, including diapers, facial and bath tissue,assorted paper towels and food wraps.  Inaddition, we manufacture and market a broad range of converted tissueproducts.  Our business is comprised oftwo segments: tissue and machine-glazed paper. In addition, our tissue segment consists of two product lines: (1) hardroll tissue and (2) consumer and away-from-home converted tissueproducts.  We own and operate sixfacilities in the United States, located in Connecticut, Michigan, Mississippi,New York, two facilities in Wisconsin and one facility located in Ontario,Canada.

 

OnJune 12, 2006, our parent entered into an Agreement and Plan of Mergerwith Cellu Parent, a corporation organized and controlled by Weston Presidio,and Cellu Acquisition Corporation, a newly formed wholly owned subsidiary ofCellu Parent, or Merger Sub.  Pursuant tothe agreement, on June 12, 2006, Merger Sub was merged with and into ourparent, with our parent surviving and becoming a wholly owned subsidiary ofCellu Parent, or the Merger.

 

Weaccounted for the Merger as a purchase in accordance with the provisions ofStatement of Financial Accounting Standards No. 141 (“SFAS 141”), *Business Combinations*, which resulted in a new valuation forour assets and liabilities based upon fair values as of the date of theMerger.  As allowed under SEC StaffAccounting Bulletin No. 54, *Push Down Basis ofAccounting Required in Certain Limited Circumstances*(“Push DownAccounting”), we have reflected all applicable purchase accounting adjustmentsin our consolidated financial statements for all periods subsequent to theMerger date.  Push Down Accountingrequires us to establish a new basis for our assets and liabilities based onthe amount paid for our equity at the close of business on June 12,2006.  Accordingly, our parent’sownership basis is reflected in our consolidated financial statements beginningupon completion of the Merger.  In orderto 

 

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applyPush Down Accounting, our parent’s purchase price of $280.1 million, includingassumption of $162.0 million in aggregate principal amount of our outstanding9.75% senior secured notes (referred to herein as the Original Notes) and $39.0million in operating liabilities, and an additional $35.0 million of contingentconsideration was allocated to the assets and liabilities based on their fairvalues. With respect to the contingent consideration the Company has theoption to settle contingent consideration due to certain members of managementin preferred stock of Cellu Parent in lieu of cash if such individuals are nolonger employed by the Company at the time of payout. If these individuals arenot employed at the time of the payout, it is at the Company’s discretion if theindividual receives cash or stock. As noted above, the total consideration includes anadjustment for up to an additional $35.0 million in contingent earn-outconsideration based upon the achievement of certain financial targets.  If any portion of the earned contingentpayments is unable to be made by us, then Weston Presidio has agreed to providethe necessary funds to former holders of our parent’s capital stock, optionsand warrants through an equity investment in our parent or otherwise.  In accordance with SFAS 141, the $35.0million has been recognized as a liability as of February 29, 2008.  For the fiscal year ended February 28,2007, no payment was required.  Forfiscal year 2008, a $15.0 million payment will be made in fiscal year 2009.

 

Wehave allocated the purchase price based on our estimates of the fair value ofassets and liabilities as follows:

 
| ** **                    | ** ** | **Purchase price  allocated to:** | ** ** |
|-------------------------------|------------|---------------------------------------------|------------|
| ** **                    | ** ** | **(Restated)**                              | ** ** |
| Current assets                |       | $                                           | 85,975,953 |   |
| Property, plant and equipment |       | 253,873,052                                 |       |
| Trademarks                    |       | 7,200,000                                   |       |
| Goodwill                      |       | 4,364,700                                   |       |
| Current liabilities           |       | (39,276,861                                 | )          |
| Long-term debt                |       | (159,975,000                                | )          |
| Contingent consideration      |       | (35,000,000                                 | )          |
| Deferred income taxes         |       | (71,399,847                                 | )          |
| Total                         |       | $                                           | 45,761,997 |   |

 

Thefollowing discussion relative to the prior year combines our operating resultsfor the period March 1, 2006 to June 12, 2006 (pre-merger) and June 13,2006 to February 28, 2007 (post-merger). See RESULTS OF OPERATIONS below for further analysis thereof.

 

In ourtissue segment, we derive our revenues from the sale of (1) tissue hardrolls sold as facial and bath tissue, specialty medical tissue, industrialwipers, napkin and paper towel stock, as well as absorbent cover stock and (2) convertedtissue products, including a variety of private label consumer andaway-from-home bath and facial tissue, napkins and folded and rolledtowels.  We derive our revenues in ourmachine-glazed paper segment from the sale of (1) machine-glazed paperhard rolls to third-party converters that manufacture fast food and commercialfood wrap, as well as niche market products such as gum wrappers, coffeefilters, tobacco papers, wax paper and butter wraps and (2) converted waxpaper products, including wet and dry wax paper, sandwich bags and waxpaper.  For fiscal year 2008, our tissuesegment generated net sales of $333.4****million orapproximately 75.2% of our net sales, and our machine-glazed paper segmentgenerated net sales of $109.7 million or approximately 24.8% of our netsales.  For fiscal year 2007 and fiscalyear 2006, our tissue segment generated $242.8****millionand $238.0 million, respectively, of net sales, or approximately 70.5% of ourtotal net sales in each of fiscal year 2007 and fiscal year 2006, and ourmachine-glazed paper segment generated $101.4 million and $99.4 million,respectively, of net sales, or approximately 29.5% of our total net sales ineach of fiscal year 2007 and fiscal year 2006.

 

Weentered the consumer and away-from-home converted tissue products marketfollowing the August 2002 acquisition of our Neenah Wisconsinmanufacturing and converting facility. Our Neenah Wisconsin facility has added approximately 85,000 tons ofannual hard roll tissue production capacity and 14 converting lines withapproximately 90,000 tons of annual converting production capacity.  Sales of our 

 

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convertedtissue products in the consumer and away-from-home converted tissue productsmarket generate significantly greater revenue per ton than sales of hard rolltissue.  Our Neenah Wisconsin facilitybegan producing our full line of consumer and away-from-home converted tissueproducts in March 2003.  We believethat, as we continue to increase the utilization of our converting capacity andadd retail focused converting equipment, we will increase our profits andgenerate higher margins on our consumer and away-from-home converted tissueproducts.

 

OnMarch 21, 2007, we consummated a definitive merger agreement withCityForest, Cellu City Merger Sub, our wholly owned subsidiary, and WayneGullstad as the shareholders’ representative. Pursuant to the agreement, and subject to the terms and conditionstherein, Cellu City Merger Sub merged with and into CityForest, with CityForestsurviving and becoming our wholly owned subsidiary (referred to herein as theCityForest Acquisition).  The aggregatemerger consideration paid (including assumption of $18.4 million in aggregateprincipal amount of industrial revenue bonds) was approximately $61 millionsubject to certain working capital and net cash adjustments.   Total cash paid for the acquisition of $46.8million (purchase price of $61.0 million less assumed indebtedness of $18.4million plus restricted cash and other miscellaneous adjustments of $1.6million and acquisition costs of $2.6 million), was financed in part byissuance of unregistered 9 3⁄4% Senior Secured Notes due 2010 (referred to hereinas the Additional Notes and, together with the Original Notes, referred toherein as the Notes) of approximately $20.0 million, borrowing on a revolvingline of credit ($17.4 million) and available cash on hand.

 

TheCityForest Acquisition has been accounted for as a purchase in accordance withthe provisions of SFAS 141 and, accordingly, the consolidated statements ofoperations includes the results of CityForest for fiscal year 2008 from thedate of acquisition.  Purchase priceallocations are subject to refinement until all pertinent information isobtained.  We have allocated the excessof purchase price over the net assets acquired in the acquisition based on itsestimates of the fair value of assets and liabilities as follows:

** **
| ** **                    | ** ** | **Excess purchase price allocated 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 our tissue segment. Unaudited pro forma results of operations for fiscal year 2008, for theperiod June 13, 2006-November 23, 2006 and for the period March 1,2006-June 12, 2006, as if we and CityForest had been combined as of thebeginning of the periods presented below. The pro forma results include estimates and assumptions, which ourmanagement believes are reasonable. However, the pro forma results do not include any cost savings or othereffects of the planned integration of CityForest and are not necessarilyindicative of the results which would have occurred if the business combinationhad been in effect on the dates indicated, or which may result in the future.

 

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| ** **              | ** ** | **Year Ended  February 29, 2008  (1)** | ** ** | **June 13, 2006-  February 28, 2007  (2)** | ** ** | **March 1, 2006-  June 12, 2006  (2)** | ** ** |
|-------------------------|------------|-------------------------------------------------------|------------|----------------------------------------------------------------|------------|------------------------------------------------------------|------------|
| ** **              | ** ** | **Actual**                                            | ** ** | **Pro Forma**                                             | ** ** | **Actual**                                                 | ** ** | **Pro Forma** | ** ** | **Actual** | ** ** | **Pro Forma** | ** ** |
| ** **              | ** ** | **(in thousands)  (Restated)**                   | ** ** | **(in thousands)  (Restated)**                            | ** ** | **(in thousands)  (Restated)**                        | ** ** |
|                    |       |                                                  |       |                                                           |       |                                                       |       |   |   |   |   |   |   |
| Net sales               |       | $                                                     | 443,081    |                                                           | $          | 445,792                                                    |       | $ | 247,412 |   | $ | 281,494 |   | $ | 96,744 |   | $ | 110,325 |   |
|                    |       |                                                  |       |                                                           |       |                                                       |       |   |   |   |   |   |   |
| Operating income (loss) |       | $                                                     | 19,630     |                                                           | $          | 20,216                                                     |       | $ | 611 |   | $ | 9,216 |   | $ | (3,330 | ) | $ | 99 |   |
|                    |       |                                                  |       |                                                           |       |                                                       |       |   |   |   |   |   |   |
| Net income (loss)       |       | $                                                     | 3,702      |                                                           | $          | 4,262                                                      |       | $ | (6,660 | ) | $ | (1,030 | ) | $ | (6,439 | ) | $ | (4,196 | ) |

 

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(1) Pro forma operating results include theoperating results for CityForest for fiscal year 2008.  The “as filed” operating results include theoperating results for CityForest for the period from the acquisition date (March 21,2007) to February 29, 2008.

 

(2) Pro forma operating results include the operating results for CityForest forfiscal year 2007, prorated between the two reporting periods presented for us,as CityForest was previously a calendar year-end company.

 

Theprimary component of cost of goods sold for each of our segments is pulp, whichrepresented approximately 45%, 43% and 43% of our cost of goods sold in fiscalyear 2008, fiscal year 2007 and fiscal year 2006, respectively. ** **We have supplyagreements with various pulp suppliers over the next two to three years.  We believe under these agreements or theirequivalents, we will purchase approximately 50% of our total annual pulprequirements.  These supply agreementspermit us to purchase pulp at prices that are discounted from published listprices and allow us to shift a portion of our pulp purchases to the spot marketto take advantage of more favorable spot market prices when such pricesfall.  In addition, our Ladysmith,Wisconsin facility processes over 98% of the fiber used in its product.  The balance of our pulp requirements arepurchased on the open market.

 

Ourlabor, manufacturing, energy, other materials and depreciation costs in theaggregate represented approximately 55%, 57% and 57% of our cost of goods soldfor fiscal year 2008, fiscal year 2007 and fiscal year 2006, respectively.  Those costs are broken down as follows: (1) wagesand benefits made up approximately****10% for eachof fiscal year 2008, fiscal year 2007 and fiscal year 2006; (2) manufacturingoverhead represented approximately 17%, 19% and 19% for fiscal year 2008,fiscal year 2007 and fiscal year 2006, respectively; (3) energy costsrepresented approximately 13%, 13% and 14%, for fiscal year 2008, fiscal year2007 and fiscal year 2006, respectively; (4) other materials (includingchemicals, wax, dye and packaging) represented approximately 9%, 9% and 10%,for fiscal year 2008, fiscal year 2007 and fiscal year 2006, respectively; and (5) depreciationrepresented approximately 6%, 6% and 4% for fiscal year 2008,  fiscal year 2007 and fiscal year 2006,respectively.

 

Wehave collective bargaining agreements with the USW in each of our Michigan, NewYork and Neenah Wisconsin facilities covering 473****ofour hourly employees.  In addition, wehave a collective bargaining agreement with Independent Paper Workers of Canadacovering****77****hourlyemployees in our Ontario facility.  Ouragreements expire between June 2008 and June 2012.  In July 2005, the USW was elected to 

 

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represent76 hourly employees at our Mississippi facility and was certified by theNational Labor Relations Board as the exclusive collective bargainingrepresentative of such employees.  On June 29,2007, a collective bargaining agreement with USW was ratified.  Historically, we have not experienced anysignificant labor disputes or work stoppages.

 

Wesatisfy all of our energy requirements through purchases of natural gas (otherthan for our Michigan facility) and electricity from local utilitycompanies.  We utilize gas strips orhedges to minimize price volatility with respect to natural gas purchases.   At our Michigan facility, our power boilersgenerate most of our energy requirements through the use of coal, with thebalance being supplied through the purchase of natural gas by contract.

 

**Results of operations**

 

TheCompany has restated its consolidated financial statements as of February 29,2008 and February 28, 2007 and for the fiscal year ended February 29,2008, the period from June 13, 2006 through February 28, 2007(post-merger),  the period from March 1,2006 through June 12, 2006 (pre-merger), the fiscal year ended February 28,2006, and its unaudited quarterly financial data for each of the interimperiods of fiscal 2008 and fiscal 2007.  Thisrestatement corrects errors in (i) accounting for deferred income taxes in connectionwith purchase accounting applied in fiscal 2007, (ii) classification ofborrowings and repayments on the revolving credit facility in the statement ofcash flows, (iii) classification of the equity investment by WestonPresidio/Other Stockholders in the period June 13, 2006-February 28, 2007 inthe statement of cash flows in said period, and certain other adjustments thatwere initially deemed to be not material by management, including (a)classification of shipping and handling costs in accordance with EITF 00-10, *Accounting for Shipping and Handling Fees and Costs*(EITF00-10), (b) accounting for derivative instruments, (c) accounting for foreignexchange gains and losses in fiscal 2008 and 2007, and (d) certain othermiscellaneous adjustments. See Note 2 — Restatement of FinancialStatements and Note 15 Quarterly Results of Operations in the accompanyingconsolidated and combined financial statements for further information.

 

Fiscalyear 2008 has been compared to the combined periods from March 1, 2006 to June 12,2006 (pre-merger) and from June 13, 2006 to February 28, 2007(post-merger) and fiscal year 2006 for purposes of management’s discussion andanalysis of the results of operations. Any references below to fiscal year 2007 shall refer to the combinedperiods.  Material fluctuations inoperations resulting from the effect of purchase accounting have beenhighlighted.

 

Thefollowing table sets forth certain sales and operating data for our businesssegments for the periods indicated:

 
| ** **                          | ** ** | **Fiscal Year**        | ** ** | **For the Period** | ** **        | ** ** | ** **                      | **Fiscal Year** | ** **                  |
|-------------------------------------|------------|-----------------------------|------------|------------------------------|-------------------|------------|---------------------------------|----------------------|-----------------------------|
| ** **                          | ** ** | **Ended**                   | ** ** | **March 1, 2006-** | ** **        | ** ** | **June 13, 2006-**    | ** **           | **Combined**                | ** ** | **Ended** | ** ** |
| **(Dollars in millions)** | ** ** | **Feb. 28, 2006** | ** ** | **June 12, 2006**  | ** **        | ** ** | **February 28, 2007** | ** **           | **Feb. 28, 2007** | ** ** | **Feb. 29, 2008** | ** ** |
| ** **                          | ** ** | ** **                  | ** ** | **(Restated)**               | ** **        | ** ** | **(Restated)**                  | ** **           | **(Restated)**              | ** ** | **(Restated)** | ** ** |
| ** **                          | ** ** | **(Pre-merger)**            | ** ** | ** **                   | **(Post-merger)** | ** ** |
| Net sales:                          | ** ** | ** **                  | ** ** | ** **                   | ** **        | ** ** | ** **                      | ** **           | ** **                  | ** ** | ** ** | ** ** |
| Tissue segment                      |       | $                           | 238.0      |                         | $                 | 68.7       |                            |                 | $                           | 174.1 |   | $ | 242.8 |   | $ | 333.4 |   |
| Machine-glazed paper segment        |       | 99.4                        |       | 28.0                         |              |       | 73.3                            |                 | 101.4                       |   | 109.7 |   |
| Total                               |       | $                           | 337.4      |                         | $                 | 96.7       |                            |                 | $                           | 247.4 |   | $ | 344.2 |   | $ | 443.1 |   |
|                                |       |                        |       |                         |              |       |                            |                 |                        |   |   |   |
| Gross profit:                       |       |                        |       |                         |              |       |                            |                 |                        |   |   |   |
| Tissue segment                      |       | $                           | 18.8       |                         | $                 | 6.4        |                            |                 | $                           | 9.8 |   | $ | 16.2 |   | $ | 35.0 |   |
| Machine-glazed paper segment        |       | 8.9                         |       | 1.8                          |              |       | 2.7                             |                 | 4.5                         |   | 6.7 |   |
| Total                               |       | $                           | 27.7       |                         | $                 | 8.2        |                            |                 | $                           | 12.5 |   | $ | 20.7 |   | $ | 41.7 |   |
|                                |       |                        |       |                         |              |       |                            |                 |                        |   |   |   |
| Percentage of net sales:            |       |                        |       |                         |              |       |                            |                 |                        |   |   |   |
| Tissue segment                      |       | 70.5                        | %          | 71.0                         | %                 |       | 70.4                            | %                    | 70.5                        | % | 75.2 | % |
| Machine-glazed paper segment        |       | 29.5                        | %          | 29.0                         | %                 |       | 29.6.                           | %                    | 29.5                        | % | 24.8 | % |
| Total                               |       | 100.0                       | %          | 100.0                        | %                 |       | 100.0                           | %                    | 100.0                       | % | 100.0 | % |
|                                |       |                        |       |                         |              |       |                            |                 |                        |   |   |   |
| Gross margin:                       |       |                        |       |                         |              |       |                            |                 |                        |   |   |   |
| Tissue segment                      |       | 7.9                         | %          | 9.3                          | %                 |       | 5.6                             | %                    | 6.7                         | % | 10.5 | % |
| Machine-glazed paper segment        |       | 9.0                         | %          | 6.4                          | %                 |       | 3.7                             | %                    | 4.4                         | % | 6.1 | % |
| Total                               |       | 8.2                         | %          | 8.5                          | %                 |       | 5.1                             | %                    | 6.0                         | % | 9.4 | % |
|                                |       |                        |       |                         |              |       |                            |                 |                        |   |   |   |
| Shipments (tons):              | ** ** | ** **                  | ** ** | ** **                   | ** **        | ** ** | ** **                      | ** **           | ** **                  | ** ** | ** ** | ** ** |
| Tissue segment                      |       | 179,401                     |       | 50,406                       |              |       | 124,012                         |                 | 174,418                     |   | 235,395 |   |
| Machine-glazed paper segment        |       | 81,783                      |       | 23,108                       |              |       | 57,231                          |                 | 80,339                      |   | 81,685 |   |
| Total                               |       | 261,184                     |       | 73,514                       |              |       | 181,243                         |                 | 254,757                     |   | 317,080 |   |
|                                     |            |                             |            |                              |                   |            |                                 |                      |                             |  |  |  |  |  |  |  |  |  |  |

 

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***Fiscal year ended February 29, 2008 (fiscalyear 2008) compared to fiscal year ended February 28, 2007 (fiscal year2007)***

*** ***

**Net sales**for fiscal year 2008 increased $98.9 million, or 28.7%, to $443.1 million from$344.2 for fiscal year 2007.  On acompany-wide basis, tons sold increased for fiscal year 2008 compared to fiscalyear 2007.  For fiscal year 2008, we sold317,080 tons of tissue hard rolls, machine-glazed paper hard rolls andconverted paper products, an increase of 62,323, or 24.5%, compared to fiscalyear 2007.  Furthermore, net sellingprice per ton increased from $1,351 for fiscal year 2007 to $1,397 for fiscalyear 2008.

 

Netsales for our tissue segment for fiscal year 2008 increased $90.6 million, or37.3%, to $333.4 million from $242.8 for fiscal year 2007. This increase isattributable to the CityForest Acquisition, an increase in net selling priceper ton and an increase in tonnage sold. Net selling price per ton increased from $1,392 for fiscal year 2007 to$1,416 for fiscal year 2008.   For fiscalyear 2008, we sold 235,395 tons of tissue, compared to 174,418 tons sold infiscal year 2007.  Net sales for ourmachine-glazed segment for fiscal year 2008 increased $8.4 million, or 8.3%, to$109.7 million from $101.4 million for fiscal year 2007.  This increase is also attributable to anincrease in net selling price per ton and an increase in tonnage sold.  Net selling price per ton increased from$1,262 for fiscal year 2007 to $1,343 for fiscal year 2008.  For fiscal year 2008, we sold 81,685 tons ofmachine-glazed products, compared to 80,339 tons sold in fiscal year 2007.

 

**Grossprofit** for fiscal year 2008 increased to $41.7 million from$20.7 million for fiscal year 2007, an increase of $21.0 million, or 101.6%,from fiscal year 2007.  As a percentageof net sales, gross profit increased to 9.4% for fiscal year 2008, compared to6.0% for fiscal year 2007.  The increasesin gross profit are attributable to the City Forest Acquisition, continuedimprovement in product mix and the strong market for tissue hard rolls,compared to the comparable period in the prior year.

 

Grossprofit for our tissue segment for fiscal year 2008 was $35.0 million, anincrease of $18.8 million, or 117.0%, from fiscal year 2007.   Gross profit for our machine-glazed segmentfor fiscal year 2008 was $6.7 million, an increase of $2.0 million, or 46.7%,from fiscal year 2007.     As apercentage of net sales, gross profit for the tissue segment increased to 10.5%for fiscal year 2008 from 6.7% in fiscal year 2007.  As a percentage of net sales, gross profitfor the machine-glazed segment increased to 6.1% for fiscal year 2008 from 4.4%in fiscal year 2007.

 

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**Selling,general and administrative expenses** for fiscal year 2008increased $6.8 million, or 57.2%, to $18.7 million from $11.9 million forfiscal year 2007.  As a percentage of netsales, selling, general and administrative expenses increased to 4.2% in fiscalyear 2008 from 3.4% for fiscal year 2007. Included in fiscal year 2008 are $1.6million of ongoing CityForest administrative expenses.  Also, included infiscal year 2008 are additional costs incurred in connection withSarbanes-Oxley compliance and increases in incentive compensation expenseassociated with strong business performance.

 

**Restructuringcosts** for fiscal year 2007 were $.2 million related to severancecosts associated with the elimination of a corporate position.

 

**Merger-relatedtransaction costs**for fiscal year 2007 were $6.1 million.

 

**Terminatedacquisition related transaction costs**for fiscal year 2008were $2.1 million related to costs incurred related to an acquisition that didnot transpire.

 

**Stock and related compensation expense**for fiscal year 2008 were $.6 millioncompared to $3.3 million for fiscal year 2007. The $.6 million for fiscal year 2008 was primarily related tocompensation expense related to the payment of taxes associated with arestricted stock award grant.  The $3.3million for fiscal year 2007was related to non-cash compensation expenserelated to the vesting of restricted stock awards, payment of taxes associatedwith such awards and other compensation expense related to the Merger.

 

**Vesting of stock option/restricted stock grants**for fiscal year 2008 was $.8 million comparedto $1.4 million for fiscal year 2007.

 

**Impairmentof property, plant and equipment**for fiscal year 2007resulted in a charge of $.5 million related to our decision in the fourthquarter of fiscal year 2007 to shut down permanently the paper machine at ourOntario facility, which we had idled in the third quarter of fiscal year 2006.

 

**Foreigncurrency gain (loss)**for fiscal year 2008 and 2007 were botha loss of $.1 million.

 

**Incometax benefit**for fiscal year 2008 was $3.9 million compared to$6.1 million for fiscal year 2007. Included in the income tax benefit for fiscal year 2008 is $1.5 millionand $1.4 million, respectively, of benefit associated with future changes inCanadian tax rates due to legislative changes and changes in our effectivestate tax rates which are expected to be realized in the future.  The effective income tax rate for fiscal year2007 differs from the federal statutory rate primarily due to non-deductibletransaction costs expensed for book purposes.

 

**Netincome**for fiscal year 2008 was $3.7 million compared to anet loss of $13.1 million for fiscal year 2007. Included in fiscal year 2008 net income is $2.1 million of terminatedacquisition-related costs and $1.4 million of cash and non-cash stockcompensation charges.  Also, included infiscal year 2008 net income is a tax benefit of $3.9 million.   Included in fiscal year 2007 net lossis  $.2 million of restructuring costs,$6.1 million of merger-related transaction costs, $3.8 million ofmerger-related and other compensation charges and $.5 million related to animpairment charge for our paper machine at our Ontario facility.

 

***Fiscal year ended February 28, 2007 (fiscalyear 2007) compared to fiscal year ended February 28, 2006 (fiscal year2006)***

*** ***

**Net sales**for fiscal year 2007 increased $6.8 million, or 2.0%, to $344.2 million from$337.4 for fiscal year 2006.  On acompany-wide basis, tons sold decreased for fiscal year 2007 compared to fiscalyear 2006.  For fiscal year 2007, we sold254,757 tons of tissue hard rolls, machine-glazed paper hard rolls andconverted paper products, a decrease of 6,427, or 2.5%, compared to fiscal year2006.  Included in this decrease is theeffect of the shutdown of our machine-glazed machine at our Ontario facility,which we idled in the third quarter of fiscal year 2006, and which representeda decrease of 5,925 tons.  Net of theeffect of this, tons sold decreased 502, or .2%, for fiscal year 2007 from thecomparable period in the prior year. Offsetting the decrease in volume sold for fiscal year 2007 from theprior fiscal year was an increase in net selling price per ton from $1,292 forfiscal year 2006 to $1,351 for fiscal year 2007.

 

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Netsales for our tissue segment for fiscal year 2007 increased $4.8 million, or2.0%, to $242.8 million from $238.0 for fiscal year 2006. This increase isattributable to an increase in net selling price per ton, which was partiallyoffset by a decrease in tonnage sold. Net selling price per ton increased from $1,327 for fiscal year 2006 to$1,392 for fiscal year 2007.   For fiscalyear 2007, we sold 174,418 tons of tissue, compared to 179,401 tons sold infiscal year 2006.  Net sales for ourmachine-glazed segment for fiscal year 2007 increased $2.0 million, or 2.0%, to$101.4 million from $99.4 million for fiscal year 2006.  This increase is also attributable to anincrease in net selling price per ton, which was partially offset by a decreasein tonnage sold due in part to the shutdown of our machine-glazed machine atour Ontario facility.  Net selling priceper ton increased from $1,215 for fiscal year 2006 to $1,262 for fiscal year2007.  For fiscal year 2007, we sold80,339 tons of machine-glazed products, compared to 81,783 tons sold in fiscalyear 2006.

 

**Grossprofit** for fiscal year 2007 decreased to $20.7 million from$27.7 million for fiscal year 2006, a decrease of $7.0 million, or 25.3%, fromfiscal year 2006.  As a percentage of netsales, gross profit decreased to 6.0% for fiscal year 2007, compared to 8.2%for fiscal year 2006.  Included in fiscalyear 2007 is $6.0 million of additional depreciation expense in cost of goodssold as compared to our historical basis of accounting prior to the Merger.   Also, included in fiscal year 2007 is anon-cash charge to cost of goods sold reflecting $.9 million of excess purchaseprice allocated to inventory.

 

Grossprofit for our tissue segment for fiscal year 2007 was $16.2 million, adecrease of $2.6 million, or 14.1%, from fiscal year 2006.  Included in fiscal year 2007 is the impact ofthe additional charges noted above on the tissue segment of $4.0 million and$.6 million, respectively.  Gross profitfor our machine-glazed segment for fiscal year 2007 was $4.5 million, a decreaseof $4.4 million, or 48.9%, from fiscal year 2006.  Included in fiscal year 2007 is the impact ofthe additional charges noted above on the machine-glazed segment of $2.0million and $.3 million, respectively.   As a percentage of net sales, gross profit for the tissue segmentdecreased to 6.7% for fiscal year 2007 from 7.9% in fiscal year 2006.  As a percentage of net sales, gross profitfor the machine-glazed segment decreased to 4.4% for fiscal year 2007 from 9.0%in fiscal year 2006

 

**Selling,general and administrative expenses** for fiscal year 2007decreased $1.0 million, or  7.8%, to$11.9 million from $12.9 million for fiscal year 2006.  As a percentage of net sales, selling,general and administrative expenses decreased to 3.5% in fiscal year 2007 from3.9% for fiscal year 2006.

 

**Restructuringcosts** for fiscal year 2007 were $.2 million related toseverance costs associated with the elimination of a corporate position.  Restructuring costs for fiscal year 2006 were$1.0 million, of which $.7 million related to our fiscal year 2006 decision toindefinitely idle one of our machine-glazed paper machines at our Ontariofacility and the related severance costs and $.3 million related to severancecosts associated with a corporate organizational restructuring.

 

**Merger-relatedtransaction costs**for fiscal year 2007 were $6.1million.  The merger-related transactioncosts for fiscal year 2006 were $2.3 million related to a previously announcedterminated transaction.

 

**Stock andrelated compensation expense**for fiscal year 2007 were $3.3million related to non-cash compensation expense related to the vesting ofrestricted stock awards, payments of taxes associated with such awards andother compensation expense related to the Merger.

 

**Vestingof stock option/restricted stock grants**for fiscal year 2007was $1.4 million compared to less than $.1 million for fiscal year 2006.  The $1.4 million for fiscal year 2007consists of $.9 million related primarily to restricted stock grants prior tothe Merger that vested immediately upon the Merger and $.5 million of vestingrelated to restricted stock grants made after the Merger.

 

**Impairmentof property, plant and equipment**for fiscal year 2007resulted in a charge of $.5 million related to our decision in the fourthquarter of fiscal year 2007 to shut down permanently the machine-glazed papermachine at our Ontario facility, which we had idled in the third quarter offiscal year 2006.

 

**Foreigncurrency gain (loss)**for fiscal year 2007 was a loss of $.1million compared to a loss of $.5 million for fiscal year 2006.  The increase in fiscal year 2007 is due tothe fluctuations in the foreign currency (the Canadian dollar).

 

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**Incometax benefit**for fiscal year 2007 was $6.1 million, or aneffective tax rate of 31.7%, compared to $3.6 million, or an effective tax rateof 58.2%, for fiscal year 2006.  Theeffective income tax rate for fiscal year 2007 differs from the federalstatutory rate primarily due to non-deductible transaction costs expensed forbook purposes.  Included in the 58.2%effective tax rate for fiscal year 2006 is approximately $1.2 million ofbenefit related to the different book and tax treatment of deductions relatedto stock compensation matters.  Thisbenefit was recorded in fiscal year 2006 upon completion of our fiscal year2005 tax returns.  Also included in the58.2% effective tax rate was $.1 million of tax expense related to Canadianwithholding tax.

 

**Net loss**forfiscal year 2007 was $13.1 million,****compared tonet loss of $2.6 million for fiscal year 2006. Included in fiscal year 2007 net loss is $6.9 million related toadditional depreciation and a non-cash charge to cost of goods sold resultingfrom purchase accounting, $.2 million of restructuring costs, $6.1 million ofmerger-related transaction costs, $3.8 million of merger-related and othercompensation charges and $.5 million related to an impairment charge for ourmachine-glazed paper machine at our Ontario facility.  Included in fiscal year 2006 net loss is $1.1million of restructuring costs and $2.2 million of merger-related transactioncosts related to a terminated transaction.

 

**Liquidity and capital resources**

 

Ourprincipal liquidity requirements are to service debt and meet working capital,tax and capital expenditure needs.  Ourtotal debt at February 29, 2008 was $208.6 million.

 

In March 2004,we completed a private offering of the Original Notes.   We raised $152.2 million, net of debtissuance costs of $8.0 million and original issuance discount of $1.8million.  At the same time, we enteredinto a $30.0 million revolving working capital facility with CIT Group/BusinessInc.   A portion of the proceeds, alongwith a drawdown from the working capital facility, were used to pay offexisting debt of approximately $56.0 million. In addition, we used an aggregate $100.2 million of the proceeds to funda stockholder dividend in the amount of $96.8 million to Cellu Paper Holdings, Inc.,our parent, to repurchase a portion of its outstanding common stock andwarrants at that time, and to fund compensation from the redemption of stockoptions of our parent in the amount of $3.4 million.

 

Inconnection with the CityForest Acquisition in March 2007, we issued andsold approximately $20 million of Additional Notes.

 

Furthermore,at February 29, 2008 we had outstanding borrowings of $9.8 million underour working capital facility and excess availability was $27.0 million.

 

TheNotes mature on March 15, 2010 and require semi-annual interest paymentson March 15th and September 15th.

 

Inconnection with the Merger, we solicited consents with respect to the OriginalNotes.   Consents were received withrespect to 100% of the aggregate outstanding principal amount of the OriginalNotes. We accepted all of the consents delivered in the consent solicitationand paid to the consenting noteholders a consent fee of $40 per $1,000principal amount of Original Notes for which they delivered consents.  These payments were made in the secondquarter of fiscal year 2007.  As a resultof our acceptance of the consents delivered by noteholders and the completionof the consent solicitation, the amendments to the Indenture governing theNotes described in the Consent Solicitation Statement dated May 9, 2006and related Supplement dated May 24, 2006 became operative and we were notrequired to make a change of control offer to purchase any Notes in connectionwith the Merger.

 

Weentered into a Credit Agreement, dated as of June 12, 2006 (referred toherein as the Credit Agreement), among us, as U.S. Borrower, InterlakeAcquisition Corporation Limited, one of our subsidiaries, as Canadian Borrower,our parent, the other loan guarantors party thereto, JPMorgan Chase Bank, N.A.,as U.S. Administrative Agent, JPMorgan Chase Bank, N.A., Toronto Branch, asCanadian Administrative Agent, and the other lenders party thereto.  The Credit Agreement provides for a $35.0million working capital facility, including a letter of credit sub-facility andswing-line loan sub-facility. The

 

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CreditAgreement provides that amounts under the facility may be borrowed, repaid andre-borrowed, subject to a borrowing base test, until the maturity date, whichis June 12, 2011. An amount equal to $32.0 million is available, in U.S.dollars, to the U.S. Borrower under the facility, and an amount equal to $3.0million is available, in U.S. or Canadian dollars, to the Canadian Borrowerunder the facility.  Borrowings of $17.4million were made to finance a portion of the CityForest Acquisition.   As of February 29, 2008, $9.8 millionof borrowings remained outstanding under the working capital facility.

 

Inconnection with the CityForest purchase agreement, the following agreementswere entered into:

 

***Second SupplementalIndenture***

 

We, certain of oursubsidiaries, the Trustee and CityForest have executed a Second SupplementalIndenture, dated March 21, 2007, or the Second Supplemental Indenture,pursuant to which CityForest became a party to our Indenture as a subsidiaryguarantor.  As a subsidiary guarantor,CityForest, on a joint and several basis with all the existing subsidiaryguarantors, fully, unconditionally and irrevocably guarantees to each holder ofthe Notes and the Trustee our obligations under our Indenture and the Notes.

 

***Amendment to CreditAgreement***

 

We entered into a FirstAmendment, dated March 21, 2007 (referred to herein as the FirstAmendment), to the Credit Agreement dated June 12, 2006 (as amended by theFirst Amendment, the Amended Credit Agreement) among us, as U.S. Borrower,Interlake Acquisition Corporation Limited, one of our subsidiaries, as CanadianBorrower, certain other of our subsidiaries, our parent, JPMorgan Chase Bank,N.A. and JPMorgan Chase Bank, N.A., Toronto Branch.  The maturity date of the Credit Agreement is June 12,2011.

 

The First Amendment (1) increasedthe working capital facility from $35.0 million to $40.0 million, (2) permittedthe issuance and sale by us of the Notes, (3) provided  for the consummation of the CityForestacquisition and the conversion by CityForest from a Minnesota corporation to aMinnesota limited liability company, (4) permitted the assumption ofapproximately $18.5 million in aggregate principal amount of indebtedness ofCityForest in connection with the CityForest Acquisition in accordance with theterms of the CityForest Bond Documents (as defined below under “CityForest BondDocuments”) and (5) permitted the guarantee by us of certain obligationsof CityForest under the CityForest Bond Documents.  In connection with the First Amendment,CityForest became a guarantor of the obligations of the borrowers under theAmended Credit Agreement.

 

***CityForest Bond Documents***

 

CityForest is party to aLoan Agreement, dated March 1, 1998, the Loan Agreement, with the City ofLadysmith, Wisconsin (referred to herein as the Issuer).  Pursuant to the Loan Agreement, the Issuerloaned the proceeds of the Issuer’s Variable Rate Demand Solid Waste DisposalFacility Revenue Bonds, Series 1998 (CityForest Corporation Project, orthe Bonds) to CityForest to finance the construction by CityForest of a solidwaste disposal facility.  Approximately$18.5 million in aggregate principal amount of the Bonds was outstanding as ofthe date of the CityForest Acquisition. CityForest is required, under the terms of the Indenture of Trustgoverning the Bonds, or the CityForest Indenture, to provide a letter of creditin favor of the trustee under the CityForest Indenture, or the BondsTrustee.  CityForest has entered into anAmended and Restated Reimbursement Agreement, dated March 21, 2007, or theReimbursement Agreement and, together with the CityForest Indenture and theLoan Agreement, or the CityForest Bond Documents, with Associated Bank,National Association , or Associated Bank, pursuant to which Associated Bankhas extended the required letter of credit, or the Associated Bank Letter ofCredit and has provided a revolving credit facility to CityForest in anaggregate principal amount of up to $3.5 million, or the Associated BankRevolving Credit Facility.

 

The Bonds Trustee ispermitted to draw upon the Associated Bank Letter of Credit to pay principaland interest due on the Bonds, and to provide liquidity to purchase the Bonds putto CityForest by bondholders

 

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and not remarketed; andCityForest is obligated under the Reimbursement Agreement to reimburseAssociated Bank for any such draws. CityForest is also obligated to pay a feein respect of the aggregate amount available to be drawn under the AssociatedBank Letter of Credit at a rate per annum initially equal to 1.25%, subject toadjustment on a quarterly basis based on CityForest’s leverage.  The expiration date of the Associated BankLetter of Credit is February 15, 2011.

 

Amountsborrowed by CityForest under the Associated Bank Revolving Credit Facility bearinterest at a rate per annum equal to the LIBOR Rate (as defined in theReimbursement Agreement), plus an applicable margin. The applicable marginpercentage initially is 1.75%, subject to adjustment on a quarterly basis basedupon CityForest’s leverage.  During thecontinuance of an event of default, the outstanding principal balance bearsinterest at a rate per annum equal to the then applicable interest rate plus2.00%.  CityForest is also obligated topay a commitment fee in respect of any unused commitment under the AssociatedBank Revolving Credit Facility in an amount equal to 0.50% per annum.  In addition, subject to certain exceptions,if CityForest terminates the Associated Bank Revolving Credit Facility prior toFebruary 15, 2009, CityForest is obligated to pay to Associated Bank a feeequal to 1.00% of the commitment then being terminated. The maturity date ofthe Associated Bank Revolving Credit Facility is February 15, 2011.

 

TheReimbursement Agreement requires scheduled semi-annual payments of principal ofthe Bonds equal to approximately 2% of the principal amount outstanding as ofthe date of the Acquisition, with the balance payable at maturity of the Bondson March 1, 2028. The Reimbursement Agreement also contains a number ofother provisions regarding reserve funds and other mandatory and optionalrepayments in connection with the Bonds. In addition, the Reimbursement Agreement provides that in certaincircumstances where the Company incurs Indebtedness in excess of amountscurrently permitted under its Indenture or refinances the indebtedness issuedunder its Indenture, Associated Bank may require CityForest to repay all of itsobligations to Associated Bank under the Reimbursement Agreement and either tocause the Bonds to be redeemed or to replace the Associated Bank Letter ofCredit with a Substitute Credit Facility, as such term is defined in theCityForest Indenture.

 

The Reimbursement Agreementcontains various affirmative and negative covenants customary for workingcapital and term credit facilities, as well as additional covenants relating tothe Bonds.  The negative covenantsinclude limitations on: indebtedness; liens; acquisitions, mergers andconsolidations; investments; guarantees; asset sales; sale and leasebacktransactions; dividends and distributions; transactions with affiliates;capital expenditures; and changes to the status of the Bonds. CityForest isalso required to comply on a quarterly basis with a maximum leverage covenantand a minimum fixed charge coverage covenant.

 

The Reimbursement Agreementalso contains customary events of default, including:  payment defaults; breaches of representationsand warranties; covenant defaults; cross-defaults to certain other debt,including the Notes and indebtedness under the Amended Credit Agreement;certain events of bankruptcy and insolvency; judgment defaults; certaindefaults related to the Employee Retirement Income Security Act of 1974, asamended; and a change of control of CityForest or us.

 

We have guaranteed all ofthe obligations of CityForest under the Reimbursement Agreement, pursuant to aGuaranty, dated March 21, 2007 (the “Cellu Tissue Guaranty”), executed byus in favor of Associated Bank. In addition, the obligations of CityForestunder the Reimbursement Agreement are secured by first-priority liens in favorof Associated Bank in all of CityForest’s assets.  The U.S. Administrative Agent, the CanadianAdministrative Agent, Associated Bank and CityForest have entered into anIntercreditor Agreement, dated March 21, 2007, which sets forth therespective rights and priorities of Associated Bank, on the one hand, and theU.S. Administrative Agent and the Canadian Administrative Agent, on the otherhand, as to the collateral of CityForest securing the Reimbursement Agreementand the Amended Credit Agreement.

 

Thetable that follows presents cash flows information for fiscal year 2008,combined fiscal year 2007 and fiscal year 2006:

 

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| ** **                                               | ** ** | **Pre-Merger**                                          | ** **  | **Pre-Merger**                                        | ** ** | **Post-Merger**                                               | ** ** | **Combined**                                                       | ** ** | **Post-Merger**                                              | ** ** |
|----------------------------------------------------------|------------|---------------------------------------------------------|-------------|-------------------------------------------------------|------------|---------------------------------------------------------------|------------|--------------------------------------------------------------------|------------|--------------------------------------------------------------|------------|
| ** **                                               | ** ** | **Fiscal Year Ended  February 28, 2006** | ** **  | **March 1, 2006-  June 12, 2006** | ** ** | **June 13, 2006-February 28, 2007 ** | ** ** | **Fiscal Year Ended  February 28, 2007 ** | ** ** | **Fiscal Year Ended  February 29, 2008** | ** ** |
| ** **                                               | ** ** | ** **                                              | ** **  | **(Restated)**                                        | ** ** | **(Restated)**                                                | ** ** | **(Restated)**                                                     | ** ** | **(Restated)**                                               | ** ** |
| **Net Cash Provided by (Used in) Operating  Activities** |       |                                                    |        |                                                  |       |                                                          |       |                                                               |       |                                                         |       |
| Net (loss) income                                        |       | $                                                       | (2,569,354  | )                                                     | $          | (6,439,231                                                    | )          | $                                                                  | (6,659,606 | )                                                            | $          | (13,098,837 | ) | $ | 3,701,756 |   |
| Non-cash items                                           |       | 13,694,780                                              |        | 5,245,238                                             |       | 12,076,598                                                    |       | 17,321,836                                                         |       | 18,446,327                                                   |       |
| Changes in working capital                               |       | (2,525,660                                              | )           | (5,190,415                                            | )          | 4,368,025                                                     |       | (822,390                                                           | )          | (2,352,204                                                   | )          |
| Net cash provided by (used in) operating  activities     |       | $                                                       | 8,599,766   |                                                  | $          | (6,384,408                                                    | )          | $                                                                  | 9,785,017  |                                                         | $          | 3,400,609 |   | $ | 19,795,879 |   |
|                                                     |       |                                                    |        |                                                  |       |                                                          |       |                                                               |       |                                                         |       |
| **Net Cash (Used in) Investing Activities**              |       | $                                                       | (13,050,166 | )                                                     | $          | (1,937,610                                                    | )          | $                                                                  | (7,677,141 | )                                                            | $          | (9,614,751 | ) | $ | (64,140,696 | ) |
|                                                     |       |                                                    |        |                                                  |       |                                                          |       |                                                               |       |                                                         |       |
| **Net Cash (Used in) Provided by Financing  Activities** |       | $                                                       | (281,653    | )                                                     | $          | (290,000                                                      | )          | $                                                                  | —     |                                                         | $          | (290,000 | ) | $ | 29,193,000 |   |
|                                                     |       |                                                    |        |                                                  |       |                                                          |       |                                                               |       |                                                         |       |
| **Effect of foreign currency**                           |       | $                                                       | 597,086     |                                                  | $          | 206,800                                                       |       | $                                                                  | (266,119   | )                                                            | $          | (59,319 | ) | $ | (225,396 | ) |
|                                                     |       |                                                    |        |                                                  |       |                                                          |       |                                                               |       |                                                         |       |
| **Net increase (decrease) in cash**                      |       | $                                                       | (4,134,967  | )                                                     | $          | (8,405,218                                                    | )          | $                                                                  | 1,841,757  |                                                         | $          | (6,563,461 | ) | $ | (15,377,213 | ) |

 

**Net cashprovided by (used in) operations** was $19.8 million for fiscalyear 2008, $3.4 million for fiscal year 2007 and $8.6 million for fiscal year2006.   Non-cash items for fiscal year2008, fiscal year 2007 and fiscal year 2006 totaled $18.4 million, $17.3million and $13.7 million, respectively, and consisted primarily ofamortization, depreciation and deferred income taxes.  Cash flows used by changes in working capitaltotaled $2.4 million, $.8 million and $2.5 million for fiscal year 2008, fiscalyear 2007 and fiscal year 2006, respectively. With respect to changes inaccounts receivable and inventory, cash used by these 

 

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itemswas $8.5 million for fiscal year 2008, cash provided by these items was $.1 forfiscal year 2007 and cash used by these items was $2.6 million for fiscal year2006.  Cash provided by changes inprepaid expenses, income tax receivable and other current assets was $1.9million for fiscal year 2008, $.9 million for fiscal year 2007 and $.1 millionfor fiscal year 2006.  Cash provided bychanges in accounts payable, accrued expenses, accrued interest and otherliabilities was $4.3 million for fiscal year 2008, cash used by changes inaccounts payable, accrued expenses, accrued interest and other liabilities was$1.8 million for fiscal year 2007 and cash provided by changes in accountspayable, accrued expense, accrued interest and other liabilities was less than$.1 million for fiscal year 2006.

 

** Net cash used in investing activities**wascash used in investing activities of $64.1 million for fiscal year 2008, cashused in investing activities of $9.6 million in fiscal year 2007 and cash usedin investing****activities of $13.1 million infiscal year 2006.  Included in fiscalyear 2008 is the cash paid for the CityForest Acquisition, net of cashreceived, of $43.7 million.   Investingactivities in 2007 related to the level of capital spending year over year.

 

**Net cash(used in) provided by financing** was cash provided byfinancing activities of $29.2 million for fiscal year 2008, which includesproceeds from issuance of the Additional Notes of $20.0 million, $9.8 millionof net borrowings on the working capital facility and $.6 million payment onthe industrial revenue bond assumed in the CityForest Acquisition.   The $.3 million for fiscal year 2007 relatesto payments on our industrial revenue bond. Our final payment was made in the first quarter of fiscal year2007.  Cash used in financing activitiesfor fiscal year 2006 related primarily to payments on our industrial revenuebond.

 

**Cash**as of February 29, 2008 decreased to $.9 million from $16.3 million as ofthe end of the prior fiscal year as a result of the items described above.

 

**Receivables,net** as of February 29, 2008 increased to $44.5 millionfrom $34.1 million as of the end of the prior fiscal year.  Included in the $44.5 million is $5.3 millionof receivables related to CityForest. Without the effect of the acquisition, receivables increased $5.1million, primarily due to increased net sales.

 

**Inventories**as of February 29, 2008 increased to $34.0 million from$28.8 million as of the end of the prior fiscal year.  Included in the $34.0 million is $1.4 millionof inventories related to CityForest. Without the effect of the acquisition, inventories increased $3.8million in support of increased net sales.

 

**Deferredincome taxes**as of February 29, 2008 increased to $7.2million from $6.5 million as of the end of the prior fiscal year.  This increase is primarily attributable tothe recording of the benefit of net operating loss carryforwards, or NOLs,generated during fiscal year 2008 for federal and state tax purposes.

 

**Property,plant and equipment, net**as of February 29, 2008increased to $310.5 million from $243.8 million as of the prior fiscalyear.  Included in the $310.5 million ofproperty, plant and equipment, net is $66.8 million related to CityForest.  Without the effect of the acquisition,property plant and equipment decreased $.1 million from the end of the priorfiscal year.

 

**Goodwill**asof February 29, 2008 increased to $11.3 million from $4.4 million as ofprior fiscal year, an increase of $6.9 million due to the City ForestAcquisition.

 

**Trademarks**as of February 29, 2008 increased to $9.4 million from$7.2 million as of the end of the prior fiscal year.  The additions to trademarks relate to theCityForest Acquisition.

 

**Reservedcash**as of February 29, 2008 of $1.2 million relates toreserve funds in connection with the industrial revenue bond assumed in theCityForest Acquisition.

 

**Revolvingline of credit**as of February 29, 2008 represents $17.4million of borrowings to finance a portion of the CityForest Acquisition,offset by net payments through February 29, 2008 of $7.6 million.

 

**Accountspayable**as of February 29, 2008 increased to $24.1 millionfrom $16.5 million as of the end of the prior fiscal year.  Included in the $24.1 million of accountspayable is $3.2 million related to CityForest. Without the effect of the acquisition, accounts payable increased $4.4million due to increased pulp purchases and timing of payments.

 

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**Accruedexpenses**as of February 29, 2008 increased to $19.1million from $16.3 million as of the end of the prior fiscal year.  Included in the $19.1 million of accruedexpenses is $.9 million related to CityForest.

 

**Accruedinterest**as of February 29, 2008 increased to $8.3million from $7.2 million as of the end of the prior fiscal year.  The increase is due to the additionalborrowings to finance the CityForest Acquisition and the debt assumed in thetransaction.

 

**Othercurrent liabilities**as of February 29, 2008 of $15.0million represents the amount to be paid in fiscal year 2009 related to thecontingent earnout consideration in connection with the Merger.

 

**Long-termdebt**as of February 29, 2008 increased to $198.8 millionfrom $160.4 million as of the end of the prior fiscal year due to theassumption of CityForest debt and debt incurred to finance the acquisition.

 

**Deferredincome taxes**as of February 29, 2008 increased to $81.9million from $71.0 million as of the end of the prior fiscal year primarily dueto the deferred taxes recorded in purchase accounting for CityForest.

 

**Otherliabilities**as of February 29, 2008 decreased to $20.1million from $35.2 as of the end of the prior fiscal year primarily due to thereclassification of $15.0 million to other current liabilities reflecting theamount to be paid in fiscal year 2009 related to the contingent earnoutconsideration in connection with the Merger.

 

**Stockholders’equity** as of February 29,2008 increased to $46.1 million compared to equity of $38.8 million as of theend of the prior fiscal year.  The equityas of February 29, 2008 is reflective of the net income generated forfiscal year 2008 and the increase in the foreign currency translation charge toequity.

 

**Capital spending summary**

 

Capitalexpenditures were $20.5 million, $9.6 million and $13.1 million for fiscal year2008, fiscal year 2007 and fiscal year 2006, respectively.  We have increased capital expenditures sincefiscal year 2002 to support ongoing cost savings programs (cost improvements)and growth in our manufacturing capacity. We have concentrated the growth in our manufacturing capacity sincefiscal year 2003 on our converting operations at our Wisconsin facility for theproduction of value-added converted tissue products.

 

**Contractual obligations**

 

At February 29,2008, our material obligations under firm contractual arrangements, includingcommitments for future payments under long-term debt arrangements, operatinglease arrangements and other long-term obligations, are summarized below.

 
| ** **                           | ** ** | **Cash payments due by period** | ** ** |
|--------------------------------------|------------|-----------------------------------------------------|------------|
| **(Dollars in thousands)** | ** ** | **Total**                                           | ** ** | **Less than  1 year** | ** ** | **1-3 years** | ** ** | **3-5 years** | ** ** | **More than  5 years** | ** ** |
| Long-term debt obligations (1)       |       | $                                                   | 200,131    |   | $ | 760 |   | $ | 184,536 |   | $ | 2,280 |   | $ | 12,555 |   |
|                                 |       |                                                |       |   |   |   |   |   |   |   |   |
| Operating lease obligations          |       | 2,830                                               |       | 1,141 |   | 1,689 |   | — |   | — |   |
| Purchase obligations                 |       | 106,119                                             |       | 53,059 |   | 53,060 |   | — |   | — |   |
| Total                                |       | $                                                   | 309,080    |   | $ | 54,960 |   | $ | 239,285 |   | $ | 2,280 |   | $ | 12,555 |   |

 

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(1)  Interest incurred at 9 3/4%,payable semi-annually for the Notes and varying from 1.38% to 4.15% for theindustrial revenue bond.

 

**Net operating loss carryforwards**

 

At February 29,2008, we had federal NOLs of approximately $9,804,000, which begin to expire in2021 and state NOLs of approximately $14,506,000, which begin to expire in2019.   We currently anticipate fullyutilizing recorded federal and state NOLs prior to their expiration.

 

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Inassessing the realizability of deferred tax assets, we consider whether it ismore likely than not that some portion or all of the deferred tax assets willnot be realized.  The ultimate realizationof deferred tax assets is dependent upon the generation of future taxableincome during the periods in which those temporary differences becomedeductible.  We consider the scheduledreversal of deferred tax liabilities, projected future taxable income and taxplanning strategies in making this assessment. Based on the level of historical taxable income and projections forfuture taxable income over the periods in which the deferred tax assets aredeductible, we believe it is more likely than not that we will realize thebenefits of these deductible differences.

 

**New accounting standards**

 

Referto Note 2 (Summary of Significant Accounting Policies) of the notes to ourconsolidated financial statements included elsewhere in this Annual Report fora discussion of new accounting pronouncements and the potential impact to ourconsolidated results of operations and financial position.

 

***Critical accounting policies and estimates***

*** ***

Preparationof our financial statements requires management to make estimates andassumptions that affect the reported amounts of assets, liabilities, revenuesand expenses.  Significant accountingpolicies used in the preparation of our consolidated financial statements aredescribed in Note 2 (Summary of Significant Accounting Policies), includedelsewhere in this Annual Report. Management believes the most complex and sensitive judgments, because oftheir critical nature, result primarily from the need to make estimates aboutthe effects of matters with inherent uncertainty.  The most critical areas involving managementestimates are described below.  Actualresults in these areas could differ from management’s estimates.

 

***Allowance for doubtfulaccounts***

*** ***

Weestimate our allowance for doubtful accounts using two methods.  First, we determine a specific reserve forindividual accounts where information is available that the customer may havean inability to meet its financial obligation. Second, we estimate additional reserves for all customers based on historicalwrite-offs.  Accounts are charged-offagainst the allowance for doubtful accounts when we have exhausted allcollection efforts and have deemed the accounts uncollectible.

 

***Goodwill and Trademarks***

*** ***

Goodwillis not amortized but tested for impairment annually at year-end, and at anytime when events suggest impairment may have occurred. Our goodwill impairmenttest is performed by comparing the net present value of projected cash flows tothe carrying value of the reporting unit including goodwill.  We incorporate assumptions involving futuregrowth rates, discount rates and tax rates in projecting the future cashflows.  In the event the carrying valueof a reporting unit exceeds its fair value, an impairment loss would berecognized to the extent the carrying amount of the reporting unit’s goodwillexceeds its implied fair value. Goodwill as of February 28, 2007 was $4.4million. Goodwill as of February 29, 2008 was $11.4 million, of which $7.0million was recorded in connection with an acquisition in the currentyear.  No goodwill impairment has beennoted in fiscal year 2007 or 2008.

 

Trademarksare not amortized but tested for impairment annually at the end of our secondquarter, and at any time when events suggest impairment may have occurred.  Our impairment test is performed by comparingcarrying amount to its fair market value at the time of the assessment.  In the event the carrying value of areporting unit exceeds its fair value, an impairment loss would be recognizedto the extent the carrying amount of the reporting unit’s trademarks exceedtheir implied fair value.  No trademarkimpairments were recorded during fiscal year 2008 or the period from June 13,2006 to February 28, 2007 (post-merger).

 

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***Income taxes***

*** ***

Werecognize deferred tax assets and liabilities for expected future taxconsequences of events that have been included in the financial statements orincome tax returns.  Under thismethodology, deferred tax assets and liabilities are determined based on thedifference between the financial statements and the tax basis of assets andliabilities using enacted tax rates in effect for the year in which thedifferences are expected to reverse.

 

**ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK**

 

InMarch 2004, we completed a private offering of the Original Notes.  At the same time, we entered into a $30.0million revolving working capital facility. We raised approximately $152.0 million, net of debt issuance costs andoriginal discount on the Original Notes. The proceeds, along with a drawdown from the revolver, were used to payoff existing debt of approximately $56.0 million and to fund a stockholderdividend to our parent to purchase shares of its common stock and warrants andfund compensation from the redemption of stock options of our parent, in theamount of $100.2 million.  In connectionwith the CityForest Acquisition in March 2007, we issued and soldapproximately $20 million of Additional Notes. Furthermore, we borrowed $17.4 million under our working capitalfacility.  As a result of these transactions,we are highly leveraged.  As of February 29,2008, $9.8 million of borrowings remained outstanding under the working capitalfacility and excess availability was $27.0 million.

 

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

 

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

 

SeeItem 15 for an index to financial statements and financial statementschedules.  Such financial statements andfinancial statement schedules are incorporated herein by reference.

 

**ITEM 9.   CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING ANDFINANCIAL DISCLOSURE**

 

None.

 

**ITEM 9A(T).  CONTROLS AND PROCEDURES**

 

**EVALUATIONSOF DISCLOSURE CONTROLS AND PROCEDURES (Restated)**

 

Wemaintain disclosure controls and procedures designed to ensure that informationrequired to be disclosed in the reports that we file or submit under the ExchangeAct is recorded, processed, summarized and reported within the time periodsspecified in the SEC’s rules and forms. Disclosure controls andprocedures, as defined in Rules 13a—15(e) and 15d—15(e) underthe Exchange Act, include controls and procedures designed to ensure thatinformation required to be disclosed in the reports we file or submit under theExchange Act is accumulated and communicated to our management, including theChief Executive Officer and the Chief Financial Officer, as appropriate, toallow timely decisions regarding required disclosure. Any system of controls,however well designed and operated, can provide only reasonable, and notabsolute, assurance that the objectives of the system are met.

 

Asrequired by SEC rules, we have evaluated the effectiveness of the design andoperation of our disclosure controls and procedures as of the end of the periodcovered by this Annual Report on Form 10-K/A. This evaluation was carriedout under the supervision and with the participation of our management,including our Chief Executive Officer and Chief Financial Officer. Based onthis evaluation, our management, including our Chief Executive Officer andChief Financial Officer have concluded that, in light of the material weakness inour internal control over financial reporting discussed below, as of February 29,2008, our disclosure controls and procedures were not effective.

 

As aresult of this material weakness, management performed additional procedures toensure that our consolidated financial statements are prepared in accordancewith accounting principles generally accepted in the United States of America (USGAAP). Accordingly, we believe that the financial statements for the periodscovered by and included in this Annual Report on Form 10-K/A fairlypresent in all material respects our financial condition, results of operationsand cash flows.

 

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**MANAGEMENT’SREPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING (Restated)**

 

Managementof the Company is responsible for establishing and maintaining adequateinternal control over financial reporting. The Company’s internal control overfinancial reporting is designed to provide reasonable assurance regarding thereliability of financial reporting and the preparation of financial statementsfor external purposes in accordance with generally accepted accountingprinciples in the United States of America. The Company’s internal control overfinancial reporting includes those policies and procedures that: (i) pertainto the maintenance of records that, in reasonable detail, accurately and fairlyreflect the transactions and dispositions of the assets of the Company; (ii) providereasonable assurance that transactions are recorded as necessary to permitpreparation of financial statements in accordance with generally acceptedaccounting principles in the United States of America, and that receipts andexpenditures of the Company are being made only in accordance withauthorizations of management and directors of the Company; and (iii) providereasonable assurance regarding prevention or timely detection of unauthorizedacquisition, use or disposition of the Company’s assets that could have amaterial effect on the financial statements.

 

Anysystem of internal control, no matter how well designed, has inherentlimitations, including the possibility that a control can be circumvented oroverridden and misstatements due to error or fraud may occur and not bedetected in a timely manner. Also, because of changes in conditions, internalcontrol effectiveness may vary over time. Accordingly, even an effective systemof internal control will provide only reasonable assurance with respect tofinancial statement preparation.

 

Managementassessed the effectiveness of the Company’s internal control over financialreporting as of February 29, 2008. In making this assessment, managementused the criteria set forth by the Committee of Sponsoring Organizations of theTreadway Commission (COSO) in “Internal Control-Integrated Framework.”

 

InManagement’s Report on Internal Control over Financial Reporting included inthe Company’s original Annual Report on Form 10-K for the year ended February 29,2008, management previously concluded that the Company maintained effectiveinternal control over financial reporting as of February 29, 2008.Management subsequently concluded that the material weakness described belowexisted as of February 29, 2008. As a result, management has concludedthat the Company did not maintain effective internal control over financialreporting as of February 29, 2008, based on the criteria in “InternalControl-Integrated Framework” issued by COSO. Accordingly, management hasrestated its report on internal control over financial reporting.

 

Amaterial weakness is a deficiency, or combination of deficiencies, in internalcontrols over financial reporting, such that there is reasonable possibilitythat a material misstatement of the Company’s annual or interim financialstatements will not be prevented or detected on a timely basis.

 

Inconnection with the restatement of the Company’s financials statements as of February 29,2008, we identified the following material weakness in our internal controlover financial reporting:

 

We didnot maintain effective internal control over financial reporting with respectto the application of US GAAP as it relates to complex purchase accountingissues and accounting for derivatives. The Company lacks sufficient US GAAP expertise to properly assess andrecord complex accounting matters, specifically (i) deferred income taxesassociated with purchase accounting; (ii) shipping and handling fees andcosts; (iii) foreign exchange gains and losses; and (iv) derivatives.  These deficiencies resulted in ourrestatement of our consolidated financial statements as of and for the fiscalyears ended February 29, 2008 and February 28, 2007.  See Note 2 — Restatement of FinancialStatements in the consolidated financial statements.

 

ThisAnnual Report does not include an attestation report of the Company’sregistered public accounting firm regarding internal control over financialreporting. Management’s report was not subject to attestation by the Company’sregistered public accounting firm pursuant to temporary rules of theSecurities and Exchange Commission that permit the Company to provide onlymanagement’s report in this Annual Report.

 

**Plan ofRemediation for Material Weakness**

 

Thesedeficiencies have not been fully remediated.

 

Managementhas prepared an action plan for all identified deficiencies at February 29,2008. The status of this plan will be monitored by management and reviewed bythe Audit Committee periodically.

 

Withrespect to the identified material weakness, we will review and assess ourinternal controls, processes and procedures to timely and properly monitor,evaluate and record complex tax and accounting matters in accordance with US GAAP.We intend to review the responsibilities within our accounting and financedepartments and may hire additional finance and accounting resources to focuson research and the application of US GAAP. In addition, we may supplement our internal resources with assistancefrom outside advisors for the evaluation of unusual and non-routinetransactions.

 

**CHANGESIN INTERNAL CONTROL OVER FINANCIAL REPORTING**

 

Duringthe quarter ended February 29, 2008, there were no significant changes inour internal control over financial reporting that have materially affected orare reasonably likely to materially affect our internal control over financialreporting.

** **

**ITEM 9B. OTHER INFORMATION**

 

None.

 

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**PART III**

 

**ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE**

 

Thefollowing table sets forth certain information regarding the members of ourboard of directors and our executive officers. Each of our directors will hold office until removal by our parent assole stockholder.  Our officers serve atthe discretion of our board of directors.

 
| **Name**           | ** ** | **Age** | ** ** | **Position**                                                             |
|--------------------|------------|---------|------------|--------------------------------------------------------------------------|
| Russell C. Taylor  |       | 51      |       | President, Chief Executive  Officer and Director                         |
| David J. Morris    |       | 52      |       | Senior Vice President,  Finance and Chief Financial Officer              |
| W. Edwin Litton    |       | 44      |       | General Counsel, Senior  Vice President, Human Resources and Secretary   |
| Steven D. Ziessler |       | 48      |       | President,  Tissue & Machine-Glazed and Chief Operating Officer |
| R. Sean Honey      |       | 37      |       | Chairman  of the Board                                                   |
| Scott M. Bell      |       | 32      |       | Director                                                                 |
| David L. Ferguson  |       | 53      |       | Director                                                                 |

 

*RussellC. Taylor* has been our president and chief executive officersince October 2001.  Mr. Taylorbecame a member of our board of directors upon assuming his role as chiefexecutive officer in October 2001. Prior to that, he was employed by Kimberly Clark Corporation, amanufacturer of personal care paper products, from May 1997 to January 1999as president, Kimberly Clark, Professional/Pulp, North America/Europe, and fromJanuary 1999 to October 2001 as group president, Kimberly Clark,Professional Pulp/Tissue Paper/Environmental, North America/Europe.

 

*David J.Morris* has been our chief financial officer and senior vicepresident, finance since August 2007. Previously, Mr. Morris was employed by BlueLinx Holdings, Inc.as Chief Financial Officer and Treasurer from May 2004 to December 2006.  Prior to that time, Mr. Morris spent 14years with Georgia-Pacific Corporation, most recently as Vice President ofFinance for the distribution division since 1999.

 

*W. EdwinLitton* has been our general counsel and senior vice presidentof human resources since July 2006 and secretary since December 2006.  From August 2003 to July 2006, Mr. Littonwas retained by us as outside counsel.  Mr. Littonserved as in-house legal counsel for Lacerte Technologies, Inc. from May 2002until May 2003 and was employed in the private practice of law from September 1990until April 2002.

 

*Steven D.Ziessler* has been our president, tissue & machine-glazedand chief operating officer since August 2005.   Previously, Mr. Ziessler was employedby Kimberly Clark Corporation as (i) vice president, Global Health CareSales from January 2005 to April 2005; (ii) president, KimberlyClark Professional Europe from 2003 to 2004; and (iii) vice president ofsales, marketing and general manager from 1997 to 2003.

 

*R. SeanHoney*was appointed to our board of directors in June 2006and has served as chairman since that date. Mr. Honey is a partner with Weston Presidio, which he joined in1999.  Prior to that, Mr. Honey waswith J.P. Morgan Capital (the predecessor to JP Morgan Partners).

 

*Scott M.Bell*was appointed to our board of directors in January 2007.  Mr. Bell joined Weston Presidio in2004.  Prior to that, Mr. Bellworked as an associate for Goldman, Sachs & Company.

 

*David L.Ferguson*was appointed to our board of directors in June 2006.  Mr. Ferguson is a partner with WestonPresidio, which he joined in 2003.  Priorto that, Mr. Ferguson was a general partner of JP Morgan Partners.  His prior work experience includes BankersTrust New York Corporation and Prudential Securities, as well as the auditdepartments of KPMG Peat Marwick and Deloitte & Touche.

 

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**Shareholders’ Agreement**

 

CelluParent, our indirect parent, has entered into a Shareholders’ Agreement, datedas of June 12, 2006, with certain of its stockholders, including RussellC. Taylor, our chief executive officer and president and a member of our boardof directors, and Steven Ziessler, president, tissue & machine-glazedand chief operating officer.   Uponemployment of David J. Morris in August 2007, this agreement was alsoexecuted with Mr. Morris, senior vice president, finance and chieffinancial officer.  The agreement createdcertain rights and restrictions with respect to Cellu Parent’s common stock,including restrictions on the transfer of stock, tag-along rights, pre-emptiverights, call rights, co-sale rights, registration rights and the right ofWeston Presidio, in certain circumstances, to compel other stockholders to selltheir stock.

 

**Compensation Committee Interlocks and InsiderParticipation**

 

Thereare no compensation committee interlocks (none of our executive officers servesas a member of the board of directors or the compensation committee of anotherentity that has an executive officer serving on our board of directors).

 

**Board of Directors and Committees**

 

Theboard of directors held four****meetingsduring fiscal year 2008.  During fiscalyear 2008, each director then in office attended 100% of the aggregate totalnumber of meetings of the board of directors held during the period in which hewas a director and the total number of meetings held by all of the committeesof the board of directors on which he served. The only standing committees of the board of directors are an auditcommittee and a compensation committee.

 

*AuditCommittee*

 

R.Sean Honey, David L. Ferguson, and Scott Bell are members of the auditcommittee.  The audit committee isempowered to: (i)  appoint, fix the compensation of and oversee the workof our independent auditors (including the power to resolve any disagreementsbetween management and the independent auditors), with the independent auditorsreporting directly to the audit committee; (ii) pre-approve all auditservices and permissible non-audit services; (iii) establish proceduresfor whistleblower complaints; and (iv) engage and determine funding forindependent counsel and other advisors. The board of directors has determined that it currently does not have anaudit committee financial expert within the meaning of the rules of theSecurities and Exchange Commission serving on its audit committee.  In connection with the acquisition of ourparent by Weston Presidio in June 2006, the former director who served asan audit committee financial expert resigned as a member of the board ofdirectors.

 

*CompensationCommittee*

 

R.Sean Honey and David L. Ferguson are members of the compensationcommittee.  The compensation committee isresponsible for (i) compensation of our executives; (ii) equity-basedcompensation plans, including, without limitation, stock option plans in whichofficers or employees participate; and (iii) arrangements with executiveofficers, relating to their employment relationships with us, including,without limitation, employment agreements and restrictive covenants.  The compensation committee has overallresponsibility for approving andevaluating our executive officer compensation plans, policies and programs, aswell as all equity-based compensation plans and policies.  In addition, the compensation committee oversees,reviews and approves all of our ERISA and other employee benefit plans.

 

**Code of Ethics**

 

Wehave adopted a Code of Ethics that applies to our chief executive officer,senior financial officer and other senior officers (as that term is defined inthe Code of Ethics).  A copy of the Codeof Ethics was filed with the Securities and Exchange Commission as Exhibit 14.1to our Annual Report on Form 10-K for the fiscal year ended February 28,2005.

 

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**ITEM 11. EXECUTIVE COMPENSATION**

 

**COMPENSATION DISCUSSION AND ANALYSIS**

 

Inthis section, we will give an overview and analysis of our compensation programand policies, the material compensation decisions we have made under thoseprograms and policies, and the material factors that we considered in makingthose decisions.  Later in this Part IIIunder the heading “Additional Information Regarding Executive Compensation,”you will find tables containing specific information about the compensationearned by the following individuals, all of whom received compensation inexcess of $100,000 in fiscal year 2008, whom we refer to as our “namedexecutive officers”:

 

·      RussellC. Taylor, president, chief executive officer and director

 

·      DavidJ. Morris, senior vice president, finance and chief financial officer since August 2007

 

·      DianneM. Scheu, who was senior vice president, finance and chief financial officeruntil July 31, 2007

 

·      W.Edwin Litton, general counsel, senior vice president, human resources andsecretary

 

·      StevenD. Ziessler, president and chief operating officer

 

Thediscussion below is intended to help you understand the detailed informationprovided in those tables and put that information into context within ouroverall compensation program.

 

**CompensationPhilosophy**

 

Ourcompensation programs are designed to attract, motivate and retain keyemployees, rewarding them for the achievement of significant goals thatcontinuously improve our business performance and increase our value.  Performance and compensation are evaluatedannually****to ensure that we maintain our abilityto attract and retain outstanding employees in key positions and that compensationprovided to our key employees is competitive relative to the compensation paidto similarly situated employees of comparable companies.

 

Ourcompensation decisions with respect to executive officer salaries and annualincentives, as well as long-term incentives such as restrictive stock awardsand stock option grants, are influenced by (a) the executive’s level ofresponsibility and function, (b) our overall performance and profitabilityand (c) our assessment of the competitive marketplace, including otherpeer companies.  As discussed below inmore detail, our philosophy is to focus on total direct compensationopportunities through a mix of base salary and annual cash bonus, asapplicable, and long-term incentives, including stock-based awards.

 

**Overviewof Compensation Committee**

 

Ourexecutive compensation philosophy, policies, plans and programs are under thesupervision of the compensation committee of our board of directors.  The compensation committee’s responsibilitiesinclude (i) compensation of our executives; (ii) administration andoverview of equity-based compensation plans, including, without limitation, the2006 Stock Option and Restricted Stock Plan, in which officers and employeesmay participate and (iii) arrangements with executive officers related totheir employment relationships with us, including, without limitation,employment agreements and restrictive covenants.  The compensation committee has overallresponsibility for approving and evaluating our executive officer compensationplans, policies and programs, as well as all equity-based compensation plansand policies.

 

**Overviewof Compensation Program**

 

Throughoutthis narrative discussion and in the accompanying tables, we refer to our namedexecutive officers.  The key compensationpackage provided to our named executive officers includes:

 

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·      basesalary, which provides fixed compensation based on competitive market practiceand, except for W. Edwin Litton, in accordance with the terms of eachindividual’s employment agreement;

 

·      bonus/performance-basedincentive compensation, which provides focus on meeting corporate****annual goals that lead to our long-term success andmotivates achievement of critical annual performance metrics;

 

·      equitycompensation, as applicable, in the form of restrictive stock awards or stockoption grants by Cellu Parent, our indirect parent, which is designed to rewardand motivate employees by aligning their interests with those of thestockholders of Cellu Parent and provide an opportunity to acquire an indirectproprietary interest in the Company;

 

·      ourmatching cash contributions to our named executive officers who participate inour 401(k) Plan; and

 

·      otherbenefits.

 

**Determinationof Appropriate Pay Levels**

 

Wecompete with many other companies for experienced and talented executives.  As such, market information is reviewed toassist in determining the reasonableness of our compensation and ensuring thatcompensation levels remain competitive in the marketplace.  As described elsewhere in this Annual Report,three of our executive officers entered into employment agreements with us thatestablish various terms and conditions of their employment For a furtherdescription of these agreements, see “Additional Information RegardingExecutive Compensation–Employment Agreements; Restricted Stock AwardAgreements”

 

Eachelement of compensation (including any base adjustments to the terms andconditions set forth in the employment agreements) is reviewed so that theoverall compensation package will attract, motivate and retain our keyemployees, including our named executive officers, by rewarding superiorperformance and providing an incentive for the achievement of our strategicgoals.  The following factors areconsidered to determine the amount of compensation paid to each executiveofficer:

 

·      overalljob performance, including performance against corporate and individualobjectives;

 

·      jobresponsibilities, including unique skills necessary to support our long-termcorporate performance;

 

·      teamwork,both contributions as a member of the executive management team and fosteringan environment of personal and professional growth for the entire work force;

 

·      performanceof general management responsibilities, execution of our objectives andcontributions to our continuing success; and

 

·      ouroverall financial position and providing for an equitable distribution ofcompensation.

 

**Allocationof Compensation**

 

Thereis no pre-established policy or target for the allocation of compensation,other than the employment agreements as previously referenced.  The factors described above, as well as theoverall compensation philosophy, and compensation is reviewed to determineappropriate level and mix of compensation.

 

**Timing ofCompensation**

 

Asdiscussed elsewhere, compensation for our named executive officers is reviewedannually, including incentive plan goal specifications and incentive planpayments for our named executive officers.

 

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**MinimumStock Ownership Requirements**

 

We donot have any minimum stock ownership guidelines.  All of our shares are beneficially owned byour parent, and all of the shares of our parent are beneficially owned by CelluParent, our indirect parent.  All of thenamed executive officers, however, currently beneficially own shares ofrestrictive stock, or stock options to purchase common stock, of Cellu Parent.

 

**CompensationComponents for Fiscal Year 2008**

 

Forfiscal year 2008, the principal components of compensation for the namedexecutive officers were:

 

·      basesalary;

 

·      bonus;

 

·      equityawards under the 2006 Stock Option and Restricted Stock Plan of Cellu Parentand the 2001 Stock Incentive Plan of Cellu Holdings; and

 

·      401(k) andother benefits.

 

*BaseSalary*

 

Weprovided our named executive officers and other officers with a base salary tocompensate them for services rendered during the fiscal year.  In general, base salary ranges are determinedfor each executive based on his or her position and responsibility.  Base salary levels are reviewed annually, aspart of our performance review process, and adjustments are made.

 

On July 12,2006 in connection with the Merger, we entered into employment agreements witheach of Russell C. Taylor, Dianne M. Scheu (former Senior Vice President,Finance and Chief Financial Officer), and Steven Ziessler.  On August 2, 2007, we entered into an employment agreement withDavid J. Morris, Senior Vice President,Finance and Chief Financial Officer. We discuss the terms and conditions of these agreements elsewhere in thisPart III under “Additional Information Regarding Executive Compensation–EmploymentAgreements; Restricted Stock Award Agreements.”

 

*AnnualBonus Compensation*

 

On March 27,2006, we entered into bonus agreements with Messrs. Taylor and Ziesslerand Ms. Scheu pursuant to which each such executive officer was entitledto receive a fixed amount one-time stay cash bonus as an incentive to continueemployment with us up through and including the effective date of theMerger.  Pursuant to the bonus agreementsfor fiscal year 2007, each of the applicable executive officers received a lumpsum cash payment equal to one year’s current base salary.   The bonus payments are reflected in Column (d) ofthe Summary Compensation Table.

 

Forfiscal year 2008, and for each fiscal year thereafter, named executive officersare eligible to receive an annual incentive-based cash bonus of up to 100% ofbase salary, subject to the achievement by us of certain EBITDA targets set bythe chairman of our board of directors and approved by the CompensationCommittee.   It is anticipated that, foreach fiscal year, a range of EBITDA targets will be set for each executiveofficer, usually in the first quarter of such fiscal year.  Each EBITDA target will be expressed as apercentage of base salary, ranging from 0% to 100%.  Performance measures for each fiscal yearwill be reviewed and performance incentive awards granted by the CompensationCommittee to executive officers, as applicable.

 

Forfiscal year 2008, the bonus pool is subject to us achieving minimum adjustedEBITDA of at least $44.0 million.  Themaximum bonus pool amount is realized if fiscal year 2008 adjusted EBITDA of$49 million is achieved.  If fiscal year2008 adjusted EBITDA is between $44.0 and $49.0 million, then the bonus poolwill be prorated, between 50% and 100% based on the fiscal year 2008 adjustedEBITDA achieved.  If the bonus pool isearned, then it will be distributed to executive officers, based on theirrespective base salaries, with a maximum paid out of 50% or 100% of theirrespective base salaries, dependent upon the executive’s position.  The bonus pool payout for fiscal year 2008was 85.5% of target, which will be paid in the first quarter of fiscal year2009.

 

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*EquityAwards*

 

OnJune 12, 2006, the board of directors of Cellu Parent adopted the 2006Stock Option and Restricted Stock Plan, or the Plan.  Under the Plan, the board of directors ofCellu Parent or its delegate (referred to as the plan administrator) may grantto participants, including named executive officers, stock option awards topurchase shares of common stock of Cellu Parent and/or awards of restrictedshares of common stock of Cellu Parent. A maximum of 8,095 shares of common stock of Cellu Parent may bedelivered in satisfaction of awards under the Plan, determined net of shares ofcommon stock withheld by Cellu Parent in payment of the exercise price of anaward or in satisfaction of tax-withholding requirements.  Key employees and directors of, andconsultants and advisors to, Cellu Parent or its affiliates who, in the opinionof the plan administrator, are in a position to make a significant contributionto the success of Cellu Parent and its affiliates are eligible to participatein the Plan.   Stock options are grantedat the fair market value as determined by the plan administrator in accordancewith the applicable regulations of the Code on the date of grant and have a10-year term.  Generally, stock optiongrants vest ratably over four years from the date of grant.

 

*401(k) andOther Benefits*

 

401(k) Plan

 

Wehave a Savings Incentive and Profit-Sharing Plan qualified under Section 401(k) ofthe Code, which is available to all our employees who are 21 years of age orolder with one or more years of service. Employees may contribute up to 20% of their annual compensation (subjectto certain statutory limitations) to the plan through voluntary salary deferredpayments.  We match 100% of eachemployee’s contribution up to 2% of the employee’s salary and 70% of theemployee’s remaining contribution up to 6% of the employee’s salary.  Eligible named executive officersparticipated in the 401(k) Plan in fiscal year 2008 and 2007 and receivedmatching contributions from us under the 401(k) Plan as follows:

 
| **Named Executive** | ** ** | **2008 Matching Contributions  under the 401(K) Plan** | ** ** | **2007 Matching Contributions  under the 401(K) Plan** | ** ** |
|--------------------------|------------|---------------------------------------------------------------------------------|------------|---------------------------------------------------------------------------------|------------|
| Russell C. Taylor        |       | $                                                                               | 10,812     |                                                                            | $          | 4,562 |   |
| David J. Morris          |       | $                                                                               | 2,308      |                                                                            | N/A        |   |
| Dianne M. Scheu          |       | $                                                                               | 4,390      |                                                                            | $          | 4,100 |   |
| Steven D. Ziessler       |       | N/A                                                                             |       | N/A                                                                             |       |
| W. Edwin Litton          |       | $                                                                               | 8,630      |                                                                            | $          | 1,328 |   |

 

OtherBenefits

 

Eachof the named executive officers receives medical and dental insurance coverageon the same terms as other employees.

 

**Accountingand Tax Considerations**

 

Weadopted the provisions of SFAS 123R using the prospective method effective March 1,2006.  There was no accounting effect onany of the outstanding awards of restricted common stock units.

 

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**COMPENSATION COMMITTEE REPORT**

 

Thecompensation committee of our board of directors has reviewed and discussed theCompensation Discussion and Analysis required by Item 402(b) of RegulationS-K with management and, based on such review and discussions, the compensationcommittee recommended to the board of directors that the CompensationDiscussion and Analysis be included in this Annual Report on Form 10-K.

 

 
|   | THE COMPENSATION COMMITTEE |
|--------|----------------------------|
|   |                       |
|   | R. Sean Honey              |
|   | David L. Ferguson          |

 

**ADDITIONAL INFORMATION REGARDING EXECUTIVECOMPENSATION**

 

**SummaryCompensation Table**

 

Thefollowing table shows the compensation earned for services rendered to us andour subsidiaries in fiscal year 2008 and fiscal year 2007 by each of our namedexecutive officers.

 
| **Name and  principal  position  (a)**            | ** ** | **Fiscal  Year  (b)** | ** ** | **Salary  (c)** | ** ** | **Bonus (1)  (d)** | ** ** | **Stock  Award(2)  (e)** | ** ** | **Option  Awards  (3)  (f)** | ** ** | **Non-Equity  Incentive Plan  Compensation  (4)  (g)** | ** ** | **Change in  Pension  Value and  Nonqualified  Deferred  Compensation  Earnings  (h)** | ** ** | **All Other  Compensation  (i)** | ** ** | **Total  (j)** | ** ** |
|--------------------------------------------------------|------------|-----------------------|------------|-----------------|------------|-------------------------|------------|--------------------------|------------|------------------------------|------------|-------------------------------------------------------------|------------|--------------------------------------------------------------------------------------------------|------------|---------------------------------------|------------|----------------|------------|
| Russell C. Taylor,  President and                      |       | 2008                  |       | $               | 475,000    |                    | $          | —                   |       | $                            | 403,009    |                                                        | $          | —                                                                                           |       | $                                     | 406,125    |           | $          | — |   | $ | 10,812 | (5) | $ | 1,294,946 |   |
| Chief Executive  Officer                               |       | 2007                  |       | $               | 469,428    |                    | $          | 425,000                  |       | $                            | 287,075    |                                                        | $          | —                                                                                           |       | $                                     | —     |           | $          | — |   | $ | 4,562 | (5) | $ | 1,186,065 |   |
|                                                   |       |                  |       |            |       |                    |       |                     |       |                         |       |                                                        |       |                                                                                             |       |                                  |       |           |       |
| David J. Morris,  Senior Vice  President,              |       | 2008                  |       | $               | 144,231    |                    | $          | —                   |       | $                            | 611,170    |                                                        | $          | —                                                                                           |       | $                                     | 60,738     |           | $          | — |   | $ | 2,308 | (5) | $ | 818,447 |   |
| Finance, and  Chief Financial  Officer (6)             |       | 2007                  |       | $               | —     |                    | $          | —                   |       | $                            | —     |                                                        | $          | —                                                                                           |       | $                                     | —     |           | $          | — |   | $ | — |   | $ | — |   |
|                                                   |       |                  |       |            |       |                    |       |                     |       |                         |       |                                                        |       |                                                                                             |       |                                  |       |           |       |
| Dianne M. Scheu,  Senior Vice                          |       | 2008                  |       | $               | 97,308     |                    | $          | —                   |       | $                            | 41,002     |                                                        | $          | —                                                                                           |       | $                                     | 81,938     |           | $          | — |   | $ | 4,390 | (5) | $ | 224,638 |   |
| President,  Finance, and  Chief Financial  Officer (7) |       | 2007                  |       | $               | 228,654    |                    | $          | 230,000                  |       | $                            | 858,380    |                                                        | $          | —                                                                                           |       | $                                     | —     |           | $          | — |   | $ | 4,100 | (5) | $ | 1,321,134 |   |
|                                                   |       |                  |       |            |       |                    |       |                     |       |                         |       |                                                        |       |                                                                                             |       |                                  |       |           |       |
| Steven Ziessler,  President, Tissue  and Machine-      |       | 2008                  |       | $               | 267,127    |                    | $          | —                   |       | $                            | 143,901    |                                                        | $          | —                                                                                           |       | $                                     | 235,125    |           | $          | — |   | $ | — |   | $ | 646,153 |   |
| Glazed & Chief  Operating Officer                  |       | 2007                  |       | $               | 247,885    |                    | $          | 250,000                  |       | $                            | 892,432    |                                                        | $          | —                                                                                           |       | $                                     | —     |           | $          | — |   | $ | — |   | $ | 1,390,317 |   |
|                                                   |       |                  |       |            |       |                    |       |                     |       |                         |       |                                                        |       |                                                                                             |       |                                  |       |           |       |
| W. Edwin Litton,  General Counsel,  Senior Vice        |       | 2008                  |       | $               | 172,000    |                    | $          | —                   |       | $                            | —     |                                                        | $          | 8,234                                                                                            |       | $                                     | 73,530     |           | $          | — |   | $ | 8,630 | (5) | $ | 262,394 |   |
| President, Human  Resources and  Secretary             |       | 2007                  |       | $               | 102,314    |                    | $          | —                   |       | $                            | —     |                                                        | $          | 3,139                                                                                            |       | $                                     | —     |           | $          | — |   | $ | 1,328 | (5) | $ | 106,781 |   |

 

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(1)           Amountsfor fiscal year 2007 represent one-time stay bonuses in fixed amounts pursuantto bonus agreements entered into with certain named executives in connectionwith the Merger.  See further discussionunder “Bonus Agreements.”  Amounts forfiscal year 2008 represent incentive-based cash awards and are reported undercolumn (g) of this Summary Compensation Table.

 

(2)           Reflectsshares of restricted stock of (i) our parent granted under the Cellu PaperHoldings, Inc. 2001 Incentive Plan that fully vested at the effective dateof the Merger and were repurchased by our parent in fiscal year 2007 (Mr. Ziessler–$478,816;and Ms. Scheu–$444,764); and (ii) Cellu Parent granted under the 2006Stock Option and Restricted Stock Plan in fiscal year 2008 and fiscal year2007, respectively,  (Mr. Taylor–$403,009and $287,075; Mr. Morris - $97,188 and $0; Mr. Ziessler–$143,901 and$102,505; and Ms. Scheu–$41,002 and $102,505) and the gross-up amount paidrelated thereto in fiscal year 2007 (each of Mr. Ziessler and Ms. Scheu–$311,111)  and in fiscal year 2008 (Mr. Morris-$513,982).  The amounts in column (e) represent theproportionate amount of the total fair value of restricted stock recognized byus as an expense in fiscal year 2008 and fiscal year 2007 for financial accountingpurposes, disregarding for this purpose the estimate of forfeitures related toservice-based vesting conditions.  Thefair values of these awards and the amounts expensed in fiscal year 2007 andfiscal year 2008 were determined in accordance with FAS No. 123R.  The awards for which expense is shown incolumn (e) include the awards described in the Grants of Plan-Based Awardsincluded elsewhere in this section.  Theassumptions used in determining the grant date fair values of these awards areset forth in Note 3 to our consolidated financial statements included elsewherein this Annual Report.

 

(3)          Reflectsoptions granted under the 2006 Stock Option and Restricted Stock Plan topurchase shares of common stock of Cellu Parent upon exercise of such options.The amounts in column (f) represent the proportionate amount of the totalfair value of options recognized by us as an expense in fiscal year 2007andfiscal year 2008 for financial accounting purposes, disregarding for thispurpose the estimate of forfeitures related to service-based vestingconditions.  The fair values of theseawards and the amounts expensed in fiscal year 2007and fiscal year 2008 weredetermined in accordance with FAS No. 123R.  The awards for which expense is shown incolumn (f) include the awards described in the Grants of Plan-Based Awardsincluded elsewhere in this section.   Theassumptions used in determining the grant date fair values of these awards areset forth in Note 3 to our consolidated financial statements included elsewherein this Annual Report.

 

(4)          Theamounts in column (g) represent the incentive-based cash awards earned infiscal year 2008 and payable in the fiscal year ending February 28, 2009,which are further discussed under “Compensation Discussion and Analysis-CompensationComponents for Fiscal Year 2008-Annual Bonus Compensation” and, which, forpurposes of this Summary Compensation Table, have been characterized as“Non-Equity Incentive Plan Compensation” under this column (g) rather than“Bonus” under column (d).

 

(5)          Reflectsmatching contributions to the 401(k) plan.

 

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(6)          Mr. Morriscommenced employment with us as chief financial officer and senior vicepresident, finance on August 6, 2007.

 

(7)          Ms. Scheuresigned as senior vice president, finance and chief financial officer on July 31,2007.

 

**EmploymentAgreements; Restricted Stock Award Agreements**

 

We have enteredinto an employment agreement with Russell Taylor, dated June 12, 2006,pursuant to which Mr. Taylor will continue to serve as our chief executiveofficer and president.  The agreement isfor a term of four years, commencing on June 12, 2006, and willautomatically extend for successive terms of one year each, unless either Mr. Tayloror we provide notice to the other at least 60 days prior to the expiration ofthe original or any extension term that the agreement is not to beextended.  The agreement provides Mr. Taylorwith an annual base salary of $475,000, a bonus opportunity of up to 100% ofbase salary and certain severance benefits under the following circumstances:

 

(A)          If Mr. Taylor’s employment is terminateddue to death or disability, he will be entitled to (i) any earned, butunpaid, base salary through the date of termination; (ii) any earned, butunpaid, annual bonus for any fiscal year prior to the fiscal year of histermination; (iii) a pro rata portion of his Target Bonus (as defined); (iv) alump sum payment equal to the lesser of (A) 12 months of base salary or (B) basesalary for a period equal to the remainder of the term of the employmentagreement; and (v) any reimbursed business expenses.

 

(B)           If Mr. Taylor’s employment is terminationby us without cause (as defined) or by him with good reason (as defined), hewill be entitled to (i) any earned, but unpaid, base salary through thedate of termination; (ii) any earned, but unpaid, annual bonus for anyfiscal year prior to the fiscal year of his termination; (iii) a pro rataportion of his Target Bonus; (iv) a lump sum payment equal to the greaterof (a) 24 months of base salary or (b) base salary for a period equalto the remainder of the term of the employment agreement; (v) a lump sumequal to the greater of (x) one times the Target Bonus or (y) paymentof the Target Bonus with respect to a period equal to the remainder of theterm; and (vi) any reimbursed business expenses.

 

(C)           If Mr. Taylor’s employment is terminatedby non-renewal of his employment agreement by us for any reason (other than forcause), he will be entitled to (i) any earned, but unpaid, base salarythrough the date of termination; (ii) any earned, but unpaid, annual bonusfor any fiscal year prior to the fiscal year of his termination; (iii) apro rata portion of his Target Bonus; (iv) a lump sum payment equal to 24months of base salary; and (v) any reimbursed business expenses.

 

If a change of control (asdefined) occurs and, within three months before and two years following suchchange of control, we terminate Mr. Taylor’s employment other than forcause or by reason of death or disability, or Mr. Taylor terminates hisemployment for good reason, then, in lieu of any payments otherwise due underClauses (B) or (C) he will be entitled to (i) any earned, butunpaid, base salary through the date of termination; (ii) any earned, butunpaid, annual bonus for any fiscal year prior to the fiscal year of histermination; (iii) a pro rata portion of his Target Bonus; (iv) alump sum payment equal to the greater of (a) 36 months of base salary or (b) basesalary for a period equal to the remainder of the term of the employmentagreement; (v) a lump sum equal to the greater of (x) one times theTarget Bonus or (y) payment of the Target Bonus with respect to a periodequal to the remainder of the term of the employment agreement; and (vi) anyreimbursed business expenses.

 

In addition, the agreementalso provides that, during the term and for a period of one year after the endof the term, we will pay the premium for a term life insurance policy covering Mr. Taylorin the amount of $1,000,000.  Theagreement includes a non-competition and non-solicitation covenant by Mr. Taylorthat extends during the term of his employment and for two yearsthereafter.  The agreement also providesthat Mr. Taylor will receive an award of restricted shares of CelluParent’s common stock, or the Cellu Parent Shares, pursuant to the 2006 StockOption and Restricted Stock Plan, and a Restricted Stock Award Agreement.  On June 12,2006, Cellu Parent awarded Mr. Taylor 3,778 Cellu Parent Shares.  The Cellu Paent Shares are subject to vestingin accordance with the following vesting schedule:  (1) 25% of the Cellu 

 

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Parent Shares are vested onand after June 12, 2007; (2) an additional 25% of the Cellu ParentShares are vested on and after June 12, 2008; (3) an additional 25%of the Cellu Parent Shares are vested on and after June 12, 2009; and (4) anadditional 25% of the Cellu Parent Shares are vested on and after June 12,2010.  None of the Cellu Parent Shareswill vest on any vesting date unless Mr. Taylor is then, and since thedate of the award has continuously been, employed by Cellu Parent or itssubsidiaries (including the Company).  IfMr. Taylor ceases to be employed by Cellu Parent or its subsidiaries, anythen outstanding and unvested Cellu Parent Shares will be automatically andimmediately forfeited, unless employment ceases due to death or disability, inwhich case 50% of the Cellu Parent Shares that are not then already vested willvest, or unless employment ceases by reason of Cellu Parent’s election not torenew the employment agreement (and, at the time of such election, there existsno cause for the termination), in which case one hundred percent 100% of theCellu Parent Shares that are not then already vested will vest.  The foregoing description is qualified in itsentirety by reference to the actual employment agreement executed with Mr. Taylor.

 

We have entered into anemployment agreement with David Morris, dated August 6, 2007, pursuant towhich Mr. Morris will continue to serve as our chief financialofficer.  The agreement is for a term offour years, commencing on August 6, 2007, and will automatically extendfor successive terms of one year each, unless either Mr. Morris or weprovide notice to the other at least 60 days prior to the expiration of theoriginal or any extension term that the agreement is not to be extended.  The agreement provides Mr. Morris withan annual base salary of $250,000, a bonus opportunity of up to 100% of basesalary, and certain severance benefits under the following circumstances:

 

(A)          If Mr. Morris’ employment is terminateddue to death or disability, he will be entitled to (i) any earned, butunpaid, base salary through the date of termination; (ii) any earned, butunpaid, annual bonus for any fiscal year prior to the fiscal year of histermination; (iii) a pro rata portion of his Target Bonus; (iv) alump sum payment equal to the lesser of (A) 12 months of base salary orbase salary for a period equal to the remainder of the term of the employmentagreement; and (v) any reimbursed business expenses.

 

(B)           If Mr. Morris’ employment is terminationby us without cause or by him with good reason, he will be entitled to (i) anyearned, but unpaid, base salary through the date of termination; (ii) anyearned, but unpaid, annual bonus for any fiscal year prior to the fiscal yearof his termination; (iii) a pro rata portion of his Target Bonus; (iv) alump sum payment equal to 24 months of base salary; (v) a lump sum equalto one times the Target Bonus; and (vi) any reimbursed business expenses.

 

(C)           If Mr. Morris’ employment is terminatedby non-renewal of his employment agreement by us for any reason (other than forcause), he will be entitled to (i) any earned, but unpaid, base salarythrough the date of termination; (ii) any earned, but unpaid, annual bonusfor any fiscal year prior to the fiscal year of his termination; (iii) apro rata portion of his Target Bonus; (iv) a lump sum payment equal to 24months of base salary; and (v) any reimbursed business expenses.

 

The agreementalso provides that Mr. Morris will receive an award of Cellu ParentShares, pursuant to the 2006 Stock Option and Restricted Stock Plan, and aRestricted Stock Award Agreement.  On August 6, 2007, Cellu Parent awarded Mr. Morris700 Cellu Parent Shares.  The vesting and forfeiture terms applicableto Mr. Morris’ award are the same as those applicable to Mr. Taylor’saward as described above.  Theforegoing description is qualified in its entirety by reference to the actualemployment agreement executed with Mr. Morris.

 

We have entered into anemployment agreement with Steven Ziessler, dated June 12, 2006, pursuantto which Mr. Ziessler will continue to serve as our chief operatingofficer.  The agreement is for a term offour years, commencing on June 12, 2006, and will automatically extend forsuccessive terms of one year each, unless either Mr. Ziessler or weprovide notice to the other at least 60 days prior to the expiration of theoriginal or any extension term that the agreement is not to be extended.  The agreement provides Mr. Ziessler withan annual base salary of $250,000, a bonus opportunity of up to 100% of basesalary, and certain severance benefits under the following circumstances:

 

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(A)          If Mr. Ziessler’s employment isterminated due to death or disability, he will be entitled to (i) anyearned, but unpaid, base salary through the date of termination; (ii) anyearned, but unpaid, annual bonus for any fiscal year prior to the fiscal yearof his termination; (iii) a pro rata portion of his Target Bonus; (iv) alump sum payment equal to the lesser of (A) 12 months of base salary orbase salary for a period equal to the remainder of the term of the employmentagreement; and (v) any reimbursed business expenses.

 

(B)           If Mr. Ziessler’s employment istermination by us without cause or by him with good reason, he will be entitledto (i) any earned, but unpaid, base salary through the date oftermination; (ii) any earned, but unpaid, annual bonus for any fiscal yearprior to the fiscal year of his termination; (iii) a pro rata portion ofhis Target Bonus; (iv) a lump sum payment equal to 24 months of basesalary; (v) a lump sum equal to one times the Target Bonus; and (vi) anyreimbursed business expenses.

 

(C)           If Mr. Ziessler’s employment isterminated by non-renewal of his employment agreement by us for any reason(other than for cause), he will be entitled to (i) any earned, but unpaid,base salary through the date of termination; (ii) any earned, but unpaid,annual bonus for any fiscal year prior to the fiscal year of his termination; (iii) apro rata portion of his Target Bonus; (iv) a lump sum payment equal to 24months of base salary; and (v) any reimbursed business expenses.

 

In addition, the agreementalso provides that, during the term and for a period of one year after the endof the term, we will pay the premium for a term life insurance policy covering Mr. Ziesslerin the amount of $1,000,000.  Theagreement includes a non-competition and non-solicitation covenant by Mr. Ziessler that extends duringthe term of his employment and for two years thereafter.  The agreement also provides that Mr. Ziesslerwill receive an award of Cellu Parent Shares, pursuant to the 2006 Stock Optionand Restricted Stock Plan, and a Restricted Stock Award Agreement.  On June 12,2006, Cellu Parent awarded Mr. Ziessler 1,349 Cellu Parent Shares.  Thevesting and forfeiture terms applicable to Mr. Ziessler’s award are thesame as those applicable to Mr. Taylor’s award as described above.  The foregoing description is qualifiedin its entirety by reference to the actual employment agreement executed with Mr. Ziessler.

 

Inthe case of termination for any of the above-referenced reasons, for each ofthe named executive officers (x) we shall continue the insurance coveragebenefits for the period contemplated therein, and (y) subject to anyemployee contribution applicable to employees and their dependents, generallyfor the period following termination of 24 months (36 months in the case of achange in control for Mr. Taylor), or if earlier, until the date that theexecutive becomes eligible for coverage with a subsequent employer, we willcontinue to contribute to the premium cost of coverage for the executive andthe executive’s dependents under our medical and dental plans provided that atimely election is made pursuant to the Consolidated Omnibus Budget ReconciliationAct of 1985, as amended, or COBRA, at the executive’s expense.  Each of the executives may also be entitledto receive a gross-up payment in certain circumstances if payments or benefitsprovided trigger an excise tax under Section 4999 of the Code, but only ifthe payments and benefits provided exceed 105% of the greatest amount thatcould be paid without triggering the excise tax.  If the payments and benefits provided do notexceed 105% of the greatest amount that could be paid without triggering the excisetax, then the payments and benefits will be reduced to the greatest amount thatcould be paid without triggering the excise tax.

 

***2006 Stock Option and Restricted Stock Plan***

 

Theboard of directors of Cellu Parent has adopted the 2006 Stock Option andRestricted Stock Plan.  The 2006 StockOption and Restricted Stock Plan authorizes the award of incentive stockoptions, which are stock options that qualify for special federal income taxtreatment.  The exercise price of anystock option granted under the 2006 Stock Option and Restricted Stock Plan maynot be less than the fair market value of the common stock on the date ofgrant.  In general, each option grantedunder the 2006 Stock Option and Restricted Stock Plan vests annually in fourequal installments and expires ten years from the date of grant, subject toearlier expiration in case of termination of employment.   The vesting period is subject tocertain acceleration provisions if a change in control occurs.   The Plan also authorizes awards of restrictedstock.  On June 12, 2006, inconnection with the Merger, Cellu Parent entered into Restricted StockAgreements 

 

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withMessrs Taylor and Ziessler and Ms. Scheu, pursuant to which Cellu Parentgranted 3,778 restricted shares of its common stock to Mr. Taylor and1,349 restricted shares of its common stock to each of Mr. Ziessler and Ms. Scheu.  Effective July 31, 2007, Ms. Scheuresigned and forfeited three-fourths of her restricted stock grant.

 

OnAugust 6, 2007, David Morris received a restricted stock grant of 700shares.

 

***2001 Stock Incentive Plan***

 

Prior to the merger, theboard of directors of our parent, Cellu Paper, adopted the 2001 Stock IncentivePlan, or the 2001 Plan.  The 2001 Planauthorized the award of incentive stock options, which are stock options thatqualify for special federal income tax treatment, to purchase shares of commonstock of Cellu Paper.  The 2001 Plan alsoauthorized awards of restricted stock of Cellu Paper.  On March 27, 2006, prior to the Merger,our parent entered into Restricted Stock Agreements with Dianne Scheu andSteven Ziessler, pursuant to which our parent granted 170.65 restricted sharesof its common stock to each of Dianne Scheu and Steven Ziessler pursuant to the2001 Plan.  In accordance with the termsof the 2001 Plan, the shares of restricted stock fully vested at the effectivedate of the Merger and were repurchased by our parent.  In addition, our parent paid an additionalamount to Ms. Scheu and Mr. Ziessler, as the case may be, to fullygross up her or him, as applicable, for the amount included in gross income forincome tax purposes as a result of making a Section 83(b) electionunder the Code.  The 2001 Plan wasterminated at the effective date of the Merger.

 

**Bonus Agreements**

 

On March 27, 2006, we entered into bonus agreements with each ofRussell Taylor, Dianne Scheu and Steven Ziessler.  Pursuant to the bonus agreements, each of theexecutive officers was entitled to receive a fixed amount one-time stay bonusas an incentive to continue employment with us up through and including theeffective date of the Merger.  Pursuantto the bonus agreements, each of the executive officers was entitled to receivea lump sum cash payment equal to one year’s current base salary upon theexecution of the applicable agreement. The bonus payments, as reflected in Column (d) of the SummaryCompensation Table, were $425,000 for Mr. Taylor, $230,000 for Ms. Scheuand $250,000 for Mr. Ziessler.

 

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**GRANTS OF PLAN-BASED AWARDS FOR FISCALYEAR 2008**

 
| **Name (a)** | ** ** | **Grant  Date  (b)** | ** ** | **Estimated  Potential/  Future  Payouts  Under  Non-  Equity  Incentive  Plan  Awards  Threshold  ($) (c)** | ** ** | **Estimated  Potential/  Future  Payouts  Under  Non-  Equity  Incentive  Plan  Awards  Target  ($)(d)** | ** ** | **Estimated  Potential/  Future  Payouts  Under  Non-  Equity  Incentive  Plan  Awards  Max  ($)(e)** | ** ** | **Threshold  ($) (f)** | ** ** | **Target  ($)(g)** | ** ** | **Max  ($)(h** | ** ** | **All Other  Stock  Awards  Number  of Shares  of Stock  or Units  (#)(i)** | ** ** | **All Other  Option  Awards:  Number  of  Securities   Underlying  Options  (#)(j)** | ** ** | **Exercise  or Base  Price of  Option  Awards  ($/SH) (k)** | ** ** | **Grant Date  Fair Value of  Stock and  Option  Awards (1)  (l)** | ** ** |
|-------------------|------------|----------------------|------------|--------------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------|------------|-------------------------------------------------------------------------------------------------------|------------|------------------------|------------|--------------------|------------|----------------|------------|-------------------------------------------------------------------------------------------------|------------|------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------|------------|--------------------------------------------------------------------------------------------|------------|
|              |       |                 |       |                                                                                                         |       |                                                                                                     |       |                                                                                                  |       |                   |       |               |       |           |       |                                                                                            |       |                                                                                           |       |                                                                  |       |                                                                                       |       |
| Russell Taylor    |       | —               |       | —                                                                                                       |       | —                                                                                                   |       | —                                                                                                |       |  —           |       |  —       |       |  —   |       |  —                                                                                    |       |  —                                                                                   |       |  —                                                          |       |  —                                                                               |       |
|              |       | (2)                  |       | $                                                                                                            | 237,500    |                                                                                                     | $          | 406,125                                                                                               |       | $                      | 475,000    |               | —     |           | —     |                                                                                            | —     |                                                                                           | —     |                                                                  | —     |                                                                                       | —     |   | — |   |
|              |       |                 |       |                                                                                                         |       |                                                                                                     |       |                                                                                                  |       |                   |       |               |       |           |       |                                                                                            |       |                                                                                           |       |                                                                  |       |                                                                                       |       |
| David Morris      |       | 8/07                 |       | —                                                                                                       |       | —                                                                                                   |       | —                                                                                                |       |  —           |       |  —       |       |  —   |       | 700                                                                                             | (3)        |  —                                                                                   |       | $                                                                     | 979.25     |                                                                                       | $          | 685,475 |   |
|              |       | (2)                  |       | $                                                                                                            | 35,519     |                                                                                                     | $          | 60,738                                                                                                |       | $                      | 71,038     |               | —     |           | —     |                                                                                            | —     |                                                                                           | —     |                                                                  | —     |                                                                                       | —     |   | — |   |
|              |       |                 |       |                                                                                                         |       |                                                                                                     |       |                                                                                                  |       |                   |       |               |       |           |       |                                                                                            |       |                                                                                           |       |                                                                  |       |                                                                                       |       |
| Steven. Ziessler  |       | —               |       | —                                                                                                       |       | —                                                                                                   |       | —                                                                                                |       |  —           |       |  —       |       |  —   |       |  —                                                                                    |       |  —                                                                                   |       |  —                                                          |       |  —                                                                               |       |
|              |       | (2)                  |       | $                                                                                                            | 137,500    |                                                                                                     | $          | 235,125                                                                                               |       | $                      | 275,000    |               | —     |           | —     |                                                                                            | —     |                                                                                           | —     |                                                                  | —     |                                                                                       | —     |   | — |   |
|              |       |                 |       |                                                                                                         |       |                                                                                                     |       |                                                                                                  |       |                   |       |               |       |           |       |                                                                                            |       |                                                                                           |       |                                                                  |       |                                                                                       |       |
| Edwin Litton      |       | 4/07                 |       | —                                                                                                       |       | —                                                                                                   |       | —                                                                                                |       |  —           |       |  —       |       |  —   |       |  —                                                                                    |       | 25                                                                                             |       | $                                                                     | 704.25     |                                                                                       | $          | 17,606 |   |
|              |       | (2)                  |       | $                                                                                                            | 43,000     |                                                                                                     | $          | 73,530                                                                                                |       | $                      | 86,000     |               | —     |           | —     |                                                                                            | —     |                                                                                           | —     |                                                                  | —     |                                                                                       | —     |   | — |   |

 

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(1)           Thiscolumn reflects the full grant date value of stock and option awards under FAS No. 123Rgranted to the named executive officers in fiscal year 2008.  We use the Black-Scholes option pricing modelto estimate the fair value of options on the date of grant which requirescertain estimates to be made by management including the expected forfeiturerate and expected term of 

 

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the options.  The actual value, if any, that a namedexecutive officer may realize upon exercise of stock options will depend on theexcess of the stock price over the base value on the date of exercise, so thereis no assurance that the value realized by a named executive officer will be ator near the value estimated by the Black-Scholes model.  The assumptions used in determining the grantdate fair values of these stock and option awards are set forth in the notes toour consolidated financial statements included elsewhere in this Annual Report

 

(2)           Theamounts reflected in columns (c), (d) and (e) represent the potentialminimum and maximum payouts of the incentive-based cash wards granted in fiscalyear 2008 to each of the named executive officers.  See footnote 4 to Summary Compensation Tablefor actual amounts earned in fiscal year 2008 and payable in fiscal year 2009.

 

(3)           OnAugust 6, 2007, upon employment, Cellu Parent entered into a RestrictedStock Agreement with our chief financial officer, pursuant to which CelluParent granted 700 restricted shares of its to the named individual under the2006 Stock Option and Restricted Stock Plan.   See further discussion under “Employment Agreements; Restricted StockAgreements.”

 

**OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END**

 
| ** **       | ** ** | **Options Awards**                                                                | ** ** | **Stock Awards**                                                                    | ** ** |
|------------------|------------|----------------------------------------------------------------------------------------|------------|------------------------------------------------------------------------------------------|------------|
| ** **       | ** ** | ** **                                                                             | ** ** | ** **                                                                               | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | **Equity** | ** ** |
| ** **       | ** ** | ** **                                                                             | ** ** | ** **                                                                               | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | **Incentive** | ** ** |
| ** **       | ** ** | ** **                                                                             | ** ** | ** **                                                                               | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | **Equity** | ** ** | **Plan** | ** ** |
| ** **       | ** ** | ** **                                                                             | ** ** | ** **                                                                               | ** ** | ** ** | ** ** | **Incentive** | ** ** | **Awards:** | ** ** |
| **Name**         | ** ** | **Number of  Securities  Underlying  Unexercised  Options (#)  Exercisable** | ** ** | **Number of  Securities  Underlying  Unexercised  Options (#)  Unexercisable** | ** ** | **Equity  Incentive  Plan  Awards:  Number of  Securities  Underlying  Unexercised  Unearned  Options (#)** | ** ** | **Option  Exercise  Price ($)** | ** ** | **Option  Expiration  Date** | ** ** | **Number  of Shares  or Units  of Stock  That Have  Not  Vested (#)** | ** ** | **Market  Value of  Shares or  Units of  Stock  That Have  Not  Vested ($)** | ** ** | **Plan  Awards:  Number  of Shares,  Units, or  Other  Rights  That Have  Not  Vested (#)** | ** ** | **Market or  Payout  Value of  Unearned  Shares,  Unites or  Other Rights  That Have  Not Vested  ($)** | ** ** |
|             |       |                                                                                   |       |                                                                                     |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Russell Taylor   |       | —                                                                                 |       | —                                                                                   |       | — |   | — |   | — |   | 2,833 |   | 1,208,813 |   | — |   | — |   |
|             |       |                                                                                   |       |                                                                                     |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| David Morris     |       | —                                                                                 |       | —                                                                                   |       | — |   | — |   | — |   | 700 |   | 685,475 |   | — |   | — |   |
|             |       |                                                                                   |       |                                                                                     |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Steven. Ziessler |       | —                                                                                 |       | —                                                                                   |       | — |   | — |   | — |   | 1,012 |   | 431,810 |   | — |   | — |   |
|             |       |                                                                                   |       |                                                                                     |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Edwin Litton     |       | —                                                                                 |       | 25                                                                                       |       | — |   | $ | 704.25 |   | 2017 |   | — |   | — |   | — |   | — |   |
|             |       | —                                                                                 |       | 50                                                                                       |       | — |   | $ | 426.69 |   | 2016 |   | — |   | — |   | — |   | — |   |

 

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**OPTIONEXERCISES AND STOCK VESTED**

 

**The following tableincludes certain information with respect to restricted stock awards andoptions that vested during the fiscal year 2008:**

 
| ** **        | ** ** | **Option Award**              | ** ** | **Stock Awards** | ** ** |
|-------------------|------------|------------------------------------|------------|-----------------------|------------|
| ** **        | ** ** | **Shares  Acquired  on  Exercise** | ** ** | **Value  Realized**   | ** ** | **Number of Shares  Acquired on  Vesting** | ** ** | **Value Realized on  Vesting** | ** ** |
| **Name**          | ** ** | **(#)**                            | ** ** | **($)**               | ** ** | **(#)** | ** ** | **($) (1)** | ** ** |
|              |       |                               |       |                  |       |   |   |   |   |
| Russell C. Taylor |       | —                             |       | —                |       | — |   | $ | 403,222 |   |
| David J. Morris   |       | —                             |       | —                |       | — |   | — |   |
| Steve D. Ziessler |       | —                             |       | —                |       | — |   | $ | 143,795 |   |
| W. Edwin Litton   |       | —                             |       | —                |       | — |   | — |   |

 

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(1)       Representsrestricted shares of our parent’s common stock, which became vested duringfiscal year 2008.  Restricted sharesvested in four equal annual installments beginning on June 12, 2006.  The value realized when the restricted sharedvested represents the valuation of our parent’s common stock of $426.69.

 

**Potential Payments Upon Termination or Change inControl**

 

The followingtables summarize the value of the termination payments and benefits that Messrs. Taylor,Ziessler and Morris would receive if they had terminated employment on February 29,2008 under the circumstances shown, pursuant to employment agreements and restricted stock agreements we have enteredinto with each of them.  Forfurther description of the employment agreements and restrictive stockagreements governing these payments, see “Employment Agreements; Restricted StockAward Agreements.”  The tables exclude (i) amountsaccrued through February 29, 2008 that would be paid in the normal courseof continued employment, such as accrued but unpaid salary and earned annualbonus for fiscal year 2008 and reimbursed business expenses and (ii) vestedaccount balances under our 401(k) Plan that is generally available to allof our employees.

 

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**Russell C. Taylor**

 
| **Benefit**                         | ** ** | **Retirement ($)** | ** ** | **Death ($)** | ** ** | **Disability ($)** | ** ** | **Termination  by Company  without Cause  or Executive  with Good  Reason ($)** | ** ** | **Termination  due to Non-  Renewal by  Company  (Other Than  for Cause) ($)** | ** ** | **Termination  Within Two  Years  Following or  Three Months  Prior to a  Change in  Control($) (1)** | ** ** |
|-------------------------------------|------------|-------------------------|------------|--------------------|------------|-------------------------|------------|----------------------------------------------------------------------------------------------------------|------------|--------------------------------------------------------------------------------------------------------------|------------|------------------------------------------------------------------------------------------------------------------------------------------|------------|
|                                | ** ** | ** **              |       |               |       |                    |       |                                                                                                     |       |                                                                                                         |       |                                                                                                                                     |       |
| Cash Severance                      | ** ** | **$**                   | **—** |               | $          | 475,000                 | (2)        | $                                                                                                        | 475,000    | (2)                                                                                                          | $          | 2,170,685                                                                                                                                | (3)        | $ | 950,000 | (4) | $ | 2,170,685 | (5) |
|                                |       |                    |       |               |       |                    |       |                                                                                                     |       |                                                                                                         |       |                                                                                                                                     |       |
| Acceleration of  Restricted Stock   | ** ** | **$**                   | **—** |               | $          | 1,387,108               | (6)        | $                                                                                                        | 1,387,108  | (6)                                                                                                          | **$**      | **—**                                                                                                                               |       | $ | 2,774,215 | (7) | $ | — |   |
|                                | ** ** | ** **              |       |               |       |                    |       | ** **                                                                                               |       |                                                                                                         |       |                                                                                                                                     |       |
| Health &  Welfare Benefits |       | $                       | —     | (8)                | $          | —                  | (8)        | $                                                                                                        | —     | (8)                                                                                                          | $          | —                                                                                                                                   | (8)        | $ | — | (8) | $ | — | (8) |
|                                |       |                    |       |               |       |                    |       |                                                                                                     |       |                                                                                                         |       |                                                                                                                                     |       |
| Total                               |       | $                       | —     |               | $          | 1,862,108               |       | $                                                                                                        | 1,862,108  |                                                                                                         | $          | 2,170,685                                                                                                                                |       | $ | 3,724,215 |   | $ | 2,170,685 |   |

 

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(1)           Excludinga termination for cause or by reason of death or disability.

 

(2)           Excludingaccrued, but unpaid, base salary and annual bonus, executive is entitled toreceive a lump sum payment equal to the lesser of (A) 12 months of basesalary or (B) base salary for a period equal to the remainder of the termof the employment agreement.

 

(3)           Excludingaccrued, but unpaid, base salary and annual bonus, executive is entitled toreceive a (i) lump sum payment equal to the greater of (A) 24 monthsof base salary or (B) base salary for a period equal to the remainder ofthe term of the employment; and (ii) lump sump equal to the greater of (x) onetimes the Target Bonus or (y) payment of the Target Bonus with respect toa period equal to the remainder of the term of the employment agreement.

 

(4)           Excludingaccrued, but unpaid, base salary and annual bonus, executive is entitled toreceive a  lump sum payment equal to 24months of base salary.

 

(5)           Excludingaccrued, but unpaid, base salary and annual bonus, executive is entitled toreceive a (i) lump sum payment equal to the greater of (A) 36 monthsof base salary or (B) base salary for a period equal to the remainder ofthe term of the employment agreement; and (ii) lump sump equal to onetimes the Target Bonus.  Payments in respectof a change in control are in lieu of payments for termination by reason ofdeath or disability or by the Company without cause or the Executive for goodreason or non-renewal of the employment agreement.

 

(6)           Reflectsthe value of 50% of the restricted shares not yet vested which accelerates inconnection with a termination due to death or disability, calculated inaccordance with the fair market value of the common stock of Cellu Parent as ofFebruary 29, 2008.

 

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(7)           Reflectsthe value of 100% of the restricted shares not yet vested which accelerates inconnection with a termination due to non-renewal of the executive’s employmentagreement (other than for cause), calculated in accordance with the fair marketvalue of the common stock of Cellu Parent as of February 29, 2008.

 

(8)           Executive is entitled to continuedparticipation in our group health plan, assuming he makes a timely election ofcontinuation coverage under COBRA, at the executive’s expense.

 

**David J. Morris**

 
| **Benefit**                         | ** ** | **Retirement ($)** | ** ** | **Death ($)** | ** ** | **Disability ($)** | ** ** | **Termination  by Company  without Cause  or Executive  with Good  Reason ($)** | ** ** | **Termination  due to Non-  Renewal by  Company  (Other Than  for Cause) ($)** | ** ** | **Termination  Within Two  Years  Following or  Three Months  Prior to a  Change in  Control $(1)** | ** ** |
|-------------------------------------|------------|-------------------------|------------|--------------------|------------|-------------------------|------------|----------------------------------------------------------------------------------------------------------|------------|--------------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------------------------------------|------------|
| ** **                          | ** ** | ** **              | ** ** | ** **         | ** ** | ** **              | ** ** | ** **                                                                                               | ** ** | ** **                                                                                                   | ** ** | ** **                                                                                                                             | ** ** |
| Cash Severance                      | ** ** | **$**                   | **—** |               | $          | 250,000                 | (2)        | $                                                                                                        | 250,000    | (2)                                                                                                          | $          | 750,000                                                                                                                                | (3)        | $ | 500,000 | (4**)** | $ | — | (5) |
|                                | ** ** | ** **              |       |               |       |                    |       |                                                                                                     |       |                                                                                                         |       |                                                                                                                                   |       |
| Acceleration of  Restricted Stock   | ** ** | **$**                   | **—** |               | $          | 342,738                 | (6)        | $                                                                                                        | 342,738    | (6**)**                                                                                                      | **$**      | **—**                                                                                                                             |       | $ | 685,475 | (7) | $ | — |   |
|                                | ** ** | ** **              |       |               |       |                    |       | ** **                                                                                               |       |                                                                                                         |       |                                                                                                                                   |       |
| Health &  Welfare Benefits |       | $                       | —     | (8)                | $          | —                  | (8)        | $                                                                                                        | —     | (8)                                                                                                          | $          | —                                                                                                                                 | (8)        | $ | — | (8) | $ | — | (8) |
|                                |       |                    |       |               |       |                    |       |                                                                                                     |       |                                                                                                         |       |                                                                                                                                   |       |
| Total                               |       | $                       | —     |               | $          | 592,738                 |       | $                                                                                                        | 592,738    |                                                                                                         | $          | 750,000                                                                                                                                |       | $ | 1,185,475 |   | $ | — |   |

 

----

(1)           Excludinga termination for cause or by reason of death or disability.

 

(2)           Excludingaccrued, but unpaid, base salary and annual bonus, executive is entitled toreceive a lump sum payment equal to the lesser of (A) 12 months of basesalary or (B) base salary for a period equal to the remainder of the termof the employment agreement.

 

(3)           Excludingaccrued, but unpaid, base salary and annual bonus, executive is entitled toreceive a (i) lump sum payment equal to 24 months of base salary; and (ii) lumpsump equal to one times the Target Bonus.

 

(4)           Excludingaccrued, but unpaid, base salary and annual bonus, executive is entitled toreceive a  lump sum payment equal to 24months of base salary.

 

(5)           Executiveis not entitled to any specific payments upon a change in control, other thansuch payments that executive would otherwise be entitled to if termination upona change in control is by reason of death or disability or by the Company forcause or the Executive for good reason or non-renewal of the employmentagreement, as provided in the related columns.

 

(6)           Reflectsthe value of 50% of the restricted shares not yet vested which accelerates inconnection with a termination due to death or disability, calculated inaccordance with the fair market value of the common stock of Cellu Parent as ofFebruary 29, 2008.

 

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(7)           Reflectsthe value of 100% of the restricted shares not yet vested which accelerates inconnection with a termination due to non-renewal of the executive’s employmentagreement (other than for cause), calculated in accordance with the fair marketvalue of the common stock of Cellu Parent as of February 29, 2008.

 

(8)           Executive is entitled to continuedparticipation in our group health plan, assuming he makes a timely election ofcontinuation coverage under COBRA, at the executive’s expense.

 

**Steven D. Ziessler**

 
| **Benefit**                         | ** ** | **Retirement ($)** | ** ** | **Death ($)** | ** ** | **Disability ($)** | ** ** | **Termination  by Company  without Cause  or Executive  with Good  Reason ($)** | ** ** | **Termination  due to Non-  Renewal by  Company  (Other Than  for Cause) ($)** | ** ** | **Termination  Within Two  Years  Following or  Three Months  Prior to a  Change in  Control $ (1)** | ** ** |
|-------------------------------------|------------|-------------------------|------------|--------------------|------------|-------------------------|------------|----------------------------------------------------------------------------------------------------------|------------|--------------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------|------------|
|                                | ** ** | ** **              |       |               |       |                    |       |                                                                                                     |       |                                                                                                         | ** ** | ** **                                                                                                                                   | ** ** |
| Cash Severance                      | ** ** | **$**                   | **—** |               | $          | 275,000                 | (2)        | $                                                                                                        | 275,000    | (2)                                                                                                          | $          | 825,000                                                                                                                                      | (3)        | $ | 550,000 | (4**)** | $ | — | (5) |
|                                | ** ** | ** **              |       |               |       |                    |       |                                                                                                     |       |                                                                                                         |       |                                                                                                                                         |       |
| Acceleration of  Restricted Stock   |       | $                       | —     |               | $          | 495,501                 | (6)        | $                                                                                                        | 495,501    | (6**)**                                                                                                      | **$**      | **—**                                                                                                                                   |       | $ | 991,001 | (7) | $ | — |   |
|                                |       |                    |       |               |       |                    |       | ** **                                                                                               |       |                                                                                                         |       |                                                                                                                                         |       |
| Health &  Welfare Benefits |       | $                       | —     | (8)                | $          | —                  | (8)        | $                                                                                                        | —     | (8)                                                                                                          | $          | —                                                                                                                                       | (8)        | $ | — | (8) | $ | — | (8) |
|                                |       |                    |       |               |       |                    |       |                                                                                                     |       |                                                                                                         |       |                                                                                                                                         |       |
| Total                               |       | $                       | —     |               | $          | 770,501                 |       | $                                                                                                        | 770,501    |                                                                                                         | $          | 825,000                                                                                                                                      |       | $ | 1,541,001 |   | $ | — |   |

 

----

(1)           Excludinga termination for cause or by reason of death or disability.

 

(2)           Excludingaccrued, but unpaid, base salary and annual bonus, executive is entitled toreceive a lump sum payment equal to the lesser of (A) 12 months of basesalary or (B) base salary for a period equal to the remainder of the termof the employment agreement.

 

(3)           Excludingaccrued, but unpaid, base salary and annual bonus, executive is entitled toreceive a (i) lump sum payment equal to 24 months of base salary; and (ii) lumpsump equal to one times the Target Bonus.

 

(4)           Excludingaccrued, but unpaid, base salary and annual bonus, executive is entitled toreceive a  lump sum payment equal to 24months of base salary.

 

(5)           Executiveis not entitled to any specific payments upon a change in control, other thansuch payments that executive would otherwise be entitled to if termination upona change in control is by reason of death or disability or by the Company forcause or the Executive for good reason, or non-renewal of the employmentagreement, as provided in the related columns.

 

(6)           Reflectsthe value of 50% of the restricted shares not yet vested which accelerates inconnection with a termination due to death or disability, calculated inaccordance with the fair market value of the common stock of Cellu Parent as ofFebruary 29, 2008.

 

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| (7)    | Reflects the value of 100% of the restricted shares  not yet vested which accelerates in connection with a termination due to  non-renewal of the executive’s employment agreement (other than for cause),  calculated in accordance with the fair market value of the common stock of  Cellu Parent as of February 29, 2008. |
|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                                                                                                                                                    |
| (8)    | Executive is entitled to  continued participation in our group health plan, assuming he makes a timely  election of continuation coverage under COBRA, at the executive’s expense.                                                                                                                                                 |

 

**W. Edwin Litton**

 

Mr. Litton is notentitled to any payments in connection with any termination, including, withoutlimitation, resignation, severance, retirement, death, disability, withoutcause or as a result of a change in control (nor is he entitled to any gross-uppayments under Section 4999 of the Code), except that, in the event of achange in control, any unvested stock options held by Mr. Litton topurchase shares of common stock of Cellu Parent would be fullyaccelerated.  Accordingly, if Mr. Litton’semployment was terminated on February 29, 2008 due to a change in control,he would have received $27,628, representing the difference between theexercise price and the fair market value of 50 shares of common stock of CelluParent as of February 29, 2008.  Mr. Littonholds 25 other stock options for which the fair market value as of February 29,2008 equaled the exercise price of his unvested options which would acceleratein connection with a change in control. Notwithstanding the foregoing, Mr. Litton is entitled to (i) amountsaccrued through the date of termination that would be paid in the normal courseof continued employment, such as accrued but unpaid salary and earned annualbonus, (ii) vested account balances under our 401(k) Plan that isgenerally available to all of our employees and (iii) any post-employmentbenefits that are available to all of our salaried employees and do notdiscriminate in favor of Mr. Litton. Furthermore, under the provisions of ERISA, he would be entitled to oneyear’s salary.

 

**Compensation of Directors**

 

Membersof our board of directors (including Russell C. Taylor, our president and chiefexecutive officer) do not receive director’s fees or other compensation forserving as directors.  All members of ourboard of directors are reimbursed for actual expenses incurred in connectionwith attendance at board meetings. Compensation payable to Mr. Taylor as a named executive officer forfiscal year 2008 and fiscal year 2007 is reported in the Summary CompensationTable included elsewhere in this section.

 

**ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFCIAL OWNERS AND MANAGEMENT**

 

We area wholly owned subsidiary of Cellu Paper Holdings, Inc (referred to herein asour parent) and a wholly owned indirect subsidiary of Cellu Parent Corporation(referred to herein as Cellu Parent).  Asof the date of this report, our parent’s outstanding capital stock consisted of11,127 shares of common stock, par value $0.01 per share, all of which wasbeneficially owned by Cellu Parent.  Asof the date of this report, Cellu Parent’s outstanding capital stock consistedof 45,730 shares of Series A preferred stock and 6,164 shares of commonstock, par value $0.01 per share. The following table sets forth informationwith respect to the beneficial ownership of Cellu Parent’s common stock as of May 2,2008 by:

 
| · | each person who is  known by us to beneficially own more than 5% of the outstanding shares of  common stock; |
|--------|--------------------------------------------------------------------------------------------------------------|
|   |                                                                                                         |
| · | each executive officer  named in the summary compensation table;                                             |
|   |                                                                                                         |
| · | each member of our  board of directors; and                                                                  |
|   |                                                                                                         |
| · | all members of our board  of directors and executive officers as a group.                                    |

 

To ourknowledge, each of the holders of common stock listed below has sole voting andinvestment power as to the shares of common stock beneficially owned by suchholder, unless otherwise noted.  Sharesof common stock subject to options that are currently exercisable orexercisable within 60 days of May 1, 

 

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2007are deemed outstanding for computing the ownership percentage of thestockholder holding such options, but are not deemed outstanding for computingthe ownership of any other stockholder.

 
| **Name and address of  beneficial owner** | ** ** | **Number of Shares  of Series A  Preferred Stock** | ** ** | **Percentage of  Class** | ** ** | **Number of  Shares of  Common  Stock** | ** ** | **Percentage  of Class** | ** ** |
|---------------------------------------------------------------|------------|-----------------------------------------------------------------------------|------------|-------------------------------|------------|---------------------------------------------------|------------|-------------------------------|------------|
| Weston Presidio (1)                                           |       | 42,502                                                                      |       | 92.9                          | %          | —                                            |       | —                        |       |
| Russell C. Taylor (2) (3)                                |       | 2,559                                                                       |       | 5.6                           | %          | 3,778                                             |       | 61.3                          | %          |
| David J. Morris (2) (3)                                  |       | —                                                                      |       | —                        |       | 700                                               |       | 11.4                          | %          |
| Steven D. Ziessler (2)(3)                                     |       | 96                                                                          |       | Less than 1                   | %          | 1,349                                             |       | 21.9                          | %          |
| W. Edwin Litton (2)                                           |       |                                                                        |       | —                        |       | —                                            |       | —                        |       |
| R. Sean Honey (1)                                             |       | 42,502                                                                      | (5)        | 92.9                          | %          | —                                            |       | —                        |       |
| David L. Ferguson (1)                                         |       | 42,502                                                                      | (5)        | 92.9                          | %          | —                                            |       | —                        |       |
| Scott M. Bell (1)                                             |       | —                                                                      |       | —                        |       | —                                            |       | —                        |       |
| All directors and executive officers as a  group (7 persons)  |       | 45,157                                                                      |       | 98.7                          | %          | 5,827                                             |       | 94.6                          | %          |

 

----

| (1)    |   | The address for Weston Presidio and for each of  Messrs. Honey, Ferguson and Bell is Pier 1 Bay 2, San Francisco,  California 94111.                                                                                                                                                                                                                                                                                |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                     |
| (2)    |   | The address for each officer is c/o Cellu Tissue  Holdings, Inc., 1855 Lockeway Drive, Alpharetta, Georgia 30004.                                                                                                                                                                                                                                                                                                   |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                     |
| (3)    |   | Common stock ownership represents restricted stock  that vests ratably over 4 years. As of February 29, 2008, 2,834, 700 and  1,012 for Messrs. Taylor, Morris and Ziessler, respectively, have not  vested.                                                                                                                                                                                                   |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                     |
| (5)    |   | Each of Messrs. Honey and Ferguson is a partner  of Weston Presidio and, as such, is deemed to have shared voting and  investment power (along with other partners of Weston Presidio) as to the  shares of common stock beneficially owned directly by Weston Presidio. Each  of Messrs. Honey and Ferguson disclaims beneficial ownership with  respect to the shares beneficially owned by Weston Presidio. |

 

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The following table summarizes shares of common stockof our Cellu Parent, our indirect parent, to be issued upon exercise ofoptions, the weighted-average exercise price of outstanding options and optionsavailable for future issuance as of February 28, 2007.

 
| **PLAN CATEGORY**                                      | ** ** | **NUMBER OF  SECURITIES TO BE  ISSUED UPON  EXERCISE OF  OUTSTANDING  OPTIONS,  WARRANTS AND  RIGHTS  (a)** | ** ** | **WEIGHTED-AVERAGE  EXERCISE PRICE OF  OUTSTANDING  OPTIONS, WARRANTS  AND RIGHTS  (b)** | ** ** | **REMAINING AVAILABLE  NUMBER OF SECURITIES  FOR FUTURE ISSUANCE  UNDER EQUITY  COMPENSATION PLANS  (EXCLUDING  SECURITIES REFLECTED  IN COLUMN (a))  (c)** | ** ** |
|-------------------------------------------------------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------------------------------------------------------------------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| Equity compensation plans approved by  security holders     |       | 1,125                                                                                                                                     |       | $                                                                                                            | 745.94     |                                                                                                                                                                                                          | 806        |   |
| Equity compensation plans not approved by  security holders |       | —                                                                                                                                    |       | —                                                                                                       |       | —                                                                                                                                                                                                        |       |
| Total                                                       |       | 1,125                                                                                                                                     |       | $                                                                                                            | 745.94     |                                                                                                                                                                                                          | 806        |   |

 

The 2006 Stock Option andRestricted Stock Plan authorizes the award of incentive stock options, whichare stock options that qualify for special federal income tax treatment.  The exercise price of any stock optiongranted under the 2006 Stock Option and Restricted Stock Plan may not be lessthan the fair market value of the common stock on the date of grant.  In general, each option granted under the2006 Stock Option and Restricted Stock Plan vests annually in four equalinstallments and expires ten years from the date of grant, subject to earlierexpiration in case of termination of employment. **  **The vesting period is subject tocertain acceleration provisions if a change in control occurs.   The Plan also authorizes awards ofrestricted stock.

 

**ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTORINDEPENDENCE**

 

**Management Agreement**

 

On June 12, 2006, theCompany, Cellu Parent, and Cellu Acquisition Corporation entered into aManagement Agreement with Weston Presidio Service Company, LLC (“WestonPresidio Service Company”), pursuant to which Weston Presidio Service Companyhas agreed to provide the Company with certain management, consulting andfinancial and other advisory services. Weston Presidio Service Company is an affiliate of Weston Presidio,which is the controlling shareholder of Cellu Parent, which is the soleshareholder of the Company’s parent corporation, Cellu Paper.  In consideration for such services, theCompany, Cellu Parent and Cellu Acquisition Corporation have jointly andseverally agreed to pay Weston Presidio Service Company an annual fee of$450,000, to be paid in equal quarterly installments, and to reimburse expensesof Weston Presidio Service Company and its affiliates.  In addition, in connection with theconsummation of the Merger and as required by the Management Agreement, theCompany paid Weston Presidio Service Company a fee in the amount of$2,000,000.  The Management Agreementexpires on June 12, 2016 but will be automatically extended on eachanniversary of such date for an additional year unless one of the partiesprovides written notice of its desire not to automatically extend the term atleast 90 days prior to such anniversary. Weston Presidio Service Company may terminate the Management Agreementupon not less than 10 days written notice to the Company, and the ManagementAgreement will terminate upon the consummation of an initial public offering ora change of 

 

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control.  The Management Agreement also provides thatthe Company, Cellu Parent and Cellu Acquisition Corporation will jointly andseverally indemnify Weston Presidio Service Company and its affiliates andtheir related persons from and against any and all actions, causes of action,suits, claims, liabilities, losses, damages and costs and expenses incurred asa result of, arising out of, or in any way relating to the ManagementAgreement, the services provided under the Management Agreement, the Merger orits equity interest in and ownership of the Company or Cellu Parent, except forany such indemnified liabilities arising on account of gross negligence orwillful misconduct of the party seeking indemnification.  If and to the extent that indemnification maybe unavailable or unenforceable for any reason, the Company, Cellu Parent andCellu Acquisition Corporation agree to make the maximum contribution to thepayment and satisfaction of each of the indemnified liabilities that ispermissible under applicable law.  Theforegoing description is qualified in its entirety by reference to the actualManagement Agreement.

 

**ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES**

 

Aggregatefees for professional services rendered to us by Ernst & Young LLP asof or for the fiscal years ended February 29, 2008 and February 28,2007 are set forth below.  The aggregatefees included in the Audit category are fees billed for the fiscal years forthe audit of our annual financial statements and review of regulatoryfilings.  The aggregate fees included ineach of the other categories are for fees billed in the fiscal years.

 
| ** **         | ** ** | **February 29, 2008** | ** ** | **February 28, 2007** | ** ** |
|--------------------|------------|---------------------------------|------------|---------------------------------|------------|
| Audit Fees         |       | $                               | 527,000    |                            | $          | 400,000 |   |
| Audit-Related Fees |       | 95,700                          |       | 285,056                         |       |
| Tax Fees           |       | 418,935                         |       | 162,794                         |       |
| Total Fees         |       | $                               | 1,041,635  |                            | $          | 847,850 |   |

 

*AuditFees: *Fees for audit services include feesassociated with the annual audits and reviews of our quarterly reports on Form 10-Qand annual report on Form 10-K.

 

*Audit-Related Fees: *Fees for audit-related services in fiscalyear 2008 also relate to the acquisition related audit.  Fees for audit-related services in fiscalyear 2007 relate to the merger transaction and acquisition related audit work.

 

*TaxFees: *Fees for tax services relate to thepreparation of U.S. and Canadian tax returns, other miscellaneous compliancematters and foreign tax planning.

 

**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

 

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

 

(b)          Exhibits

 

The following exhibits are filed with this report or incorporated byreference:

 

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**INDEX TO EXHIBITS**

 
| **Exhibit  No.** | ** ** | ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
|------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** **       | ** ** | ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| 3.1              |       | Certificate of Incorporation of Cellu Tissue  Holdings, Inc. (the “Company”) (incorporated by reference to  Exhibit 3.1 of the Company’s Registration Statement on Form S-4  dated September 3, 2004 (No. 333-118829))                                                                                                                                                                                                  |
|             |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| 3.2              |       | By-Laws of the Company (incorporated by reference to  Exhibit 3.2 of the Company’s Registration Statement on Form S-4  dated September 3, 2004 (No. 333-118829))                                                                                                                                                                                                                                                                       |
|             |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| 4.1A             |       | Indenture, dated as of March 12, 2004, by and  among the Company, the Subsidiary Guarantors (as defined therein) and The  Bank of New York, as trustee (incorporated by reference to Exhibit 4.1  of the Company’s Registration Statement on Form S-4 dated  September 3, 2004 (No. 333-118829))                                                                                                                                  |
|             |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| 4.1B             |       | First Supplemental Indenture, dated as of  June 2, 2006, by and among the Company, the subsidiary guarantors, and  the Bank of New York Trust Company, N.A., as successor trustee to the Bank of  New York (incorporated by reference to Exhibit 10.4 of the Company’s  Current Report on Form 8-K, filed with the SEC on June 16, 2006)                                                                                               |
|             |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| 4.1C             |       | Second Supplemental Indenture, dated March 21,  2007, by and among the Company, the subsidiary guarantors, and The Bank of  New York Trust Company, N.A., as successor trustee to the Bank of New York  (incorporated by reference to Exhibit 10.2 of the Company’s Current  Report on Form 8-K/A, filed with the SEC on March 27, 2007)                                                                                               |
|             |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| 4.2              |       | Form of 9 3⁄4% Senior Secured Exchange Note due  2010 (incorporated by reference to Exhibit 4.2 of the Company’s Registration  Statement on Form S-4 dated September 3, 2004  (No. 333-118829))                                                                                                                                                                                                                                |
|             |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| 4.3              |       | Notation of Guarantee, Natural Dam, Neenah, Cellu  Tissue LLC, Coastal, Interlake, Menominee, Van Paper and Van Timber as  Guarantors (incorporated by reference to Exhibit 4.3 of the Company’s  Registration Statement on Form S-4 dated September 3, 2004  (No. 333-118829))                                                                                                                                                        |
|             |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| 4.5              |       | Registration Rights Agreement, dated as of  March 12, 2004, by and among the Company and The Bank of New York  (incorporated by reference to Exhibit 4.5 of the Company’s Registration  Statement on Form S-4 dated September 3, 2004  (No. 333-118829))                                                                                                                                                                          |
|             |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| 4.6              |       | Indenture, dated March 1, 1998, between City of  Ladysmith, Wisconsin and Norwest Bank Wisconsin, N.A. (incorporated by  reference to Exhibit 10.6 of the Company’s Current Report on  Form 8-K/A, filed with the SEC on March 21, 2007)                                                                                                                                                                                               |
|             |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| 10.1             |       | Financing Agreement, dated as of March 12,  2004, by and among the Company, Natural Dam, Neenah, Cellu Tissue LLC,  Coastal, Interlake, Menominee, Van Paper and Van Timber, Cellu Paper  Holdings, Inc., the Lenders party thereto and The CIT Group/Business  Credit, Inc. (incorporated by reference to Exhibit 10.1 of the  Company’s Registration Statement on Form S-4 dated September 3,  2004 (No. 333-118829)) |
|             |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| 10.2             |       | Purchase Agreement, dated as of March 5, 2004,  by and among the Company and Initial Purchasers named therein (incorporated  by reference to Exhibit 10.2 of the Company’s Registration Statement on  Form S-4 dated September 3, 2004 (No. 333-118829))                                                                                                                                                                          |
|             |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| 10.3             |       | Employment Agreement, dated June 12, 2006,  between Russell Taylor and the Company (incorporated by reference to  Exhibit 10.1 of the Company’s Quarterly Report on Form 10-Q for the  quarter ended May 25, 2006)                                                                                                                                                                                                                     |
|             |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| 10.4             |       | Employment Agreement, dated June 12, 2006,  between Dianne Scheu and the Company (incorporated by reference to  Exhibit 10.2 of the Company’s Quarterly Report on Form 10-Q for the  quarter ended May 25, 2006)                                                                                                                                                                                                                       |

 

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| 10.5   |   | Employment Agreement, dated June 12, 2006,  between Steven Ziessler and the Company (incorporated by reference to  Exhibit 10.2 of the Company’s Quarterly Report on Form 10-Q for the  quarter ended May 25, 2006)                                                                                                                                                                                                                                                                                                                     |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| 10.6   |   | Cellu Parent Corporation 2006 Stock Option and  Restricted Stock Plan (incorporated by reference to Exhibit 10.1 of the  Company’s Current Report on Form 8-K, filed with the SEC on  June 16, 2006)                                                                                                                                                                                                                                                                                                                                         |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| 10.7   |   | Management Agreement, dated June 12, 2006, by  and among Cellu Parent Corporation, Cellu Acquisition Corporation, the  Company and Weston Presidio Service Company, LLC (incorporated by reference  to Exhibit 10.2 of the Company’s Current Report on Form 8-K, filed  with the SEC on June 16, 2006)                                                                                                                                                                                                                                  |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| 10.8   |   | Financial Advisory and Management Services  Agreement, dated as of September 30, 2002, between Cellu Tissue  Holdings, Inc. and Charterhouse Group International, Inc.  (incorporated by reference to Exhibit 10.5 of the Company’s Registration  Statement on Form S-4 dated September 3, 2004  (No. 333-118829))                                                                                                                                                                                                       |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| 10.9   |   | Shareholders Agreement, dated as of June 12,  2006, among Cellu Parent Corporation and each of the Security Holders.                                                                                                                                                                                                                                                                                                                                                                                                                                        |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| 10.10  |   | Cellu Paper Holdings 2001 Stock Incentive Plan (incorporated  by reference to Exhibit 10.7 of the Company’s Registration Statement on  Form S-4 dated September 3, 2004 (No.333-118829))                                                                                                                                                                                                                                                                                                                                                     |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| 10.11  |   | Bonus Agreement, dated as of March 27, 2006,  between Cellu Tissue Holdings, Inc. and Russell C. Taylor (incorporated  by reference to Exhibit 10.8 of the Company’s Annual Report on  Form 10-K for the fiscal year ended February 28, 2006)                                                                                                                                                                                                                                                                                      |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| 10.12  |   | Bonus Agreement, dated as of March 27, 2006,  between Cellu Tissue Holdings, Inc. and Dianne M. Scheu (incorporated by  reference to Exhibit 10.9 of the Company’s Annual Report on  Form 10-K for the fiscal year ended February 28, 2006)                                                                                                                                                                                                                                                                                        |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| 10.13  |   | Bonus Agreement, dated as of March 27, 2006,  between Cellu Tissue Holdings, Inc. and Steven Ziessler (incorporated by  reference to Exhibit 10.10of the Company’s Annual Report on  Form 10-K for the fiscal year ended February 28, 2006)                                                                                                                                                                                                                                                                                        |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| 10.14  |   | Restricted Stock Agreement, dated as of  March 27, 2006, between Cellu Paper Holdings, Inc. and Dianne M.  Scheu (incorporated by reference to Exhibit 10.11 of the Company’s  Annual Report on Form 10-K for the fiscal year ended February 28,  2006)                                                                                                                                                                                                                                                                            |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| 10.15  |   | Restricted Stock Agreement, dated as of  March 27, 2006, between Cellu Paper Holdings, Inc. and Steven  Ziessler (incorporated by reference to Exhibit 10.12 of the Company’s  Annual Report on Form 10-K for the fiscal year ended February 28,  2006)                                                                                                                                                                                                                                                                            |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| 10.16  |   | Cellu Tissue Holdings, Inc. Severance Pay Plan  (incorporated by reference to Exhibit 10.8 of the Company’s Annual  Report on Form 10-K for the fiscal year ended February 28, 2005)                                                                                                                                                                                                                                                                                                                                                    |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| 10.17  |   | Agreement and Plan of Merger by and among Cellu  Parent Corporation, Cellu Acquisition Corporation and Cellu Paper  Holdings, Inc. (incorporated by reference to Exhibit 10.14 of the  Company’s Annual Report on Form 10-K, filed with the SEC on May 9,  2006)                                                                                                                                                                                                                                                                        |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| 10.18  |   | Credit Agreement, dated as of June 12, 2006,  among Cellu Paper, the Company, as U.S. Borrower, Interlake Acquisition  Corporation Limited, a subsidiary of the Company, 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 the Company’s Current Report on  Form 8-K, filed with the SEC on June 16, 2006) |

 

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| 10.19  |   | Merger Agreement among the Company, 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 the Company Current Report on  Form 8-K, filed with the SEC on March 1, 2007                                                                                                                                                                                                                                                                                                                 |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| 10.20  |   | Note Purchase Agreement, dated March 21, 2007,  between the Company and Wingate Capital Ltd. (incorporated by reference to  Exhibit 10.1 of the Company’s Current Report on Form 8-K/A, filed  with the SEC on March 27, 2007)                                                                                                                                                                                                                                                                                                                                                                                               |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| 10.21  |   | First Amendment, dated March 21, 2007, to  Credit Agreement dated June 12, 2006 (as amended by the Amendment, the  “Amended Credit Agreement”) among the Company, as U.S. Borrower, Interlake  Acquisition Corporation Limited, a subsidiary of the Company, as Canadian  Borrower, certain subsidiaries of the Company, Cellu Paper  Holdings, Inc. , the parent corporation of the Company, JPMorgan Chase  Bank, N.A. and JPMorgan Chase Bank, N.A., Toronto Branch (incorporated by  reference to Exhibit 10.3 of the Company’s Current Report on Form 8-K/A,  filed with the SEC on March 27, 2007) |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| 10.22  |   | 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 the  Company’s Current Report on Form 8-K/A, filed with the SEC on  March 27, 2007)                                                                                                                                                                                                                                                                                                                                        |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| 10.23  |   | Loan Agreement, dated March 1, 1998, between  CityForest Corporation and City of Ladysmith, Wisconsin (incorporated by  reference to Exhibit 10.5 of the Company’s Current Report on  Form 8-K/A, filed with the SEC on March 27, 2007)                                                                                                                                                                                                                                                                                                                                                                                      |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| 10.24  |   | Guaranty, dated March 1, 1998, executed by the  Company in favor of Associated Bank, National Association (incorporated by  reference to Exhibit 10.7 of the Company’s Current Report on  Form 8-K/A, filed with the SEC on March 27, 2007)                                                                                                                                                                                                                                                                                                                                                                                  |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| 10.25  |   | Employment Agreement, dated August 6, 2007,  between David Morris and the Company (incorporated by reference to  Exhibit 10.1 of the Company’s Quarterly Report on Form 10-Q for the  quarter ended August 30, 2007)                                                                                                                                                                                                                                                                                                                                                                                                         |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| 10.26* |   | Corporate Bonus Plan, dated June 21, 2007                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| 14.1   |   | Code of Ethics (incorporated by reference to  Exhibit 14.1 of the Company’s Annual Report on Form 10-K for the  fiscal year ended February 28, 2005)                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| 21.1*  |   | List of subsidiaries of the Company                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| 31.1*  |   | Certification of CEO pursuant to Section 302 of  Sarbanes-Oxley Act of 2002                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| 31.2*  |   | Certification of CFO pursuant to Section 302 of  Sarbanes-Oxley Act of 2002                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |

 

----

* Filed herewith.

 

(c) See Financial Statements immediatelyfollowing Index to Consolidated Financial Statements and Consolidated FinancialStatement Schedule.

 

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**SIGNATURES**

 

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

 
| ** **            | **Cellu Tissue Holdings, Inc.** |
|-----------------------|--------------------------------------|
|                  |                                 |   |
|                  |                                 | By: | /s/ Russell C. Taylor |
|                  |                                 | Russell C. Taylor, President and Chief Executive  Officer |
|                  |                                 |   |
| February 3, 2009 |                                 |   |

 

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 registrantand in the capacities and on the dates indicated.

 
| /s/ Russell C. Taylor          |   | /s/ David J. Morris                |
|--------------------------------|--------|------------------------------------|
| Russell C. Taylor, President   |   | Chief Financial Officer (Principal |
| (Principal Executive Officer), |   | Financial and Accounting Officer)  |
| Director                       |   |                               |
|                           |   |                               |
| /s/ Sean Honey                 |   | /s/ David Ferguson                 |
| Chairman and Director          |   | Director                           |
|                           |   |                               |
| /s/ Scott Bell                 |   |                               |
| Director                       |   |                               |

 

65

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**FORM 10-K/A**

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

**CELLU TISSUE HOLDINGS, INC.**

 

**INDEX TO FINANCIAL STATEMENTS ANDFINANCIAL STATEMENT SCHEDULE**

 

Report of IndependentRegistered Public Accounting Firm

 

Consolidated BalanceSheets (Restated)-February 29, 2008 and February 28, 2007

 

Consolidated Statementsof Operations - for the fiscal year ended February 29, 2008 (post-merger) (Restated),for the periods from June 13, 2006 to February 28, 2007 (post-merger)(Restated), from March 1, 2006 to June 12, 2006 (pre-merger) (Restated)and for the fiscal year ended February 28, 2006 (pre-merger)

 

Consolidated Statementsof Changes in Stockholders’ Equity (Deficiency) - for the fiscal year ended February 29,2008 (post-merger) (Restated), for the periods from June 13, 2006 to February 28,2007 (post-merger) (Restated), from March 1, 2006 to June 12, 2006(pre-merger) (Restated) and for the fiscal year ended February 28, 2006(pre-merger)

 

Consolidated Statementsof Cash Flows - for the fiscal year ended February 29, 2008 (post-merger) (Restated),for the periods from June 13, 2006 to February 28, 2007 (post-merger)(Restated), from March 1, 2006 to June 12, 2006 (pre-merger) (Restated)and for the fiscal year ended February 28, 2006 (pre-merger)

 

Notes to ConsolidatedFinancial Statements (Restated)

 

Schedule II –Valuation and Qualifying Accounts ofCellu Tissue Holdings, Inc. is included in Item 15

 

All other schedules forwhich provision is made in the applicable accounting regulation of theSecurities and Exchange Commission are not required under the relatedinstructions or are inapplicable, and therefore have been omitted.

 

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Table of Contents

 

Report of Independent Registered Public AccountingFirm

 

To the Board of Directors

Cellu Tissue Holdings, Inc. and Subsidiaries

 

We have audited the accompanying consolidated balancesheets of Cellu Tissue Holdings, Inc. and Subsidiaries (the “Company”) asof February 29, 2008 and February 28, 2007, and the relatedconsolidated statements of operations, changes in stockholders’ equity(deficiency), and cash flows for the fiscal year ended February 29, 2008(post-merger), for the periods from June 13, 2006 to February 28,2007 (post-merger), from March 1, 2006 to June 12, 2006 (pre-merger)and for the fiscal year ended February 28, 2006 (pre-merger). Our auditsalso include the financial statement schedule listed in the Index at Item15(a).  These financial statements andschedule are the responsibility of the Company’s management. Our responsibilityis to express an opinion on these financial statements and schedule based onour audits.

 

We conducted our audits in accordance with thestandards of the Public Company Accounting Oversight Board (United States).Those standards require that we plan and perform the audit to obtain reasonableassurance about whether the financial statements are free of materialmisstatement. We were not engaged to perform an audit of the Company’s internalcontrol over financial reporting.  Ouraudits included consideration of internal control over financial reporting as abasis for designing audit procedures that are appropriate in the circumstances,but not for the purpose of expressing an opinion on the effectiveness of theCompany’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 bymanagement, and evaluating the overall financial statement presentation. Webelieve that our audits provide a reasonable basis for our opinion.

 

In our opinion, the financial statements referred toabove present fairly, in all material respects, the consolidated financialposition of Cellu Tissue Holdings, Inc. and Subsidiaries at February 29,2008 and February 28, 2007, and the consolidated results of theiroperations and their cash flows for the fiscal year ended February 29,2008 (post-merger),  for the periods fromJune 13, 2006 to February 28, 2007 (post-merger), from March 1,2006 to June 12, 2006 (pre-merger) and for the  fiscal year ended February 28, 2006(pre-merger) in conformity with U. S. generally accepted accountingprinciples.  Also, in our opinion, therelated financial statement schedule, when considered in relation to the basic financialstatements taken as a whole, presents fairly in all material respects theinformation set forth therein.

 

As discussed in Note 3 to the Consolidated FinancialStatements, the Company adopted Statement of Financial Accounting Standards(“SFAS”) No. 123 (Revised 2004), “Share-Based Payment” effective March 1,2006.  As discussed in Note 8 to theConsolidated Financial Statements, the Company adopted Financial AccountingStandards Board Interpretation No. 48, “Accounting for Uncertainty inIncome Taxes-an Interpretation of SFAS No. 109”, effective March 1,2007.

 

As discussed in Note 2, the consolidated financialstatements as of February 29, 2008 and February 28, 2007, and for thefiscal year ended February 29, 2008 (post-merger), for the periods from June 13,2006-February 28, 2007 (pre-merger), and from March 1, 2006 to June 12,2006 (pre-merger) have been restated.

 
|                                                                               |                                                                 /s/  Ernst & Young |
|------------------------------------------------------------------------------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| Hartford, Connecticut                                                              |                                                                                                                                                                                                                                                                                                                                                                                                                        |
| May 7, 2008, except for Note 2  as to which the date is January 28, 2009 |

 

F-2

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Table of Contents

 

Cellu Tissue Holdings, Inc. and Subsidiaries

 

Consolidated Balance Sheets

 
| ** **                                                                                                                                                       | ** ** | **February 29  2008** | ** **  | **February 28  2007** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------|-------------|----------------------------|------------|
| ** **                                                                                                                                                       | ** ** | **(Restated)**             | ** **  | **(Restated)**             | ** ** |
| **Assets**                                                                                                                                                       |       |                       |        |                       |       |
| Current assets:                                                                                                                                                  |       |                       |        |                       |       |
| Cash and cash equivalents                                                                                                                                        |       | $                          | 883,388     |                       | $          | 16,260,601 |   |
| Receivables, net of allowance of $169,811 in 2008  and $408,314 in 2007                                                                                          |       | 44,542,337                 |        | 34,140,844                 |       |
| Inventories                                                                                                                                                      |       | 33,996,439                 |        | 28,754,695                 |       |
| Prepaid expenses and other current assets                                                                                                                        |       | 3,745,989                  |        | 3,787,996                  |       |
| Income tax receivable                                                                                                                                            |       | 177,281                    |        | 329,861                    |       |
| Deferred income taxes                                                                                                                                            |       | 7,157,191                  |        | 6,498,098                  |       |
| Total current assets                                                                                                                                             |       | 90,502,625                 |        | 89,772,095                 |       |
|                                                                                                                                                             |       |                       |        |                       |       |
| Property, plant and equipment, net                                                                                                                               |       | 310,488,081                |        | 243,781,804                |       |
| Goodwill                                                                                                                                                         |       | 11,334,755                 |        | 4,364,754                  |       |
| Trademarks                                                                                                                                                       |       | 9,400,000                  |        | 7,200,000                  |       |
| Reserved cash                                                                                                                                                    |       | 1,243,956                  |        | —                     |       |
| Other assets                                                                                                                                                     |       | 247,262                    |        | 224,438                    |       |
| Total assets                                                                                                                                                     |       | $                          | 423,216,679 |                       | $          | 345,343,091 |   |
| **Liabilities and stockholders’ equity**                                                                                                                    | ** ** | ** **                 | ** **  | ** **                 | ** ** |
| Current liabilities:                                                                                                                                             |       |                       |        |                       |       |
| Revolving line of credit                                                                                                                                         |       | $                          | 9,800,000   |                       | $          | — |   |
| Accounts payable                                                                                                                                                 |       | 24,055,782                 |        | 16,523,755                 |       |
| Accrued expenses                                                                                                                                                 |       | 19,085,912                 |        | 16,298,489                 |       |
| Accrued interest                                                                                                                                                 |       | 8,253,915                  |        | 7,226,753                  |       |
| Other current liabilities                                                                                                                                        |       | 15,000,000                 |        | —                     |       |
| Current portion of long-term debt                                                                                                                                |       | 760,000                    |        | —                     |       |
| Total current liabilities                                                                                                                                        |       | 76,955,609                 |        | 40,048,997                 |       |
|                                                                                                                                                             |       |                       |        |                       |       |
| Long-term debt, less current portion                                                                                                                             |       | 198,086,944                |        | 160,355,507                |       |
| Deferred income taxes                                                                                                                                            |       | 81,940,082                 |        | 71,006,838                 |       |
| Other liabilities                                                                                                                                                |       | 20,148,590                 |        | 35,179,252                 |       |
| Stockholders’ equity:                                                                                                                                       |       |                       |        |                       |       |
| Common stock, Class A, $.01 par value, 1,000  shares authorized, 100 shares issued and outstanding as of February 29,  2008 and February 28, 2007 |       | 1                          |        | 1                          |       |
| Capital in excess of par value                                                                                                                                   |       | 47,035,214                 |        | 46,259,101                 |       |
| Accumulated deficit                                                                                                                                              |       | (2,862,117                 | )           | (6,563,873                 | )          |
| Accumulated other comprehensive income (loss)                                                                                                                    |       | 1,912,356                  |        | (942,732                   | )          |
| Total stockholders’ equity                                                                                                                                  |       | 46,085,454                 |        | 38,752,497                 |       |
| Total liabilities and stockholders’ equity                                                                                                                  |       | $                          | 423,216,679 |                       | $          | 345,343,091 |   |

 

*See accompanying notes to consolidated financialstatements.*

 

F-3

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Table of Contents

 

Cellu Tissue Holdings, Inc. and Subsidiaries

Consolidated Statements of Operations

 
| ** **                                       | ** ** | **Fiscal Year Ended  February 29, 2008** | ** **  | **For the Period  June 13, 2006-  February 28, 2007** | ** **       | ** **  | **For the Period  March 1, 2006-  June 12, 2006** | ** ** | **Fiscal Year Ended  February 28, 2006** | ** ** |
|--------------------------------------------------|------------|--------------------------------------------------------------|-------------|-------------------------------------------------------------------------------------|------------------|-------------|---------------------------------------------------------------------------------|------------|--------------------------------------------------------------|------------|
| ** **                                       | ** ** | **(Restated)**                                               | ** **  | **(Restated)**                                                                      | ** **       | ** **  | **(Restated)**                                                                  | ** ** | ** **                                                   | ** ** |
| ** **                                       | ** ** | **(Post-Merger)**                                            | ** **  | ** **                                                                          | **(Pre-Merger)** | ** **  |
| Net sales                                        |       | $                                                            | 443,081,130 |                                                                                | $                | 247,411,860 |                                                                            |       | $                                                            | 96,743,812 |   | $ | 337,363,282 |   |
| Cost of goods sold                               |       | 401,352,016                                                  |        | 234,897,497                                                                         |             |        | 88,555,692                                                                      |       | 309,641,564                                                  |       |
| Gross profit                                     |       | 41,729,114                                                   |        | 12,514,363                                                                          |             |        | 8,188,120                                                                       |       | 27,721,718                                                   |       |
| Selling, general and administrative expenses     |       | 18,661,904                                                   |        | 7,207,057                                                                           |             |        | 4,661,285                                                                       |       | 12,872,052                                                   |       |
| Restructuring costs                              |       | —                                                       |        | 240,218                                                                             |             |        | —                                                                          |       | 1,050,363                                                    |       |
| Merger-related transaction costs                 |       | —                                                       |        | 142,079                                                                             |             |        | 5,933,265                                                                       |       | 2,284,475                                                    |       |
| Terminated acquisition-related transaction costs |       | 2,078,212                                                    |        | —                                                                              |             |        | —                                                                          |       | —                                                       |       |
| Stock and related compensation expense           |       | 550,804                                                      |        | 3,328,834                                                                           |             |        | —                                                                          |       | —                                                       |       |
| Vesting of stock option/restricted stock grants  |       | 808,111                                                      |        | 497,105                                                                             |             |        | 923,580                                                                         |       | 81,787                                                       |       |
| Impairment of property, plant and equipment      |       | —                                                       |        | 488,274                                                                             |             |        | —                                                                          |       | —                                                       |       |
| Income (loss) from operations                    |       | 19,630,083                                                   |        | 610,796                                                                             |             |        | (3,330,010                                                                      | )          | 11,433,041                                                   |       |
| Interest expense, net                            |       | (19,870,029                                                  | )           | (11,468,975                                                                         | )                |        | (4,896,355                                                                      | )          | (17,076,757                                                  | )          |
| Foreign currency (loss) gain                     |       | (100,335                                                     | )           | 4,802                                                                               |             |        | (133,598                                                                        | )          | (503,262                                                     | )          |
| Other income                                     |       | 132,623                                                      |        | 14,527                                                                              |             |        | 27,049                                                                          |       | 2,492                                                        |       |
| Loss before income tax benefit                   |       | (207,658                                                     | )           | (10,838,850                                                                         | )                |        | (8,332,914                                                                      | )          | (6,144,486                                                   | )          |
| Income tax benefit                               |       | (3,909,414                                                   | )           | (4,179,244                                                                          | )                |        | (1,893,683                                                                      | )          | (3,575,132                                                   | )          |
|                                             |       |                                                         |        |                                                                                |             |        |                                                                            |       |                                                         |       |
| Net income (loss)                                |       | $                                                            | 3,701,756   |                                                                                | $                | (6,659,606  | )                                                                               |       | $                                                            | (6,439,231 | ) | $ | (2,569,354 | ) |

 

*See accompanying notes to consolidated financialstatements.*

 

F-4

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Table of Contents

 

Cellu Tissue Holdings, Inc.and Subsidiaries

 

**Consolidated Statements of Changes inStockholders’ Equity (Deficiency)**

 
| ** **                                     | ** ** | **Class A  Common  Stock** | ** ** | **Capital in  Excess of Par  Value** | ** ** | **Accumulated  Earnings  (Deficit)** | ** ** | **Accumulated Other  Comprehensive  Income (Loss)** | ** ** | **Total Stockholders’  Equity (Deficiency)** | ** ** |
|------------------------------------------------|------------|---------------------------------|------------|-----------------------------------------------------|------------|--------------------------------------|------------|---------------------------------------------------------------|------------|-------------------------------------------------------------|------------|
| ** **                                     | ** ** | ** **                      | ** ** | ** **                                          | ** ** | ** **                           | ** ** | ** **                                                    | ** ** | ** **                                                  | ** ** |
| Balance, February 28, 2005                     |       | $                               | 1          |                                                | $          | 533,551                              |       | $                                                             | (9,056,405 | )                                                           | $          | 937,063 |   | $ | (7,585,790 | ) |
| Accelerated vesting-stock options              | ** ** | ** **                      |       | 81,787                                              |       |                                 |       |                                                          |       | 81,787                                                      |       |
| Net loss                                       |       |                            |       |                                                |       | (2,569,354                           | )          |                                                          |       | (2,569,354                                                  | )          |
| Foreign currency translation                   |       |                            |       |                                                |       |                                 |       | 3,167,797                                                     |       | 3,167,797                                                   |       |
| Comprehensive income                           |       |                            |       |                                                |       |                                 |       |                                                          |       | 598,443                                                     |       |
| Balance, February 28, 2006                     |       | 1                               |       | 615,338                                             |       | (11,625,759                          | )          | 4,104,860                                                     |       | (6,905,560                                                  | )          |
|                                           |       |                            |       |                                                |       |                                 |       |                                                          |       |                                                        |       |
| Net loss 3/1/06-6/12/06 (Restated)             | ** ** | ** **                      |       |                                                |       | (6,439,231                           | )          |                                                          |       | (6,439,231                                                  | )          |
| Foreign currency translation (Restated)        | ** ** | ** **                      |       |                                                |       |                                 |       | 586,186                                                       |       | 586,186                                                     |       |
| Comprehensive loss 3/1/06-6/12/06 (Restated)   | ** ** | ** **                      |       |                                                |       |                                 |       |                                                          |       | (5,853,045                                                  | )          |
| Vesting-stock awards 3/1/06-6/12/06            | ** ** | ** **                      |       | 52,658                                              |       |                                 |       |                                                          |       | 52,658                                                      |       |
| Accelerated vesting-stock awards               | ** ** | ** **                      |       | 870,922                                             |       |                                 |       |                                                          |       | 870,922                                                     |       |
| Recapitalization-June 12, 2006 (Restated)      | ** ** | ** **                      |       | 44,223,078                                          |       | 18,064,990                           |       | (4,691,046                                                    | )          | 57,597,022                                                  |       |
| Balance, June 12, 2006, after recapitalization |       | 1                               |       | 45,761,996                                          |       | —                               |       | —                                                        |       | 45,761,997                                                  |       |
| Vesting-stock awards 6/13/06-/28/07            | ** ** | ** **                      |       | 497,105                                             |       |                                 |       |                                                          |       | 497,105                                                     |       |
| Net loss 6/13/06-2/28/07 (Restated)            | ** ** | ** **                      |       |                                                |       | (6,659,606                           | )          |                                                          |       | (6,659,606                                                  | )          |
| Foreign currency translation (Restated)        | ** ** | ** **                      |       |                                                |       | 95,733                               |       | (942,732                                                      | )          | (846,999                                                    | )          |
| Comprehensive loss 6/13/06-2/28/07 (Restated)  |       |                            |       |                                                |       |                                 |       |                                                          |       | (7,506,605                                                  | )          |
| Balance, February 28, 2007 (Restated)          |       | 1                               |       | 46,259,101                                          |       | (6,563,873                           | )          | (942,732                                                      | )          | 38,752,497                                                  |       |
| Vesting-stock awards                           | ** ** | ** **                      |       | 776,113                                             |       |                                 |       |                                                          |       | 776,113                                                     |       |
| Net income (Restated)                          | ** ** | ** **                      |       |                                                |       | 3,701,756                            |       |                                                          |       | 3,701,756                                                   |       |
| Foreign currency translation (Restated)        | ** ** | ** **                      |       |                                                |       |                                 |       | 2,855,088                                                     |       | 2,855,088                                                   |       |
| Comprehensive income (Restated)                |       |                            |       |                                                |       |                                 |       |                                                          |       | 6,556,844                                                   |       |
| Balance, February 29, 2008 (Restated)          |       | $                               | 1          |                                                | $          | 47,035,214                           |       | $                                                             | (2,862,117 | )                                                           | $          | 1,912,356 |   | $ | 46,085,454 |   |

 

*See accompanying notes to consolidated financialstatements.*

 

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Table of Contents

 

Cellu Tissue Holdings, Inc.and Subsidiaries

Consolidated Statements of Cash Flows

 
| ** **                                                                                          | ** ** | **Fiscal Year Ended  February 29, 2008** | ** ** | **For the Period  June 13, 2006-  February 28, 2007** | ** **       | ** ** | **For the Period  March 1, 2006-  June 12, 2006** | ** ** | **Fiscal Year Ended  February 28, 2006** | ** ** |
|-----------------------------------------------------------------------------------------------------|------------|--------------------------------------------------------------|------------|-------------------------------------------------------------------------------------|------------------|------------|---------------------------------------------------------------------------------|------------|--------------------------------------------------------------|------------|
| ** **                                                                                          | ** ** | **(Restated)**                                               | ** ** | **(Restated)**                                                                      | ** **       | ** ** | **(Restated)**                                                                  | ** ** | ** **                                                   | ** ** |
| ** **                                                                                          | ** ** | **(Post-Merger)**                                            | ** ** | ** **                                                                          | **(Pre-Merger)** | ** ** |
| **Cash flows from operating activities**                                                            |       |                                                         | ** ** | ** **                                                                          | ** **       | ** ** | ** **                                                                      | ** ** | ** **                                                   | ** ** |
| Net income (loss)                                                                                   |       | $                                                            | 3,701,756  |                                                                                | $                | (6,659,606 | )                                                                               |       | $                                                            | (6,439,231 | ) | $ | (2,569,354 | ) |
| Adjustments to reconcile net income (loss) to net  cash provided by (used in) operating activities: |       |                                                         |       |                                                                                |             |       |                                                                            |       |                                                         |       |
| Noncash inventory charge                                                                            |       | —                                                       |       | 909,264                                                                             |             |       | —                                                                          |       | —                                                       |       |
| Amortization of debt issuance costs                                                                 |       | —                                                       |       | —                                                                              |             |       | 405,568                                                                         |       | 1,423,388                                                    |       |
| Derivative gain                                                                                     |       | (170,564                                                     | )          | (78,295                                                                             | )                |       |                                                                            |       |                                                         |       |
| Depreciation                                                                                        |       | 24,146,137                                                   |       | 16,758,505                                                                          |             |       | 4,226,643                                                                       |       | 14,854,021                                                   |       |
| Deferred income taxes                                                                               |       | (6,964,358                                                   | )          | (6,891,107                                                                          | )                |       | (396,024                                                                        | )          | (2,955,381                                                   | )          |
| Accretion of debt discount                                                                          |       | 616,437                                                      |       | 380,560                                                                             |             |       | 85,471                                                                          |       | 299,970                                                      |       |
| Stock-based compensation                                                                            |       | 808,111                                                      |       | 497,105                                                                             |             |       | 923,580                                                                         |       | 81,787                                                       |       |
| Impairment of fixed assets                                                                          |       | —                                                       |       | 488,274                                                                             |             |       | —                                                                          |       | —                                                       |       |
| Gain on disposal of equipment                                                                       |       | —                                                       |       | —                                                                              |             |       | —                                                                          |       | (9,005                                                       | )          |
| Changes in operating assets and liabilities:                                                        |       |                                                         |       |                                                                                |             |       |                                                                            |       |                                                         |       |
| Receivables                                                                                         |       | (4,829,995                                                   | )          | 2,908,202                                                                           |             |       | (1,994,674                                                                      | )          | 732,294                                                      |       |
| Inventories                                                                                         |       | (3,696,311                                                   | )          | 1,373,920                                                                           |             |       | (2,208,757                                                                      | )          | (3,318,880                                                   | )          |
| Prepaid expenses and other current assets                                                           |       | 1,226,090                                                    |       | 1,618,316                                                                           |             |       | (683,329                                                                        | )          | 427,048                                                      |       |
| Other assets                                                                                        |       | 552,555                                                      |       | (48,517                                                                             | )                |       | (5,328                                                                          | )          | (11,470                                                      | )          |
| Income tax receivable                                                                               |       | 137,153                                                      |       | —                                                                              |             |       | —                                                                          |       | (362,122                                                     | )          |
| Accounts payable, accrued expenses, accrued interest  and other liabilities                         |       | 4,268,868                                                    |       | (1,471,604                                                                          | )                |       | (298,327                                                                        | )          | 7,470                                                        |       |
| Total adjustments                                                                                   |       | 16,094,123                                                   |       | 16,444,623                                                                          |             |       | 54,823                                                                          |       | 11,169,120                                                   |       |
| Net cash provided by (used in) operating activities                                                 |       | 19,795,879                                                   |       | 9,785,017                                                                           |             |       | (6,384,408                                                                      | )          | 8,599,766                                                    |       |
|                                                                                                     |            |                                                              |            |                                                                                     |                  |            |                                                                                 |            |                                                              |            |  |  |  |  |

 

F-6

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Table of Contents

 

Cellu Tissue Holdings, Inc. and Subsidiaries

 

Consolidated Statements of Cash Flows (continued)

 
| ** **                                               | ** ** | **Fiscal Year Ended  February 29, 2008** | ** ** | **For the Period  June 13, 2006-  February 28, 2007** | ** **       | ** ** | **For the Period  March 1, 2006-  June 12, 2006** | ** ** | **Fiscal Year Ended  February 28, 2006** | ** ** |
|----------------------------------------------------------|------------|--------------------------------------------------------------|------------|-------------------------------------------------------------------------------------|------------------|------------|---------------------------------------------------------------------------------|------------|--------------------------------------------------------------|------------|
| ** **                                               | ** ** | **(Restated)**                                               | ** ** | **(Restated)**                                                                      | ** **       | ** ** | **(Restated)**                                                                  | ** ** | ** **                                                   | ** ** |
| ** **                                               | ** ** | **(Post-Merger)**                                            | ** ** | ** **                                                                          | **(Pre-Merger)** | ** ** |
| **Cash flows from investing activities**                 |       |                                                         |       |                                                                                |             |       |                                                                            |       |                                                         |       |
| Cash paid for acquisition, net of cash received          |       | (43,663,270                                                  | )          | —                                                                              |             |       | —                                                                          |       | —                                                       |       |
| Capital expenditures                                     |       | (20,477,426                                                  | )          | (7,677,141                                                                          | )                |       | (1,937,610                                                                      | )          | (13,050,166                                                  | )          |
| Net cash used in investing activities                    |       | (64,140,696                                                  | )          | (7,677,141                                                                          | )                |       | (1,937,610                                                                      | )          | (13,050,166                                                  | )          |
| **Cash flows from financing activities**                 | ** ** | ** **                                                   | ** ** | ** **                                                                          | ** **       | ** ** | ** **                                                                      | ** ** | ** **                                                   | ** ** |
| Equity investment by Weston Presidio/Other  Stockholders |       | (32,000                                                      | )          | 45,761,997                                                                          |             |       | —                                                                          |       | —                                                       |       |
| Merger consideration paid to former shareholders         |       | —                                                       |       | (45,761,997                                                                         | )                |       | —                                                                          |       | —                                                       |       |
| Payments of long-term debt                               |       | (575,000                                                     | )          | —                                                                              |             |       | (290,000                                                                        | )          | (280,000                                                     | )          |
| Borrowings on revolving credit facility                  |       | 69,600,000                                                   |       | —                                                                              |             |       | —                                                                          |       | —                                                       |       |
| Payments on revolving credit facility                    |       | (59,800,000                                                  | )          | —                                                                              |             |       | —                                                                          |       | —                                                       |       |
| Proceeds from note offering                              |       | 20,000,000                                                   |       | —                                                                              |             |       | —                                                                          |       | —                                                       |       |
| Debt refinancing costs                                   |       | —                                                       |       | —                                                                              |             |       | —                                                                          |       | (1,653                                                       | )          |
| Net cash provided by (used in) financing activities      |       | 29,193,000                                                   |       | —                                                                              |             |       | (290,000                                                                        | )          | (281,653                                                     | )          |
| Effect of foreign currency                               |       | (225,396                                                     | )          | (266,119                                                                            | )                |       | 206,800                                                                         |       | 597,086                                                      |       |
| Net (decrease) increase in cash and cash equivalents     |       | (15,377,213                                                  | )          | 1,841,757                                                                           |             |       | (8,405,218                                                                      | )          | (4,134,967                                                   | )          |
| Cash and cash equivalents at beginning of period         |       | 16,260,601                                                   |       | 14,418,844                                                                          |             |       | 22,824,062                                                                      |       | 26,959,029                                                   |       |
| Cash and cash equivalents at end of period               |       | $                                                            | 883,388    |                                                                                | $                | 16,260,601 |                                                                            |       | $                                                            | 14,418,844 |   | $ | 22,824,062 |   |
| **Supplemental disclosure of cash flow information**     | ** ** | ** **                                                   | ** ** | ** **                                                                          |             |       |                                                                            | ** ** | ** **                                                   | ** ** |
| Cash paid during the year for Interest                   |       | $                                                            | 18,397,690 |                                                                                | $                | 8,000,787  |                                                                            |       | $                                                            | 8,000,000  |   | $ | 16,128,129 |   |
| Cash paid during the year for Income taxes               |       | $                                                            | 2,828,444  |                                                                                | $                | 248,476    |                                                                            |       | $                                                            | 20,804     |   | $ | 266,366 |   |

 

F-7

----

Tableof Contents

 

Cellu TissueHoldings, Inc. and Subsidiaries

 

Notes toConsolidated Financial Statements

 

February 29, 2008

 

**1.Organization and Nature of Operations**

 

The consolidatedfinancial statements include the accounts of Cellu Tissue Holdings, Inc. (the“Company”) and its wholly owned subsidiaries. The Company, a wholly ownedsubsidiary of Cellu Paper Holdings, Inc. (the “Parent”), operates facilities inthe United States and Canada. The Company manufactures specialty tissue paperfor use in personal care products such as baby and adult diapers, incontinentproducts, surgical waddings and sanitary napkins and for use in fast foodwrapping, gift wrapping and food service products. The Parent conducts nooperating activities.

 

On June 12, 2006,the Parent consummated an Agreement and Plan of Merger with Cellu ParentCorporation (“Cellu Parent”), a corporation organized and controlled by WestonPresidio V, L.P. (“Weston Presidio”), and Cellu Acquisition Corporation(“Merger Sub”), a wholly owned subsidiary of Cellu Parent and a newly formedcorporation indirectly controlled by Weston Presidio.  Pursuant to the agreement, on June 12, 2006, MergerSub was merged with and into Parent, with the Parent surviving (the“Merger”).  Accordingly, the operatingresults and cash flows for the prior year are presented in the accompanyingfinancial statements on a pre-merger (period from March 1, 2006 to June 12,2006) and post-merger (period from June 13, 2006 to February 28, 2007)basis.   The current year operatingresults and cash flows are post-merger.

 

The Companyaccounted for the merger with Cellu Parent (the “Merger”), a corporation ownedand controlled by Weston Presidio V, L.P. (“Weston Presidio”) as a purchase inaccordance with the provisions of Statement of Financial Accounting StandardsNo. 141 (“SFAS 141”), *Business Combinations*,which resulted in a new valuation for the assets and liabilities of the Companybased upon fair values as of the date of the Merger.  As allowed under SEC Staff AccountingBulletin No. 54, *Push Down Basis of Accounting Required inCertain Limited Circumstances*(“Push Down Accounting”), the Companyhas reflected all applicable purchase accounting adjustments in the Company’sconsolidated financial statements for all periods subsequent to the Mergerdate.  Push Down Accounting requires theCompany to establish a new basis for its assets and liabilities based on theamount paid for its equity at the close of business on June 12, 2006.  Accordingly, Cellu Parent’s ownership basisis reflected in the Company’s consolidated financial statements beginning uponcompletion of the Merger.  In order toapply Push Down Accounting, Cellu Parent’s purchase price of $280.1 million,including assumption of $162.0 million in aggregate principal amount of theCompany’s outstanding 9.75% senior secured notes (the “Original Notes”) and $39.0million in operating liabilities and an additional $35.0 million of contingentconsideration was allocated to the assets and liabilities based on their fairvalues.  With respect to the contingentconsideration, the Company has the option to settle contingent considerationdue to certain members of management in preferred stock of Cellu Parent in lieuof cash if such individuals are no longer employed by the Company at the timeof payout.  It these individuals are notemployed at the time of the payout, it is at the Company’s discretion if theindividual receives cash or stock.  Asnoted above, the total consideration includes an

 

F-8

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Tableof Contents

 

Cellu Tissue Holdings, Inc. and Subsidiaries

 

Notes to Consolidated Financial Statements (continued)

 

**1. Organization and Nature of Operations(continued)**

 

adjustment for up to an additional $35.0 million in contingent earnoutconsideration based upon the achievement of certain financial targets.  If any portion of the earned contingentpayments is unable to be made by the Company, then Weston Presidio has agreedto provide the necessary funds to former holders of the Parent’s capital stock,options and warrants through an equity investment in the Parent orotherwise.  In accordance with SFAS 141,the $35.0 million has been recognized as a liability, of which $15.0 million isexpected to be paid in fiscal year 2009 and is recorded in other currentliabilities as of February 29, 2008. The remaining $20.0 million is recorded in other liabilities as of February 29,2008. The Merger has resulted in the recognition of goodwill, which has beenallocated to the Tissue and Machine-glazed paper segments based on the relativefair values of the net assets acquired. Goodwill reflects the future earnings and cash flow potential of theacquired business in excess of fair values that are assigned to all otheridentifiable assets and liabilities.

 

The Company has allocated the purchase price based on its estimates ofthe fair value of acquired assets and liabilities as follows:

 
| ** **                    | ** ** | **Purchase price allocated to:** | ** ** |
|-------------------------------|------------|-------------------------------------------------|------------|
| ** **                    | ** ** | **(Restated-see Note 2)**             | ** ** |
| Current assets           |       | $                                               | 85,975,953 |   |
| Property, plant and equipment |       | 253,873,052                                     |       |
| Trademarks                    |       | 7,200,000                                       |       |
| Goodwill                      |       | 4,364,700                                       |       |
| Current Liabilities           |       | (39,276,861                                     | )          |
| Long-term debt                |       | (159,975,000                                    | )          |
| Contingent consideration      |       | (35,000,000                                     | )          |
| Deferred income taxes         |       | (71,399,847                                     | )          |
| Total                         |       | $                                               | 45,761,997 |   |

 

In conjunction with the valuation of the Company’sproperty, plant and equipment, the lives over which the assets are depreciatedwere re-evaluated and the resulting estimated useful lives of the principalclassifications of depreciable assets are as follows:

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

 

F-9

----

Table of Contents

 

Cellu Tissue Holdings, Inc. and Subsidiaries

 

Notes to Consolidated Financial Statements (continued)

 

**2. Restatement of Financial Statements**

 

The Company has restated herein itsconsolidated financial statements as of February 29, 2008 and February 28,2007 and for the fiscal year ended February 29, 2008, the period from June 13,2006 through February 28, 2007 (post-merger), the period from March 1,2006 through June 12, 2006 (pre-merger) and its unaudited quarterlyfinancial data for each of the interim periods of fiscal 2008 and fiscal 2007. Thisrestatement corrects errors in (i) accounting for deferred income taxes inconnection with purchase accounting applied in fiscal 2007, (ii) classificationof borrowings and repayments on the revolving credit facility in the statementof cash flows, (iii) classification of the equity investment by WestonPresidio/Other Stockholders in the period June 13, 2006-February 28, 2007 inthe statement of cash flows in said period, and certain other adjustments thatwere initially deemed to be not material by management, including (a) classificationof shipping and handling costs in accordance with EITF 00-10, *Accounting for Shipping and Handling Fees and Costs* (EITF00-10), (b) accounting for derivative instruments, (c) accounting for foreign exchangegains and losses in fiscal 2008 and 2007, and (d) certain other miscellaneousadjustments. The tax effect of the above items has also been recorded. Therestatement does not have a negative impact on the Company’s compliance withthe covenants under any of its current debt agreements (see Note 7 —Long-Term Debt to our accompanying consolidated financial statements).

 

These adjustments arediscussed in more detail below. The tables that follow the discussion detailthe impact on the Company’s consolidated balance sheets, statements ofoperations, statements of changes in stockholders’ equity (deficiency), andstatements of cash flows.

 

***Deferred income taxes associated with purchase accounting***

 

The Company erroneously recorded a deferredtax asset related to the $35.0 million liability for contingent consideration recordedin connection with the Merger. This error has resulted in an understatement ofthe amounts allocated to long-lived assets in connection with the merger.  The Company has corrected this error by (i) reducingthe deferred tax asset amount recorded in purchase accounting for thecontingent consideration by approximately $14.0 million; (ii) increasingthe amount allocated to acquired property, plant and equipment and trademarksby approximately $15.6 million and $0.6 million, respectively; (iii) increasingdeferred tax liabilities associated with the increased allocation of  purchase price to property, plant andequipment by approximately $6.6 million; and (iv) recognizing goodwill ofapproximately $4.4 million as a result of these adjustments. (See Note 1,3 and 8).

 

The increase in property, plant and equipmentresulted in increased depreciation expense of approximately $1.0 million and$0.6 million for the fiscal year 2008 and the period from June 13, 2006through February 28, 2007, respectively (See Note 1 and 6)

 

***Borrowings and repayments on revolving credit facility***

*** ***

The Company has consistently recorded borrowings and repayments on itsrevolving credit facility as a net amount in the statement of cash flows, whichhas been determined to be inconsistent with Statement of Financial AccountingStandards No.95, Statement of Cash Flows. The Company has corrected this errorby showing borrowings and repayments on a gross basis.

 

***Equity Investment by WestonPresidio***

 

In connection with the presentation of thecash flows related to the Merger, the Company has corrected the classificationof the amount reflected as equity investment by Weston Presidio and otherstockholders from cash flows from investing activities to cash flows fromfinancing activities.

 

***Shipping and handling fees and costs***

 

The Company has consistently recorded outboundshipping and handling costs as a reduction of sales, which is inconsistent withthe accounting in accordance with EITF 00-10. The Company

F-10

----

Table of Contents

 

Cellu Tissue Holdings, Inc. and Subsidiaries

 

Notes to Consolidated Financial Statements (continued)

 

**2. Restatement of Financial Statements (continued)**

 

has corrected this error by reclassifying thesecosts to cost of goods sold from net sales. The outbound costs were $12.1 million, $6.2 million, $2.5 million and$8.5 million for fiscal 2008,the period from June 13,2006 through February 28, 2007, the period from March 1, 2006 throughJune 12, 2006, and fiscal year 2006, respectively (See Note 3)

 

***Foreign exchange gains and losses***

 

The Company incorrectly recorded the remeasurementof an intercompany loan account with its foreign subsidiary through accumulatedother comprehensive income.  Inaccordance with FASB Statement No. 52*,**Foreign Currency Translation,*theremeasurement of the portion of the loan functioning as a short-term settlementaccount and not deemed to be of a long term investment nature should have beenrecorded to earnings.  The Company hascorrected this error by increasing (decreasing) foreign currency (loss) gainand decreasing (increasing) accumulated other comprehensive income.  The correction resulted in a decrease toforeign currency loss of approximately $0.6 million for fiscal 2008, a decreaseto foreign currency gain of approximately $0.4 million for the period from June 13,2006 through February 28, 2007, and a decrease to foreign currency loss ofapproximately $0.2 million for the period from March 1, 2006 through June 12,2006 (See Note 3).

 

***Derivatives***

 

The Company’s documentation relating to derivativeinstruments entered into in fiscal 2007 and 2008 did not meet the requirementsof SFAS 133 for hedge accounting.  The Companyhas corrected this error by reversing the amounts relating to themark-to-market adjustment that were originally recorded in accumulated othercomprehensive income (loss), with the offsetting amount recorded to cost ofgoods sold in each corresponding period. The correction resulted in a decreaseto cost of goods sold of $0.2 million and $0.1 million for the fiscal year2008 and the period from June 13, 2006 through February 28, 2007,respectively (See Note 3).

 

***Other miscellaneous adjustments***

 

The Company has also included in theappropriate periods in its restated consolidated financial statements othermiscellaneous adjustments the effect of which were initially deemed to be notmaterial by management, either individually or in the aggregate.  These adjustments primarily relate tovacation and freight accruals in the fourth quarter of fiscal 2007 thatreversed in the first quarter of fiscal 2008.  The net impact of correcting these items increased net income byapproximately $0.1 million for fiscal 2007 and decreased net income byapproximately $0.1 million for fiscal 2008. (See Note 5)

 

F-11

----

Tableof Contents

 

Cellu Tissue Holdings, Inc. and Subsidiaries

 

Notes to Consolidated Financial Statements (continued)

 

**2. Restatement of Financial Statements (continued)**

 

**CONSOLIDATED BALANCE SHEETS**

 
| ** **                                                              | ** ** | **As of February 29 2008** | ** **  | **As of February 28 2007** | ** ** |
|-------------------------------------------------------------------------|------------|------------------------------------------------|-------------|------------------------------------------------|------------|
| ** **                                                              | ** ** | **As Previously  Reported**               | ** **  | **Adjustments**                                | ** ** | **As Restated** | ** ** | **As Previously  Reported** | ** ** | **Adjustments** | ** ** | **As Restated** | ** ** |
|                                                                    |       |                                           |        |                                           |       |   |   |   |   |   |   |   |   |
| Assets                                                                  |       |                                           |        |                                           |       |   |   |   |   |   |   |   |   |
|                                                                    |       |                                           |        |                                           |       |   |   |   |   |   |   |   |   |
| Current assets:                                                         |       |                                           |        |                                           |       |   |   |   |   |   |   |   |   |
|                                                                    |       |                                           |        |                                           |       |   |   |   |   |   |   |   |   |
| Cash and cash equivalents                                               |       | $                                              | 883,388     |                                           |       |   | $ | 883,388 |   | $ | 16,260,601 |   |   |   | $ | 16,260,601 |   |
|                                                                    |       |                                           |        |                                           |       |   |   |   |   |   |   |   |   |
| Receivables, net of allowance of $169,811 in 2008  and $408,314 in 2007 |       | 44,542,337                                     |        |                                           |       | 44,542,337 |   | 34,140,844 |   |   |   | 34,140,844 |   |
|                                                                    |       |                                           |        |                                           |       |   |   |   |   |   |   |   |   |
| Inventories                                                             |       | 33,996,439                                     |        |                                           |       | 33,996,439 |   | 28,715,495 |   | 39,200 |   | 28,754,695 |   |
|                                                                    |       |                                           |        |                                           |       |   |   |   |   |   |   |   |   |
| Prepaid expenses and other current assets                               |       | 3,745,989                                      |        |                                           |       | 3,745,989 |   | 3,697,328 |   | 90,668 |   | 3,787,996 |   |
|                                                                    |       |                                           |        |                                           |       |   |   |   |   |   |   |   |   |
| Income tax receivable                                                   |       | 177,281                                        |        |                                           |       | 177,281 |   | 329,861 |   |   |   | 329,861 |   |
|                                                                    |       |                                           |        |                                           |       |   |   |   |   |   |   |   |   |
| Deferred income taxes                                                   |       | 7,157,191                                      |        |                                           |       | 7,157,191 |   | 6,498,098 |   |   |   | 6,498,098 |   |
|                                                                    |       |                                           |        |                                           |       |   |   |   |   |   |   |   |   |
| Total current assets                                                    |       | 90,502,625                                     |        |                                           |       | 90,502,625 |   | 89,642,227 |   | 129,868 |   | 89,772,095 |   |
|                                                                    |       |                                           |        |                                           |       |   |   |   |   |   |   |   |   |
| Property, plant and equipment, net                                      |       | 296,597,888                                    |        | 13,890,193                                     |       | 310,488,081 |   | 228,851,765 |   | 14,930,039 |   | 243,781,804 |   |
|                                                                    |       |                                           |        |                                           |       |   |   |   |   |   |   |   |   |
| Goodwill                                                                |       | 6,970,001                                      |        | 4,364,754                                      |       | 11,334,755 |   |   |   | 4,364,754 |   | 4,364,754 |   |
|                                                                    |       |                                           |        |                                           |       |   |   |   |   |   |   |   |   |
| Trademarks                                                              |       | 8,750,314                                      |        | 649,686                                        |       | 9,400,000 |   | 6,550,314 |   | 649,686 |   | 7,200,000 |   |
|                                                                    |       |                                           |        |                                           |       |   |   |   |   |   |   |   |   |
| Reserved cash                                                           |       | 1,243,956                                      |        |                                           |       | 1,243,956 |   |   |   |   |   |   |   |
|                                                                    |       |                                           |        |                                           |       |   |   |   |   |   |   |   |   |
| Other assets                                                            |       | 247,262                                        |        |                                           |       | 247,262 |   | 224,438 |   |   |   | 224,438 |   |
|                                                                    |       |                                           |        |                                           |       |   |   |   |   |   |   |   |   |
| Total assets                                                            |       | $                                              | 404,312,046 |                                           | $          | 18,904,633 |   | $ | 423,216,679 |   | $ | 325,268,744 |   | $ | 20,074,347 |   | $ | 345,343,091 |   |
|                                                                         |            |                                                |             |                                                |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

F-12

----

Tableof Contents

 

Cellu Tissue Holdings, Inc. and Subsidiaries

 

Notes to Consolidated Financial Statements (continued)

 

**2. Restatement of Financial Statements (continued)**

** **

**CONSOLIDATED BALANCE SHEETS**

 
| ** ** | ** ** | **As of February 29 2008** | ** ** | **As of February 28 2007** | ** ** |
|------------|------------|------------------------------------------------|------------|------------------------------------------------|------------|
| ** ** | ** ** | **As Previously  Reported**               | ** ** | **Adjustments**                                | ** ** | **As Restated** | ** ** | **As Previously  Reported** | ** ** | **Adjustments** | ** ** | **As Restated** | ** ** |
|            |            |                                                |            |                                                |            |  |  |  |  |  |  |  |  |

 
| Liabilities and stockholders’ equity                                                                                                                        | ** ** | ** **  | ** **  | ** ** | ** ** | ** **  | ** ** | ** **  | ** **  | ** ** | ** ** | ** **  | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------|-------------|------------|------------|-------------|------------|-------------|-------------|------------|------------|-------------|------------|
|                                                                                                                                                             | ** ** | ** **  | ** **  | ** ** | ** ** | ** **  | ** ** | ** **  | ** **  | ** ** | ** ** | ** **  | ** ** |
| Current liabilities:                                                                                                                                             | ** ** | ** **  | ** **  | ** ** | ** ** | ** **  | ** ** | ** **  |        |       | ** ** | ** **  | ** ** |
|                                                                                                                                                             | ** ** | ** **  | ** **  | ** ** | ** ** | ** **  | ** ** | ** **  |        |       | ** ** | ** **  | ** ** |
| Revolving line of credit                                                                                                                                         |       | $           | 9,800,000   |       | $          | —      |       | $           | 9,800,000   |       | $          | —      |       | $ | — |   | $ | — |   |
|                                                                                                                                                             |       |        |        |       |       |        |       |        |        |       |       |        |       |
| Accounts payable                                                                                                                                                 |       | 24,055,782  |        |       |       | 24,055,782  |       | 16,523,755  |        |       |       | 16,523,755  |       |
|                                                                                                                                                             |       |        |        |       |       |        |       |        |        |       |       |        |       |
| Accrued expenses                                                                                                                                                 |       | 18,860,526  |        | 225,386    |       | 19,085,912  |       | 16,315,163  |        | (16,674    | )          | 16,298,489  |       |
|                                                                                                                                                             |       |        |        |       |       |        |       |        |        |       |       |        |       |
| Accrued interest                                                                                                                                                 |       | 8,253,915   |        |       |       | 8,253,915   |       | 7,226,753   |        |       |       | 7,226,753   |       |
|                                                                                                                                                             |       |        |        |       |       |        |       |        |        |       |       |        |       |
| Other current liabilities                                                                                                                                        |       | 15,000,000  |        |       |       | 15,000,000  |       |        |        |       |       |        |       |
|                                                                                                                                                             |       |        |        |       |       |        |       |        |        |       |       |        |       |
| Current portion of long-term debt                                                                                                                                |       | 760,000     |        |       |       | 760,000     |       |        |        |       |       |        |       |
|                                                                                                                                                             |       |        |        |       |       |        |       |        |        |       |       |        |       |
| Total current liabilities                                                                                                                                        |       | 76,730,223  |        | 225,386    |       | 76,955,609  |       | 40,065,671  |        | (16,674    | )          | 40,048,997  |       |
|                                                                                                                                                             |       |        |        |       |       |        |       |        |        |       |       |        |       |
| Long-term debt, less current portion                                                                                                                             |       | 198,086,944 |        |       |       | 198,086,944 |       | 160,355,507 |        |       |       | 160,355,507 |       |
|                                                                                                                                                             |       |        |        |       |       |        |       |        |        |       |       |        |       |
| Deferred income taxes                                                                                                                                            |       | 62,008,004  |        | 19,932,078 |       | 81,940,082  |       | 50,677,332  |        | 20,329,506 |       | 71,006,838  |       |
|                                                                                                                                                             |       |        |        |       |       |        |       |        |        |       |       |        |       |
| Other liabilities                                                                                                                                                |       | 20,148,590  |        |       |       | 20,148,590  |       | 35,179,252  |        |       |       | 35,179,252  |       |
|                                                                                                                                                             |       |        |        |       |       |        |       |        |        |       |       |        |       |
| Stockholders’ equity:                                                                                                                                       |       |        |        |       |       |        |       |        |        |       |       |        |       |
|                                                                                                                                                             |       |        |        |       |       |        |       |        |        |       |       |        |       |
| Common stock, Class A, $.01 par value, 1,000  shares authorized, 100 shares issued and outstanding as of February 29,  2008 and February 28, 2007 |       | 1           |        |       |       | 1           |       | 1           |        |       |       | 1           |       |
|                                                                                                                                                             |       |        |        |       |       |        |       |        |        |       |       |        |       |
| Capital in excess of par value                                                                                                                                   |       | 47,035,214  |        |       |       | 47,035,214  |       | 46,259,101  |        |       |       | 46,259,101  |       |
|                                                                                                                                                             |       |        |        |       |       |        |       |        |        |       |       |        |       |
| Accumulated deficit                                                                                                                                              |       | (2,199,615  | )           | (662,502   | )          | (2,862,117  | )          | (6,192,366  | )           | (371,507   | )          | (6,563,873  | )          |
|                                                                                                                                                             |       |        |        |       |       |        |       |        |        |       |       |        |       |
| Accumulated other comprehensive income (loss)                                                                                                                    |       | 2,502,685   |        | (590,329   | )          | 1,912,356   |       | (1,075,754  | )           | 133,022    |       | (942,732    | )          |
|                                                                                                                                                             |       |        |        |       |       |        |       |        |        |       |       |        |       |
| Total stockholders’ equity                                                                                                                                  |       | 47,338,285  |        | (1,252,831 | )          | 46,085,454  |       | 38,990,982  |        | (238,485   | )          | 38,752,497  |       |
|                                                                                                                                                             |       |        |        |       |       |        |       |        |        |       |       |        |       |
| Total liabilities and stockholders’ equity                                                                                                                  |       | $           | 404,312,046 |       | $          | 18,904,633  |       | $           | 423,216,679 |       | $          | 325,268,744 |       | $ | 20,074,347 |   | $ | 345,343,091 |   |

 

F-13

----

Tableof Contents

 

Cellu Tissue Holdings, Inc. and Subsidiaries

 

Notes to Consolidated Financial Statements (continued)

 

**2. Restatement of Financial Statements (continued)**

 

**CONSOLIDATED STATEMENT OF OPERATIONS**

 
| ** **                                       | ** ** | **Fiscal Year Ended**  | ** **  |
|--------------------------------------------------|------------|----------------------------------|-------------|
| ** **                                       | ** ** | **February 29, 2008**  | ** **  |
| ** **                                       | ** ** | **As Previously  Reported** | ** **  | **Adjustments** | ** ** | **As Restated** | ** ** |
| ** **                                       | ** ** | **(Post-Merger)**                | ** **  |
| Net sales                                        |       | $                                | 431,022,429 |   | $ | 12,058,701 |   | $ | 443,081,130 |   |
| Cost of goods sold                               |       | 388,258,498                      |        | 13,093,518 |   | 401,352,016 |   |
| Gross profit                                     |       | 42,763,931                       |        | (1,034,817 | ) | 41,729,114 |   |
| Selling, general and administrative expenses     |       | 18,661,904                       |        |   |   | 18,661,904 |   |
| Terminated acquisition-related transaction costs |       | 2,078,212                        |        |   |   | 2,078,212 |   |
| Stock and related compensation expense           |       | 550,804                          |        |   |   | 550,804 |   |
| Vesting of stock option/restricted stock grants  |       | 808,111                          |        |   |   | 808,111 |   |
| Income (loss) from operations                    |       | 20,664,900                       |        | (1,034,817 | ) | 19,630,083 |   |
| Interest expense, net                            |       | (19,870,029                      | )           |   |   | (19,870,029 | ) |
| Foreign currency (loss) gain                     |       | (663,686                         | )           | 563,351 |   | (100,335 | ) |
| Other income                                     |       | 132,623                          |        |   |   | 132,623 |   |
| Income (loss) before income tax benefit          |       | 263,808                          |        | (471,466 | ) | (207,658 | ) |
| Income tax benefit                               |       | (3,728,943                       | )           | (180,471 | ) | (3,909,414 | ) |
| Net income (loss)                                |       | $                                | 3,992,751   |   | $ | (290,995 | ) | $ | 3,701,756 |   |
|                                                  |            |                                  |             |  |  |  |  |  |  |  |  |  |

 

F-14

----

Table of Contents

 

Cellu TissueHoldings, Inc. and Subsidiaries

 

Notes toConsolidated Financial Statements (continued)

 

**2. Restatement of FinancialStatements (continued)**

 

**CONSOLIDATED STATEMENT OF OPERATIONS**

 
| ** **                                      | ** ** | **For the Period**                                        | ** **  |
|-------------------------------------------------|------------|---------------------------------------------------------------------|-------------|
| ** **                                      | ** ** | **June 13, 2006 - February 28, 2007** | ** **  |
| ** **                                      | ** ** | **As Previously Reported**                                | ** **  | **Adjustments** | ** ** | **As Restated** | ** ** |
| ** **                                      | ** ** | **(Post-Merger)**                                                   | ** **  |
| Net sales                                       |       | $                                                                   | 241,236,592 |   | $ | 6,175,268 |   | $ | 247,411,860 |   |
| Cost of goods sold                              |       | 228,318,155                                                         |        | 6,579,342 |   | 234,897,497 |   |
| Gross profit                                    |       | 12,918,437                                                          |        | (404,074 | ) | 12,514,363 |   |
| Selling, general and administrative expenses    |       |                                                                |        |   |   |   |   |
|                                            |       | 7,207,057                                                           |        |   |   | 7,207,057 |   |
| Restructuring costs                             |       | 240,218                                                             |        |   |   | 240,218 |   |
| Merger-related transaction costs                |       | 142,079                                                             |        |   |   | 142,079 |   |
| Stock and related compensation expense          |       |                                                                |        |   |   |   |   |
|                                            |       | 3,328,834                                                           |        |   |   | 3,328,834 |   |
| Vesting of stock option/restricted stock grants |       |                                                                |        |   |   |   |   |
|                                            |       | 497,105                                                             |        |   |   | 497,105 |   |
| Impairment of property, plant and equipment     |       |                                                                |        |   |   |   |   |
|                                            |       | 488,274                                                             |        |   |   | 488,274 |   |
| Income (loss) from operations                   |       | 1,014,870                                                           |        | (404,074 | ) | 610,796 |   |
| Interest expense, net                           |       | (11,468,975                                                         | )           |   |   | (11,468,975 | ) |
| Foreign currency (loss) gain                    |       | 359,236                                                             |        | (354,434 | ) | 4,802 |   |
| Other income                                    |       | 14,527                                                              |        |   |   | 14,527 |   |
| Loss before income tax benefit                  |       | (10,080,342                                                         | )           | (758,508 | ) | (10,838,850 | ) |
| Income tax benefit                              |       | (3,887,976                                                          | )           | (291,268 | ) | (4,179,244 | ) |
| Net loss                                        |       | $                                                                   | (6,192,366  | ) | $ | (467,240 | ) | $ | (6,659,606 | ) |

 

F-15

----

Table of Contents

 

Cellu TissueHoldings, Inc. and Subsidiaries

 

Notes toConsolidated Financial Statements (continued)

 

**2. Restatement of FinancialStatements (continued)**

 

**CONSOLIDATEDSTATEMENT OF OPERATIONS**

 
| ** **                                       | ** ** | **For the Period**                                    | ** ** |
|--------------------------------------------------|------------|-----------------------------------------------------------------|------------|
| ** **                                       | ** ** | **March 1, 2006 - June 12, 2006** | ** ** |
| ** **                                       | ** ** | **As Previously Reported**                            | ** ** | **Adjustments** | ** ** | **As Restated** | ** ** |
| ** **                                       | ** ** | **(Pre-Merger)**                                                | ** ** |
| Net sales                                        |       | $                                                               | 94,241,932 |   | $ | 2,501,880 |   | $ | 96,743,812 |   |
| Cost of goods  sold                              |       | 86,053,812                                                      |       | 2,501,880 |   | 88,555,692 |   |
| Gross profit                                     |       | 8,188,120                                                       |       | — |   | 8,188,120 |   |
| Selling, general  and administrative expenses    |       | 4,661,285                                                       |       |   |   | 4,661,285 |   |
|                                             |       |                                                            |       |   |   |   |   |
| Merger-related  transaction costs                |       | 5,933,265                                                       |       |   |   | 5,933,265 |   |
| Vesting of stock  option/restricted stock grants |       | 923,580                                                         |       |   |   | 923,580 |   |
|                                             |       |                                                            |       |   |   |   |   |
| Loss from  operations                            |       | (3,330,010                                                      | )          |   |   | (3,330,010 | ) |
| Interest  expense, net                           |       | (4,896,355                                                      | )          |   |   | (4,896,355 | ) |
| Foreign currency  (loss) gain                    |       | (289,010                                                        | )          | 155,412 |   | (133,598 | ) |
| Other income                                     |       | 27,049                                                          |       |   |   | 27,049 |   |
| Income (loss)  before income tax benefit         |       | (8,488,326                                                      | )          | 155,412 |   | (8,332,914 | ) |
| Income tax  benefit                              |       | (1,953,362                                                      | )          | 59,679 |   | (1,893,683 | ) |
| Net income  (loss)                               |       | $                                                               | (6,534,964 | ) | $ | 95,733 |   | $ | (6,439,231 | ) |

 

F-16

----

Table of Contents

 

Cellu Tissue Holdings, Inc.and Subsidiaries

 

Notes toConsolidated Financial Statements (continued)

 

**2. Restatement of FinancialStatements (continued)**

** **

**CONSOLIDATEDSTATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY (DEFICIENCY)**

 
| ** **                                            | ** ** | **Accumulated  Earnings  (Deficit)** | ** ** | **Accumulated  Other  Comprehensive  Income (Loss)** | ** ** | **Total Stockholders’  Equity (Deficiency)** | ** ** |
|-------------------------------------------------------|------------|--------------------------------------|------------|-----------------------------------------------------------|------------|-------------------------------------------------------------|------------|
| February 28,  2007,  as previously reported |       | $                                    | (6,192,366 | )                                                         | $          | (1,075,754                                                  | )          | $ | 38,990,982 |   |
| Adjustments                                           |       | (371,507                             | )          | 133,022                                                   |       | (238,485                                                    | )          |
| February 28,  2007, as restated                  |       | $                                    | (6,563,873 | )                                                         | $          | (942,732                                                    | )          | $ | 38,752,497 |   |
|                                                  |       |                                 |       |                                                      |       |                                                        |       |
|                                                  |       |                                 |       |                                                      |       |                                                        |       |
| February 29,  2008, as previously reported       |       | $                                    | (2,199,615 | )                                                         | $          | 2,502,685                                                   |       | $ | 47,338,285 |   |
| Adjustments                                           |       | (662,502                             | )          | (590,329                                                  | )          | (1,252,831                                                  | )          |
| February 29,  2008, as restated                  |       | $                                    | (2,862,117 | )                                                         | $          | 1,912,356                                                   |       | $ | 46,085,454 |   |

 
| ** **                                                                           | ** ** | **Other Comprehensive  Income (Loss)** | ** ** |
|--------------------------------------------------------------------------------------|------------|--------------------------------------------------|------------|
| For the Period  March 1, 2006 - June 12, 2006 (as previously reported)     |       | $                                                | (5,948,778 | ) |
| Adjustments                                                                          |       | 95,733                                           |       |
| For the Period  March 1, 2006 - June 12, 2006 (as restated)                |       | $                                                | (5,853,045 | ) |
|                                                                                 |       |                                             |       |
| For the Period  June 13, 2006 - February 28, 2007 (as previously reported) |       | $                                                | (7,268,120 | ) |
| Adjustments                                                                          |       | (238,485                                         | )          |
| For the Period  June 13, 2006 - February 28, 2007 (as restated)            |       | $                                                | (7,506,605 | ) |
|                                                                                 |       |                                             |       |
| Fiscal Year  Ended February 29, 2008 (as previously reported)                   |       | $                                                | 7,571,190  |   |
| Adjustments                                                                          |       | (1,014,346                                       | )          |
| Fiscal Year  Ended February 29, 2008 (as restated)                              |       | $                                                | 6,556,844  |   |

 

F-17

----

Table of Contents

 

Cellu TissueHoldings, Inc. and Subsidiaries

 

Notes toConsolidated Financial Statements (continued)

 

**2. Restatement of FinancialStatements (continued)**

 

**CONSOLIDATED STATEMENT OF CASH FLOWS**

 
| ** **                                                                                | ** ** | **Fiscal Year Ended**      | ** ** |
|-------------------------------------------------------------------------------------------|------------|--------------------------------------|------------|
| ** **                                                                                | ** ** | **February 29, 2008**      | ** ** |
| ** **                                                                                | ** ** | ** **                           | ** ** | **(Post-Merger)** | ** ** | ** ** | ** ** |
| ** **                                                                                | ** ** | **As Previously Reported** | ** ** | **Adjustments** | ** ** | **As Restated** | ** ** |
| **Cash flows from operating activities**                              | ** ** | ** **                           | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net income  (loss)                                                                        |       | $                                    | 3,992,751  |   | $ | (290,995 | ) | $ | 3,701,756 |   |
| Adjustments to  reconcile net income (loss) to net cash provided by operating activities: |       |                                 |       |   |   |   |   |
| Derivative gain                                                                           |       |                                 |       | (170,564 | ) | (170,564 | ) |
| Depreciation                                                                              |       | 23,106,291                           |       | 1,039,846 |   | 24,146,137 |   |
| Deferred income  taxes                                                                    |       | (6,566,930                           | )          | (397,428 | ) | (6,964,358 | ) |
| Accretion of  debt discount                                                               |       | 616,437                              |       |   |   | 616,437 |   |
| Stock-based  compensation                                                                 |       | 808,111                              |       |   |   | 808,111 |   |
| Changes in  operating assets and liabilities:                                             |       |                                 |       |   |   |   |   |
| Receivables                                                                               |       | (4,829,995                           | )          |   |   | (4,829,995 | ) |
| Inventories                                                                               |       | (3,735,511                           | )          | 39,200 |   | (3,696,311 | ) |
| Prepaid expenses  and other current assets                                                |       | 1,124,858                            |       | 101,232 |   | 1,226,090 |   |
| Other assets                                                                              |       | 552,555                              |       |   |   | 552,555 |   |
| Income tax  receivable                                                                    |       | 137,153                              |       |   |   | 137,153 |   |
| Accounts  payable, accrued expenses, accrued interest and other liabilities               |       | 4,026,808                            |       | 242,060 |   | 4,268,868 |   |
| Total  adjustments                                                                        |       | 15,239,777                           |       | 854,346 |   | 16,094,123 |   |
|                                                                                      |       |                                 |       |   |   |   |   |
| Net cash provided  by operating activities                                                |       | 19,232,528                           |       | 563,351 |   | 19,795,879 |   |
|                                                                                           |            |                                      |            |  |  |  |  |  |  |  |

 

F-18

----

Table of Contents

 

Cellu TissueHoldings, Inc. and Subsidiaries

 

Notes toConsolidated Financial Statements (continued)

 

**2. Restatement of FinancialStatements (continued)**

 

**CONSOLIDATED STATEMENT OF CASH FLOWS**

 
| ** **                                               | ** ** | **Fiscal Year Ended**      | ** ** |
|----------------------------------------------------------|------------|--------------------------------------|------------|
| ** **                                               | ** ** | **February 29, 2008**      | ** ** |
| ** **                                               | ** ** | **As Previously Reported** | ** ** | **Adjustments** | ** ** | **As Restated** | ** ** |
| ** **                                               | ** ** | **(Post-Merger)**                    | ** ** |
| **Cash  flows from investing activities**                |       |                                 |       |   |   |   |   |
| Cash paid for  acquisition, net of cash received         |       | (43,663,270                          | )          |   |   | (43,663,270 | ) |
| Capital  expenditures                                    |       | (20,477,426                          | )          |   |   | (20,477,426 | ) |
| Net cash used in  investing activities                   |       | (64,140,696                          | )          |   |   | (64,140,696 | ) |
| **Cash  flows from financing activities**                | ** ** | ** **                           | ** ** | ** ** | ** ** | ** ** | ** ** |
| Equity  investment by Weston Presidio/Other Stockholders |       | (32,000                              | )          |   |   | (32,000 | ) |
| Payments of  long-term debt                              |       | (575,000                             | )          |   |   | (575,000 | ) |
| Borrowings on  revolving credit facility                 |       | 9,800,000                            |       | 59,800,000 |   | 69,600,000 |   |
| Payments on  revolving credit facility                   |       | —                               |       | (59,800,000 | ) | (59,800,000 | ) |
| Proceeds from  note offering                             |       | 20,000,000                           |       |   |   | 20,000,000 |   |
| Net cash  provided by financing activities               |       | 29,193,000                           |       | — |   | 29,193,000 |   |
| Effect of  foreign currency                              |       | 337,955                              |       | (563,351 | ) | (225,396 | ) |
| Net decrease in  cash and cash equivalents               |       | (15,377,213                          | )          |   |   | (15,377,213 | ) |
|                                                     |       |                                 |       |   |   |   |   |
| Cash and cash  equivalents at beginning of period        |       | 16,260,601                           |       |   |   | 16,260,601 |   |
| Cash and cash  equivalents at end of period              |       | 883,388                              |       |   |   | 883,388 |   |
| **Supplemental  disclosure of cash flow information**    | ** ** | ** **                           | ** ** | ** ** | ** ** | ** ** | ** ** |
| Cash paid during  the year for Interest                  |       | 18,397,690                           |       |   |   | 18,397,690 |   |
| Cash paid during  the year for Income taxes              |       | 2,828,444                            |       |   |   | 2,828,444 |   |

 

F-19

----

Table of Contents

 

Cellu TissueHoldings, Inc. and Subsidiaries

 

Notes toConsolidated Financial Statements (continued)

 

**2. Restatement of FinancialStatements (continued)**

 

**CONSOLIDATED STATEMENT OF CASH FLOWS**

 
| ** **                                                                                 | ** ** | **For the Period**                                        | ** ** |
|--------------------------------------------------------------------------------------------|------------|---------------------------------------------------------------------|------------|
| ** **                                                                                 | ** ** | **June 13, 2006 - February 28, 2007** | ** ** |
| ** **                                                                                 | ** ** | **(Post-Merger)**                                                   | ** ** |
| ** **                                                                                 | ** ** | **As Previously Reported**                                | ** ** | **Adjustments** | ** ** | **As Restated** | ** ** |
| **Cash  flows from operating activities**                                                  |       |                                                                |       |   |   |   |   |
| Net loss                                                                                   |       | $                                                                   | (6,192,366 | ) | $ | (467,240 | ) | $ | (6,659,606 | ) |
| Adjustments to  reconcile net loss to net cash provided by (used in) operating activities: |       |                                                                |       |   |   |   |   |
| Noncash  inventory charge                                                                  |       | 909,264                                                             |       |   |   | 909,264 |   |
| Amortization of  debt issuance costs                                                       |       |                                                                |       |   |   |   |   |
| Derivative gain                                                                            |       |                                                                |       | (78,295 | ) | (78,295 | ) |
| Depreciation                                                                               |       | 16,133,460                                                          |       | 625,045 |   | 16,758,505 |   |
| Deferred income  taxes                                                                     |       | (6,651,089                                                          | )          | (240,018 | ) | (6,891,107 | ) |
| Accretion of  debt discount                                                                |       | 380,560                                                             |       |   |   | 380,560 |   |
| Stock-based  compensation                                                                  |       | 497,105                                                             |       |   |   | 497,105 |   |
| Impairment of  fixed assets                                                                |       | 488,274                                                             |       |   |   | 488,274 |   |
| Changes in operating  assets and liabilities:                                              |       |                                                                |       |   |   |   |   |
| Receivables                                                                                |       | 2,908,202                                                           |       |   |   | 2,908,202 |   |
| Inventories                                                                                |       | 1,413,120                                                           |       | (39,200 | ) | 1,373,920 |   |
| Prepaid expenses  and other current assets                                                 |       | 1,696,689                                                           |       | (78,373 | ) | 1,618,316 |   |
| Other assets                                                                               |       | (48,517                                                             | )          |   |   | (48,517 | ) |
| Accounts  payable, accrued expenses, accrued interest and other liabilities                |       | (1,395,251                                                          | )          | (76,353 | ) | (1,471,604 | ) |
| Total  adjustments                                                                         |       | 16,331,817                                                          |       | 112,806 |   | 16,444,623 |   |
|                                                                                       |       |                                                                |       |   |   |   |   |
| Net cash  provided by (used in) operating activities                                       |       | 10,139,451                                                          |       | (354,434 | ) | 9,785,017 |   |
|                                                                                            |            |                                                                     |            |  |  |  |  |  |  |  |

 

F-20

----

Table of Contents

 

Cellu TissueHoldings, Inc. and Subsidiaries

 

Notes toConsolidated Financial Statements (continued)

 

**2. Restatement of FinancialStatements (continued)**

 

**CONSOLIDATEDSTATEMENT OF CASH FLOWS**

 
| ** **                                               | ** ** | **For the Period**                                        | ** ** |
|----------------------------------------------------------|------------|---------------------------------------------------------------------|------------|
| ** **                                               | ** ** | **June 13, 2006 - February 28, 2007** | ** ** |
| ** **                                               | ** ** | **As Previously Reported**                                | ** ** | **Adjustments** | ** ** | **As Restated** | ** ** |
| ** **                                               | ** ** | **(Post-Merger)**                                                   | ** ** |
| **Cash  flows from investing activities**                |       |                                                                |       |   |   |   |   |
| Equity  investment by Weston Presidio/Other Stockholders |       | 45,761,997                                                          |       | (45,761,997 | ) | — |   |
| Capital  expenditures                                    |       | (7,677,141                                                          | )          | — |   | (7,677,141 | ) |
| Net cash (used  in) provided by investing activities     |       | 38,084,856                                                          |       | (45,761,997 | ) | (7,677,141 | ) |
| **Cash  flows from financing activities**                | ** ** | ** **                                                          | ** ** | ** ** | ** ** | ** ** | ** ** |
| Merger consideration  paid to former Shareholders        | ** ** | (45,761,997                                                         | )          | — |   | (45,761,997 | ) |
| Equity  investment by Weston Presidio/Other Stockholders |       | —                                                              |       | 45,761,997 |   | 45,761,997 |   |
| Net cash  provided by financing activities               |       | (45,761,997                                                         | )     | 45,761,997 |   | — |   |
| Effect of  foreign currency                              |       | (620,553                                                            | )          | 354,434 |   | (266,119 | ) |
| Net increase in  cash and cash equivalents               |       | 1,841,757                                                           |       | — |   | 1,841,757 |   |
|                                                     |       |                                                                |       |   |   |   |   |
| Cash and cash  equivalents at beginning of period        |       | 14,418,844                                                          |       | — |   | 14,418,844 |   |
| Cash and cash  equivalents at end of period              |       | $                                                                   | 16,260,601 |   | $ | — |   | $ | 16,260,601 |   |
| **Supplemental  disclosure of cash flow information**    | ** ** | ** **                                                          | ** ** | ** ** | ** ** | ** ** | ** ** |
| Cash paid during  the year for interest                  |       | $                                                                   | 8,000,787  |   | $ | — |   | $ | 8,000,787 |   |
| Cash paid during  the year for income taxes              |       | $                                                                   | 248,476    |   | $ | — |   | $ | 248,476 |   |

 

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Table of Contents

 

Cellu TissueHoldings, Inc. and Subsidiaries

 

Notes toConsolidated Financial Statements (continued)

 

**2. Restatement of FinancialStatements (continued)**

 

**CONSOLIDATED STATEMENT OF CASHFLOWS**

 
| ** **                                                                                           | ** ** | **For the Period**                                    | ** ** |
|------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------|------------|
| ** **                                                                                           | ** ** | **March 1, 2006 - June 12, 2006** | ** ** |
| ** **                                                                                           | ** ** | **(Pre-Merger)**                                                | ** ** |
| ** **                                                                                           | ** ** | **As Previously Reported**                            | ** ** | **Adjustments** | ** ** | **As Restated** | ** ** |
| **Cash  flows from operating activities**                                                            |       |                                                            |       |   |   |   |   |
| Net income  (loss)                                                                                   |       | $                                                               | (6,534,964 | ) | $ | 95,733 |   | $ | (6,439,231 | ) |
| Adjustments to  reconcile net income (loss) to net cash provided by (used in) operating  activities: |       |                                                            |       |   |   |   |   |
| Amortization of  debt issuance costs                                                                 |       | 405,568                                                         |       |   |   | 405,568 |   |
| Depreciation                                                                                         |       | 4,226,643                                                       |       |   |   | 4,226,643 |   |
| Deferred income  taxes                                                                               |       | (396,024                                                        | )          |   |   | (396,024 | ) |
| Accretion of  debt discount                                                                          |       | 85,471                                                          |       |   |   | 85,471 |   |
| Stock-based  compensation                                                                            |       | 923,580                                                         |       |   |   | 923,580 |   |
| Changes in  operating assets and liabilities:                                                        |       |                                                            |       |   |   |   |   |
| Receivables                                                                                          |       | (1,994,674                                                      | )          |   |   | (1,994,674 | ) |
| Inventories                                                                                          |       | (2,208,757                                                      | )          |   |   | (2,208,757 | ) |
| Prepaid expenses  and other current assets                                                           |       | (683,329                                                        | )          |   |   | (683,329 | ) |
| Other assets                                                                                         |       | (5,328                                                          | )          |   |   | (5,328 | ) |
| Accounts  payable, accrued expenses, accrued interest and other liabilities                          |       | (358,006                                                        | )          | 59,679 |   | (298,327 | ) |
| Total  adjustments                                                                                   |       | (4,856                                                          | )          | 59,679 |   | 54,823 |   |
| Net cash  provided by (used in) operating activities                                                 |       | (6,539,820                                                      | )          | 155,412 |   | (6,384,408 | ) |
|                                                                                                      |            |                                                                 |            |  |  |  |  |  |  |  |

 

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Table of Contents

 

Cellu TissueHoldings, Inc. and Subsidiaries

 

Notes toConsolidated Financial Statements (continued)

 

**2. Restatement of FinancialStatements (continued)**

** **

**CONSOLIDATEDSTATEMENT OF CASH FLOWS**

 
| ** **                                            | ** ** | **For the Period**                                    | ** ** |
|-------------------------------------------------------|------------|-----------------------------------------------------------------|------------|
| ** **                                            | ** ** | **March 1, 2006 - June 12, 2006** | ** ** |
| ** **                                            | ** ** | **As Previously Reported**                            | ** ** | **Adjustments** | ** ** | **As Restated** | ** ** |
| ** **                                            | ** ** | **(Post-Merger)**                                               | ** ** |
| **Cash  flows from investing activities**             |       |                                                            |       |   |   |   |   |
| Capital  expenditures                                 |       | (1,937,610                                                      | )          |   |   | (1,937,610 | ) |
| Net cash used in  investing activities                |       | (1,937,610                                                      | )          |   |   | (1,937,610 | ) |
| **Cash  flows from financing activities**             | ** ** | ** **                                                      | ** ** | ** ** | ** ** | ** ** | ** ** |
| Payments of  long-term debt                           |       | (290,000                                                        | )          |   |   | (290,000 | ) |
| Net cash used in  financing activities                |       | (290,000                                                        | )          |   |   | (290,000 | ) |
| Effect of  foreign currency                           |       | 362,212                                                         |       | (155,412 | ) | 206,800 |   |
| Net decrease in  cash and cash equivalents            |       | (8,405,218                                                      | )          | — |   | (8,405,218 | ) |
|                                                  |       |                                                            |       |   |   |   |   |
| Cash and cash  equivalents at beginning of period     |       | 22,824,062                                                      |       |   |   | 22,824,062 |   |
| Cash and cash  equivalents at end of period           |       | $                                                               | 14,418,844 |   |   |   | $ | 14,418,844 |   |
| **Supplemental  disclosure of cash flow information** |       |                                                            |       |   |   |   |   |
| Cash paid during  the year for interest               |       | $                                                               | 8,000,000  |   |   |   | $ | 8,000,000 |   |
| Cash paid during  the year for income taxes           |       | $                                                               | 20,804     |   |   |   | $ | 20,804 |   |

 

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Table of Contents

 

Cellu Tissue Holdings, Inc. and Subsidiaries

 

Notes toConsolidated Financial Statements (continued)

 

**3. Summary of SignificantAccounting Policies**

 

**Principlesof Consolidation**

 

The accompanyingfinancial statements include the accounts of the Company and its wholly ownedsubsidiaries. All significant intercompany transactions and balances areeliminated in consolidation.

 

**CashEquivalents**

 

TheCompany considers all investments with an original maturity of three months orless at the date of purchase cash equivalents.

 

**RevenueRecognition**

 

The Company recognizesrevenue when persuasive evidence of an arrangement exists, delivery hasoccurred, the fee is fixed and determinable and collection is reasonablyassured. Typically, revenue is recognized from product sales when title andrisk of loss has passed to the customer in accordance with the related shippingterms, which is generally at the time products are shipped. Certain sales havefreight-on-board destination terms, in which case, revenue is recognized whenthe product is received by the customer. The Company records a provision forestimated sales returns and other allowances as a reduction of revenue at thetime of revenue recognition.

 

**TradeReceivables and Allowance for Doubtful Accounts**

 

Trade receivables arestated at gross invoice amount, less discounts and provision for uncollectibleaccounts. The Company performs periodic credit evaluations of its customers’financial condition and generally does not require collateral. The Company estimatesits allowance for doubtful accounts using two methods. First, the Companydetermines a specific reserve for individual accounts where information isavailable that the customer may have an inability to meet its financialobligation. Second, the Company estimates additional reserves for all customersbased on historical write-offs. Accounts are charged-off against the allowancefor doubtful accounts when the Company has exhausted all collection efforts andhas deemed the accounts uncollectible.

 

**Inventories**

 

Inventories are stated atthe lower of cost (average-cost method) or market. The Company providesallowances for materials or products that are determined to be obsolete, or forquantities on hand in excess of expected normal, future requirements. Includedin packaging materials and

 

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Table of Contents

 

Cellu TissueHoldings, Inc. and Subsidiaries

 

Notes toConsolidated Financial Statements (continued)

 

**3. Summary of SignificantAccounting Policies (continued)**

 

supplies are felts andwires. These component parts are kept in inventory until they are installed onthe machines. Once installed, felts and wires are amortized over their usefullives of approximately three months.

 

**Maintenance and Repairs**

 

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

 

**Property, Plant and Equipment**

 

Property, plant andequipment acquired in connection with the Merger and the CityForest Acquisitionare valued at fair value.  All otherproperty, plant and equipment acquired is stated at cost. Depreciation ofequipment and amortization of leasehold improvements are computed using thestraight-line method over the estimated useful lives of the related assets orthe life of the lease term, whichever is shorter. The estimated useful lives ofthe principal classifications of depreciable assets are as follows:

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

 

**AssetImpairment**

 

The Company evaluates theappropriateness of the carrying amounts of its long-lived assets wheneverindicators of impairment are deemed to exist. In the fourth quarter fiscal year2007, the Company shut down its machine-glazed paper machine at its Interlakefacility permanently (see Note 13) and, accordingly, recorded an impairmentcharge of  $488,274, which is reflectedas a separate line item in the Company’s statements of operations for fiscalyear 2007.  The Company believes that, asof February 29, 2008, there are no significant impairments of the carryingamounts of such assets and no reduction in their estimated useful life iswarranted.

 

**Goodwilland Trademarks**

 

Goodwill represents costsin excess of fair values assigned to the underlying net assets of acquiredbusinesses.  Goodwill is not amortized,but tested for impairment annually at year-end, and at any time when eventssuggest impairment may have occurred. The Company’s goodwill impairment test is performed by comparing thefair value of the reporting unit to the

 

F-25

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Table of Contents

 

Cellu TissueHoldings, Inc. and Subsidiaries

 

Notes toConsolidated Financial Statements (continued)

 

**3. Summary of SignificantAccounting Policies (continued)**

 

carrying value of thereporting unit.  The Company has tworeporting units and the goodwill assigned to each is tested forimpairment.  The Company incorporatesassumptions involving future growth rates, discount rates and tax rates inprojecting the future cash flows.  In theevent the carrying value of a reporting unit exceeds its fair value, animpairment loss would be recognized to the extent the carrying amount of thereporting unit’s goodwill exceeds its implied fair value.

 

Goodwill as of February 29,2008 was approximately $11.4 million of which $7.0 million was recorded inconnection with an acquisition in the current year (see Footnote 4).  No goodwill impairment has been notedsubsequent to the acquisition through the current date.

 

Trademarksare not amortized but tested for impairment annually at the end of our secondquarter and at any time when events suggest impairment may have occurred.  Our impairment test is performed by comparingthe carrying amount to its fair market value at the time of the assessment.  In the event the carrying value of areporting unit exceeds our fair value, an impairment loss would be recognizedto the extent the carrying amount of the reporting unit’s trademarks exceedstheir implied fair value.  No trademarkimpairments were recorded during fiscal year 2008 or the period from June 13,2006 to February 28, 2007 (post-merger).

 

# **Stock-Based Compensation**

# ** **

In December 2004,the Financial Accounting Standards Board (“FASB”) issued Statement of FinancialAccounting Standards No. 123R (“SFAS 123R”), *Share-BasedPayment*, which requires the measurement of all employee share-basedpayments to employees, including grants of employee stock options, using thefair-value-based method and the recording of such expense in the Company’sconsolidated statement of operations. The Company adopted the provisions of SFAS 123R using the prospectivemethod effective March 1, 2006.  Assuch, there was no accounting effect on any awards outstanding at the date ofadoption.  Upon adoption of SFAS 123R,the Company had only one share-based payment arrangement, the Cellu PaperHoldings, Inc. 2001 Stock Incentive Plan (the “Old Plan”), under which theParent granted stock options to certain members of the Company’smanagement.  In accordance with the OldPlan, each option outstanding at the time of a change in control immediatelyvested and became exercisable. Furthermore, in accordance with the terms of the Merger, all outstandingoptions were cancelled and automatically converted into the right to receivethe per share merger consideration for any in-the-money options.

 

On June 12, 2006,the Board of Directors of Cellu Parent adopted the 2006 Stock Option andRestricted Stock Plan (the “Plan”). Under the Plan, the Plan Administrator may make awards of

 

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Cellu TissueHoldings, Inc. and Subsidiaries

 

Notes toConsolidated Financial Statements (continued)

 

**3. Summary of SignificantAccounting Policies (continued)**

 

options to purchaseshares of common stock of Cellu Parent and/or awards of restricted shares ofcommon stock of Cellu Parent.  A maximumof 8,095 shares of common stock of Cellu Parent may be delivered insatisfaction of awards under the Plan, determined net of shares of common stockwithheld by Cellu Parent in payment of the exercise price of an award or insatisfaction of tax withholding requirements. Key employees and directors of, and consultants and advisors to, CelluParent or its affiliates who, in the opinion of the Plan Administrator, are ina position to make a significant contribution to the success of Cellu Parentand its affiliates are eligible to participate in the Plan.   Stock options are granted at the fair marketvalue of the Cellu Parent’s stock on the date of grant and have a 10-yearterm.  Generally, stock option grantsvest ratably over four years from the date of grant.  The following describes how certainassumptions affecting the estimated fair value of stock options aredetermined.  The dividend yield is zero;the volatility is based on historical market value of the Company’s stock; andthe risk-free interest rate is based on U.S. Treasury securities withmaturities equal to the expected life of the option.  The Company uses historical data in order toestimate exercise, termination and holding period behavior for valuationpurposes.  A summary of the optionactivity as of February 29, 2008 and for the fiscal year then ended is asfollows:

 
| ** **                      | ** ** | **Options** | ** ** | **Weighted  Average  Exercise Price** | ** ** | **Weighted  Average  Remaining  Contractual Life** | ** ** |
|---------------------------------|------------|-------------|------------|--------------------------------------------|------------|---------------------------------------------------------|------------|
| Outstanding,  beginning of year |       | 575         |       | $                                          | 426.69     |                                                    | 9.5 Years  |   |
| Forfeited                       |       | (100        | )          | $                                          | 426.69     |                                                    | 9.5 Years  |   |
| Granted                         |       | 650         |       | $                                          | 979.25     |                                                    | 9.1 Years  |   |
| Outstanding, end  of year       |       | 1,125       |       | $                                          | 733.67     |                                                    | 8.9 Years  |   |
| Exercisable, end  of year       |       | 125         |       | $                                          | 426.69     |                                                    | 8.5 Years  |   |

 

The fair value of thestock option grant was estimated on the date of grant using the Black-Scholesoption pricing model.  The weightedaverage assumptions used to value the grants were: no dividend yield; 57%volatility; 4.9% risk-free interest rate; and 10-year expected life.  The weighted average fair value of stockoptions granted was $478.82 per share and the unrecognized total compensationcost as of February 29, 2008 related to non-vested awards was $402,564**.**

 

On August 6, 2007,Cellu Parent entered into a Restricted Stock Agreement with the Company’s newlyappointed Chief Financial Officer, pursuant to which Cellu Parent granted 700restricted shares of its common stock to the named individual pursuant to thePlan.  The shares will vest and cease tobe restricted in four equal annual installments commencing on August 6,2007, as long as the named individual is continuously employed by the Companyuntil such vesting date with respect to his shares.  Any restricted stock outstanding at the timeof a Covered Transaction (as defined in the Plan) shall become vested and ceaseto be restricted stock at the time of a

 

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Table of Contents

 

Cellu TissueHoldings, Inc. and Subsidiaries

 

Notes toConsolidated Financial Statements (continued)

 

**3. Summary of SignificantAccounting Policies (continued)**

 

change in control.  Additionally, the Parent has agreed to pay anamount to the named individual equal to an amount that would be included insuch individual’s gross income and payable as income tax as a result of makinga Section 83(b) election under the Internal Revenue Code of 1986, asamended (the “Code”).  The namedindividual has made a timely Section 83(b) election.  In connection with this election, the Companyhas recorded compensation expense of $501,853 in the third quarter fiscal year2008.

 

On June 12, 2006,Cellu Parent entered into Restricted Stock Agreements with the Company’s ChiefExecutive Officer, Chief Operating Officer and the then Chief FinancialOfficer, pursuant to which Cellu Parent granted 3,778 restricted shares of itscommon stock to its Chief Executive Officer and 1,349 restricted shares of itscommon stock to each of the other two named individuals pursuant to thePlan.  The shares will vest and cease tobe restricted in four equal annual installments commencing on June 12,2007, as long as the named individual, as the case may be, is continuouslyemployed by the Company until each such vesting date with respect to his or hershares.  Any restricted stock outstandingat the time of a Covered Transaction shall become vested and cease to berestricted stock at the time of a change in control.  Additionally, the Parent has agreed to pay anadditional amount to each of the named individuals equal to an amount thatwould be included in such individual’s gross income and payable as income taxas a result of making a Section 83(b) election under the Code.  All named individuals have made a timely Section 83(b) election.

 

EffectiveJuly 31, 2007, the then Chief Financial Officer resigned and forfeitedthree-fourths of the individual’s restricted stock grant and, accordingly, theCompany only recorded compensation expense associated with this individual’sgrant through June 12, 2007, as all other shares were forfeited and nocompensation expense was required to be recognized for forfeited shares.

 

For fiscal year 2008 andfor the period from June 13, 2006 to February 28, 2007, the Companyhas recorded $685,100 and $489,661, respectively, of compensation expenserelated to the vesting of the above grants in accordance with SFAS 123R.  Immediately prior to consummation of theMerger, there were 341.3 restricted shares of Parent’s common stock.  In accordance with the terms of the Old Plan,the restricted stock immediately vested. Accordingly, for the period from March 1, 2006 to June 12,2006, the Company recorded $923,580 of compensation expense related to thevesting of the above restricted stock in accordance with SFAS 123R.

 

**Derivativesand Hedging**

 

The Company usesderivative financial instruments to offset a substantial portion of itsexposure to market risk arising from changes in the price of natural gas.  Hedging of this risk is accomplished byentering into forward swap contracts, which have not been designated as hedgesof specific quantities of natural gas expected to be purchased in futuremonths. 

 

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Table of Contents

 

Cellu TissueHoldings, Inc. and Subsidiaries

 

Notes toConsolidated Financial Statements (continued)

 

**3. Summary of SignificantAccounting Policies (continued)**

 

The fair value of thesecash flow hedging instruments was an asset of $.2 million and less than $.1million as of February 29, 2008 and February 28, 2007, respectively.  For the fiscal year ended February 29,2008 and February 28, 2007, $.2 million gain and less than $.1 milliongain was recorded as an increase to cost of goods sold, respectively.

 

**ForeignCurrency Translation**

 

The financial statementsof the Company’s foreign subsidiary have been translated into U.S. dollars inaccordance with SFAS No. 52, “*Foreign CurrencyTranslatio*n.” All balance sheet accounts are translated at currentexchange rates; income and expenses are translated using weighted averageexchange rates during the applicable fiscal year. Resulting translationadjustments are reported in accumulated other comprehensive income (loss) withthe exception of the remeasurement of the portion of the loan functioning as ashort-term settlement account  and not deemedto be of a long-term nature, which is recorded to earnings.

 

Included in foreigncurrency translation adjustments for fiscal year 2006 is a one-time adjustmentof $2.6 million to correct the cumulative effect of improperly translating thevalue of property, plant and equipment. The translation of these assets from Canadian dollars to U.S. dollarshad been occurring at historical rates, as opposed to actual month-end rates,as required under SFAS 52, “*Foreign CurrencyTranslation.”*

 

**Concentrations**

 

For fiscal year 2008, onecustomer comprised 13.4% of sales.   Forthe period from June 13, 2006 to February 28, 2007, no customercomprised more than 10% of sales.  Forthe period March 1, 2006 to June 12, 2006 and fiscal year 2006, onecustomer comprised 10.3% and 12.3%, respectively, of sales. These sales were inthe Company’s tissue segment for fiscal year 2008, the period from March 1,2006 to June 12, 2006 and for fiscal year 2006.

 

### **Labor Concentration**

### ** **

At February 29,2008, approximately****66% of theCompany’s active full-time employees were represented by either the UnitedSteel, Paper and Forestry, Rubber, Manufacturing, Energy, Allied-Industrial andService Workers International Union (the “USW”) or Independent Paper Workers ofCanada through various collective bargaining agreements that expire between June 2008and June 2012**.**  In July 2005, the USW was elected torepresent 76 hourly employees at

 

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Table of Contents

 

Cellu TissueHoldings, Inc. and Subsidiaries

 

Notes toConsolidated Financial Statements (continued)

 

**3. Summary of SignificantAccounting Policies (continued)**

 

the Company’s Mississippifacility and was certified by the National Labor Relations Board as theexclusive collective bargaining representative of such employees.  On June 29, 2007, a collectivebargaining agreement with USW was ratified.

 

### **Shipping and Handling Costs**

### ** **

The Company classifiesthird-party shipping and handling costs as a component of cost of goodssold.  Shipping and handling amounts thatthe Company bills to customers are included in net sales and the relatedshipping and handling costs that the Company incurs are included in cost of goodssold.

 

**Considerations Paid to Resellers**

 

TheCompany recognizes consideration paid to a reseller of its products as areduction of the selling price of its products sold and, therefore, reduces netsales in the Company’s statement of operations.

 

**Use of Estimates**

 

The preparation offinancial statements in conformity with U.S. generally accepted accountingprinciples requires management to make estimates and assumptions that affectthe reported amounts of assets and liabilities and disclosure of contingentassets and liabilities at the date of the financial statements and the reportedamounts of revenues and expenses during the reporting period. Actual resultscould differ from those estimates.

 

# **FinancialInstruments**

# ** **

The Company estimates thefair value of financial instruments for financial statement disclosure.  For these purposes, the carrying amounts forcash and cash equivalents, accounts receivable and accounts payable approximatefair value.  The carrying amount of theCompany’s borrowings under its revolving line of credit approximates its fairvalue.  The Company’s long-term debt has beenrecorded at its fair value, which approximates its carrying value.

 

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Table of Contents

 

Cellu TissueHoldings, Inc. and Subsidiaries

 

Notes toConsolidated Financial Statements (continued)

 

**3. Summary of SignificantAccounting Policies (continued)**

 

# **NewAccounting Standards**

# ** **

In September 2006,the FASB issued FAS No. 157,”*Fair Value Measurements*”(“SFAS 157”).  SFAS 157 defines fairvalue, establishes a framework for measuring fair value in generally acceptedaccounting principles and expands disclosures about fair value measurements.  This statement applies under other accountingpronouncements that require or permit fair value measurements.  In February 2008, the FASB issued FSP157-2, “*Effective Date of FASB Statement No. 157*”, which delays the effective date ofSFAS No. 157 to fiscal years beginning after November 15, 2008 andinterim periods within those fiscal years. The Company does not expect the adoption of this statement to have amaterial impact on its financial statements.

 

In February 2007,the FASB issued SFAS No. 159, “*The Fair Value Option forFinancial Assets and Financial Liabilities; Including an Amendment of FASBStatement No. 115*” (“SFAS 159”)  SFAS 159 provides an option to measureeligible items at fair value at specified dates.  Unrealized gains and losses on the eligibleitems for which the fair value option has been elected should be reported inearnings.  SFAS 159 is effective for theCompany’s fiscal year ending February 28, 2009.  The Company expects that the adoption of SFAS159 will not have a material effect on its financial statements.

 

In December 2007,the FASB issued SFAS No. 141R, “*Business Combinations*”(“SFAS No. 141R”), and SFAS No. 160, “*Noncontrolling Interests inConsolidated Financial Statements” (“SFAS 160*”).  SFAS 141R requires an acquirer to measure theidentifiable assets acquired, the liabilities assumed and any noncontrollinginterest in the acquiree at their fair values on the acquisition date, withgoodwill being measured and recorded at the excess value over the netidentifiable assets acquired.  SFAS 160clarifies that a noncontrolling interest in a subsidiary should be reported asequity in the consolidated financial statements.  SFAS 141R and SFAS 160 are effective forfinancial statements issued for fiscal years beginning after December 15, 2008.  Early adoption is prohibited.  The Company is currently assessing the impactthat SFAS 141R and SFAS 160 will have on its results of operations andfinancial position.

 

**4. Acquisitions**

 

On March 21, 2007,the Company executed a definitive merger agreement (the “AcquisitionAgreement”) with CityForest Corporation (“CityForest”), Cellu City AcquisitionCorporation (“Cellu City Merger Sub”) and Wayne Gullstad as the shareholders’representative.  Pursuant to the AcquisitionAgreement, and subject to the terms and conditions therein, Cellu City MergerSub, 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”).  Theaggregate merger consideration (including assumption of $18.4 million in

 

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Cellu TissueHoldings, Inc. and Subsidiaries

 

Notes toConsolidated Financial Statements (continued)

 

**4.   Acquisition (continued)**

 

aggregate principalamount of industrial revenue bonds) was approximately $61.0 million subject tocertain working capital and net cash adjustments.  Total cash paid for the acquisition of $46.8million (purchase price of $61.0 million less assumed indebtedness of $18.4million plus restricted cash and other miscellaneous adjustments of $1.6million and acquisition costs of $2.6 million) was financed in part by issuanceof unregistered 9 3/4% Senior Secured Notes due 2010 (the “Additional Notes”)of approximately $20.0 million, borrowings on a revolving line of credit ($17.4million) and available cash on hand.

 

The CityForestAcquisition has been accounted for as a purchase in accordance with theprovisions of SFAS 141 and, accordingly, the consolidated statements ofoperations includes the results of CityForest for fiscal year 2008 from thedate of acquisition.  Purchase priceallocations are subject to refinement until all pertinent information isobtained.  The Company has allocated theexcess of purchase price over the net assets acquired in the acquisition basedon its estimates of the fair value of assets and liabilities as follows:

** **
| ** **                     | ** ** | **Excess Purchase Price Allocated 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 ofCityForest’s operations from the date of acquisition (March 21, 2007) areincluded in the Company’s tissue segment. Unaudited pro forma results of operations for fiscal year 2008, for theperiod June 13, 2006-November 23, 2006 and for the period March 1,2006-June 12, 2006, as if the Company and CityForest had been combined asof March 1, 2006, are presented below. The pro forma results include estimates and assumptions, which theCompany’s management believes are reasonable. However, the pro forma results do not include any cost savings or othereffects of the planned integration of CityForest and are not necessarilyindicative of the results which would have occurred if the business combinationhad been in effect on the dates indicated, or which may result in the future.

 

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Cellu TissueHoldings, Inc. and Subsidiaries

 

Notes toConsolidated Financial Statements (continued)

 

**4.   Acquisition (continued)**

 
| ** **               | ** ** | **Year Ended  February  29, 2008  (1)** | ** ** | **June 13, 2006-  February 28, 2007  (2)** | ** ** | ** **     | **March 1, 2006-  June 12, 2006  (2)** | ** **         |
|--------------------------|------------|-------------------------------------------------------------|------------|----------------------------------------------------------------|------------|----------------|------------------------------------------------------------|--------------------|
| ** **               | ** ** | **Actual**                                                  | ** ** | **Pro Forma**                                             | ** ** | **Actual**     | ** **                                                 | **Pro Forma** | ** ** | ** ** | **Actual** | ** ** | **Pro Forma** | ** ** |
| ** **               | ** ** | **(Restated)**                                              | ** ** | **(Restated)**                                                 | ** ** | **(Restated)** | ** **                                                 | **(Restated)**     | ** ** | ** ** | **Restated** | ** ** | **(Restated)** | ** ** |
| ** **               | ** ** | ** **                                                  | ** ** | **(Unaudited)**                                                | ** ** | ** **     | ** **                                                 | **(Unaudited)**    | ** ** | ** ** | ** ** | ** ** | **(Unaudited)** | ** ** |
| ** **               | ** ** | **(in thousands)**                                     | ** ** | **(in thousands)**                                        | ** ** | ** **     | **(in thousands)**                                    | ** **         |
|                     |       |                                                        |       |                                                           |       |           |                                                       |               |   |   |   |   |   |   |
| Net sales                |       | $                                                           | 443,081    |                                                           | $          | 445,792        |                                                       | $                  | 247,412 |   | $ | 281,494 |   |   | $ | 96,744 |   | $ | 110,325 |   |
|                     |       |                                                        |       |                                                           |       |           |                                                       |               |   |   |   |   |   |   |
| Operating income  (loss) |       | $                                                           | 19,630     |                                                           | $          | 20,216         |                                                       | $                  | 611 |   | $ | 9,216 |   |   | $ | (3,330 | ) | $ | 99 |   |
|                     |       |                                                        |       |                                                           |       |           |                                                       |               |   |   |   |   |   |   |
| Net income  (loss)       |       | $                                                           | 3,702      |                                                           | $          | 4,262          |                                                       | $                  | (6,660 | ) | $ | (1,030 | ) |   | $ | (6,439 | ) | $ | (4,196 | ) |

 

----

(1) Pro forma operating results include theoperating results for CityForest for fiscal year 2008.  The “as filed” operating results include theoperating results for CityForest for the period from the acquisition date (March 21,2007) to February 29, 2008.

 

(2)  Pro forma operating results include theoperating results for CityForest for the year ended December 31, 2006,prorated between the two reporting periods presented for the Company, asCityForest was previously a calendar year-end company.

 

**5. Inventories**

 

Components of inventoriesare as follows:

 

| ** **                        | ** ** | **February 29** | ** ** | **February 28** | ** ** |
|-----------------------------------|------------|----------------------|------------|----------------------|------------|
| ** **                        | ** ** | **2008**             | ** ** | **2007**             | ** ** |
| ** **                        | ** ** | ** **           | ** ** | **(Restated)**       | ** ** |
| Finished goods                    |       | $                    | 17,961,802 |                 | $          | 18,935,990 |   |
| Raw materials                     |       | 7,073,131            |       | 2,742,025            |       |
| Packaging  materials and supplies |       | 9,082,592            |       | 7,210,268            |       |
|                              |       | 34,117,525           |       | 28,888,283           |       |
|                              |       |                 |       |                 |       |
| Reserve for  obsolescence         |       | (121,086             | )          | (133,588             | )          |
|                              |       | $                    | 33,996,439 |                 | $          | 28,754,695 |   |

 

F-33

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Table of Contents

 

Cellu TissueHoldings, Inc. and Subsidiaries

 

Notes toConsolidated Financial Statements (continued)

 

**6. Property, Plant and Equipment**

 

Property, plant andequipment consist of the following:

 

| ** **                      | ** ** | **February 29, 2008 ** | ** **  | **February 28, 2007 ** | ** ** |
|---------------------------------|------------|---------------------------------------|-------------|---------------------------------------|------------|
| ** **                      | ** ** | **(Restated)**                        | ** **  | **(Restated)**                        | ** ** |
| Land and  improvements          |       | $                                     | 3,982,298   |                                  | $          | 4,393,973 |   |
| Buildings and  improvements     |       | 36,325,911                            |        | 24,290,470                            |       |
| Machinery and  equipment        |       | 301,631,048                           |        | 226,063,198                           |       |
| Furniture and  fixtures         |       | 91,723                                |        | 37,610                                |       |
| Computer  hardware and software |       | 4,420,076                             |        | 2,892,082                             |       |
| Construction-in-progress        |       | 5,620,003                             |        | 2,862,976                             |       |
|                            |       | 352,071,059                           |        | 260,540,309                           |       |
| Less accumulated  depreciation  |       | (41,582,978                           | )           | (16,758,505                           | )          |
|                            |       | $                                     | 310,488,081 |                                  | $          | 243,781,804 |   |

 

**7. Long-Term Debt**

 

Long-term debt consistsof the following:

 

| ** **                                                                                                        | ** ** | **February 29, 2008** | ** **  | **February 28, 2007** | ** ** |
|-------------------------------------------------------------------------------------------------------------------|------------|---------------------------------|-------------|---------------------------------|------------|
| Senior secured 9 3⁄4% notes due 2010                                                                           |       | $                               | 182,255,572 |                            | $          | 162,000,000 |   |
| Less discount                                                                                                     |       | (1,283,628                      | )           | (1,644,493                      | )          |
|                                                                                                              |       | 180,971,944                     |        | 160,355,507                     |       |
| Industrial  revenue bond payable, in annual installments, plus interest ranging from 1.38%  to 4.15%, due in 2028 |       | 17,875,000                      |        | —                          |       |
|                                                                                                              |       | 198,846,944                     |        | 160,355,507                     |       |
|                                                                                                              |       |                            |        |                            |       |
| Less current  portion of debt                                                                                     |       | 760,000                         |        | —                          |       |
|                                                                                                              |       | $                               | 198,086,944 |                            | $          | 160,355,507 |   |

 

The maturities oflong-term debt for the next five years follow: 2009-$760,000; 2010-$183,015,572; 2011-$760,000; 2012-$760,000; 2013 andthereafter-$14,835,000.

 

In March 2004, theCompany completed a private offering of $162.0 million aggregate principalamount of 93⁄4% senior secured notes due 2010 (the “Original Notes” and togetherwith the Additional Notes, the “Notes”). In connection with the CityForest Acquisition (see Note 4), the 

 

F-34

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Table of Contents

 

Company entered into aNote Purchase Agreement (the “Note Purchase Agreement”) with Wingate Capital Ltd.(“Wingate”), dated March 21, 2007, pursuant to which it issued and sold

 

F-35

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Tableof Contents

 

Cellu Tissue Holdings, Inc. andSubsidiaries

 

Notes to Consolidated Financial Statements(continued)

 

**7. Long-Term Debt (continued)**

 

$20.3 million aggregate principal amount of the Additional Notes toWingate for the purchase price of approximately $20.0 million, which is equalto 98.7383% of the aggregate principal amount of the Additional Notes.  The Notes (including the Original Notes andthe Additional Notes) were issued pursuant to and will be governed by theIndenture, dated as of March 12, 2004 (as amended and supplemented, the“Cellu Tissue Indenture”) among the Company, the subsidiary guarantors partythereto and The Bank of New York Trust Company, N.A., as successor trustee tothe Bank of New York (the “Trustee”).

 

The Notes mature on March 15, 2010 and require semi-annualinterest payments on March 15 and September 15.  The Notes are collateralized by a seniorsecured interest in substantially all of the Company’s assets.  Terms of the Indenture under which the Noteshave been issued contain certain covenants, including limitations on certainrestricted payments and the incurrence of additional indebtedness.  The Notes are unconditionally guaranteed byall of the Company’s subsidiaries.

 

In connection with the Merger (see Note 1), the Company solicitedconsents with respect to the Original Notes.  Consents were received with respect to 100% of the aggregate outstandingprincipal amount of the Original Notes. The Company accepted all of theconsents delivered in the consent solicitation and paid to the consentingnoteholders a consent fee of $40 per $1,000 principal amount of Original Notesfor which they delivered consents.  Thesepayments were made in the Company’s second quarter of fiscal year 2007.  These payments, along with other transactioncosts totaling $5.9 million, are reflected as merger-related transaction costson the statement of operations for the prior year.  The Company had previously incurred $.1million in the first quarter of fiscal year 2007.   As a result of the acceptance by the Companyof the consents delivered by noteholders and the completion of the consentsolicitation, the amendments to the Cellu Tissue Indenture described in the ConsentSolicitation Statement dated May 9, 2006 and related Supplement dated May 24,2006 became operative and the Company was not required to make a change ofcontrol offer to purchase any Notes in connection with the Merger.

 

The Companyentered into a Credit Agreement, dated as of June 12, 2006 (the “CreditAgreement”), among the Company, as U.S. Borrower, Interlake AcquisitionCorporation Limited, a subsidiary of the Company, as Canadian Borrower, theParent, the other loan guarantors party thereto, JPMorgan Chase Bank, N.A., asU.S. Administrative Agent, JPMorgan Chase Bank, N.A., Toronto Branch, asCanadian Administrative Agent, and the other lenders party thereto.  The Credit Agreement provides for a $35.0million working capital facility, which was subsequently increased to $40.0million (see discussion following), including a letter of credit sub-facilityand swing-line loan sub-facility. The Credit Agreement provides that amountsunder the facility may be borrowed, repaid and re-borrowed, subject to aborrowing base test, until the maturity date, which is June 12, 2011. Anamount equal to $32.0 million is available, in U.S. dollars, to the U.S.Borrower under the facility, and an amount equal

 

F-36

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Tableof Contents

 

Cellu Tissue Holdings, Inc. andSubsidiaries

 

Notes to Consolidated Financial Statements(continued)

 

**7.Long-Term Debt (continued)**

 

to $3.0million is available, in U.S. or Canadian dollars, to the Canadian Borrowerunder the facility.  Borrowings of $17.4million were made to finance a portion of the CityForest Acquisition.  As of February 29, 2008, $9.8 million ofborrowings remained outstanding under the working capital facility and excessavailability was $27.0 million.  Inaddition to the Note Purchase Agreement, the following agreements were enteredinto in connection with the CityForest Acquisition:

 

***Second Supplemental Indenture***

 

The Company,certain of its subsidiaries, the Trustee and CityForest have executed theSecond Supplemental Indenture, dated March 21, 2007 (the “SecondSupplemental Indenture”), pursuant to which CityForest became a party to theCellu Tissue Indenture as a subsidiary guarantor.  As a subsidiary guarantor, CityForest, on ajoint and several basis with all the existing subsidiary guarantors, fully,unconditionally and irrevocably guarantees to each holder of the Notes and theTrustee the obligations of Company under its Indenture and the Notes.

 

***Amendment to Credit Agreement***

 

The Companyhas entered into a First Amendment, dated March 21, 2007 (the“Amendment”), to the Credit Agreement dated June 12, 2006 (as amended bythe Amendment, the “Amended Credit Agreement”) among Cellu Tissue, as U.S.Borrower, Interlake Acquisition Corporation Limited, a subsidiary of CelluTissue, as Canadian Borrower, certain subsidiaries of Cellu Tissue, Cellu PaperHoldings, Inc., the parent corporation of Cellu Tissue, JPMorgan ChaseBank, N.A. (the “U.S. Administrative Agent”) and JPMorgan Chase Bank, N.A.,Toronto Branch (the “Canadian Administrative Agent”).

 

The Amendment (1) increasesthe working capital facility from $35.0 million to $40.0 million, (2) permitsthe issuance and sale by the Company of the Additional Notes, (3) providesfor the consummation of the CityForest Acquisition and the conversion byCityForest from a Minnesota corporation to a Minnesota limited liabilitycompany, (4) permits the assumption of approximately $18.4 million inaggregate principal amount of indebtedness of CityForest in connection with theCityForest Acquisition in accordance with the terms of the CityForest BondDocuments (as defined below under “CityForest Bond Documents”) and (5) permitsthe guarantee by Cellu Tissue of certain obligations of CityForest under theCityForest Bond Documents.  In connectionwith the Amendment, CityForest became a guarantor of the obligations of theborrowers under the Amended Credit Agreement.

 

***CityForest Bond Documents***

 

CityForest isparty to a Loan Agreement, dated March 1, 1998 (the “Loan Agreement”),with the City of Ladysmith, Wisconsin (the “Issuer”).  Pursuant to the Loan Agreement,

 

F-37

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Tableof Contents

 

Cellu Tissue Holdings, Inc. andSubsidiaries

 

Notes to Consolidated Financial Statements(continued)

 

**7.Long-Term Debt (continued)**

 

the Issuerloaned the proceeds of the Issuer’s Variable Rate Demand Solid Waste DisposalFacility Revenue Bonds, Series 1998 (CityForest Corporation Project) (the“Bonds”) to CityForest to finance the construction by CityForest of a solidwaste disposal facility.  Approximately$18.4 million in aggregate principal amount of the Bonds was outstanding as ofthe date of the CityForest Acquisition. CityForest is required, under the terms of the Indenture of Trustgoverning the Bonds (the “CityForest Indenture”), to provide a letter of creditin favor of the trustee under the CityForest Indenture (the “BondsTrustee”).  CityForest has entered intoan Amended and Restated Reimbursement Agreement, dated March 21, 2007 (the“Reimbursement Agreement” and, together with the CityForest Indenture and theLoan Agreement, the “CityForest Bond Documents”), with Associated Bank,National Association (“Associated Bank”), pursuant to which Associated Bank hasextended the required letter of credit (the “Associated Bank Letter of Credit”)and has provided a revolving credit facility to CityForest in an aggregateprincipal amount of up to $3.5 million (the “Associated Bank Revolving CreditFacility”).

 

The BondsTrustee is permitted to draw upon the Associated Bank Letter of Credit to payprincipal and interest due on the Bonds, and to provide liquidity to purchaseBonds put to CityForest by bondholders and not remarketed; and CityForest isobligated under the Reimbursement Agreement to reimburse Associated Bank forany such draws. CityForest is also obligated to pay a fee in respect of theaggregate amount available to be drawn under the Associated Bank Letter ofCredit at a rate per annum initially equal to 1.25%, subject to adjustment on aquarterly basis based on CityForest’s leverage. The expiration date of the Associated Bank Letter of Credit is February 15,2011.

 

Amounts borrowed by CityForestunder the Associated Bank Revolving Credit Facility bear interest at a rate perannum equal to the LIBOR Rate (as defined in the Reimbursement Agreement), plusan applicable margin. The applicable margin percentage initially is 1.75%,subject to adjustment on a quarterly basis based upon CityForest’sleverage.  During the continuance of anevent of default, the outstanding principal balance bears interest at a rateper annum equal to the then applicable interest rate plus 2.00%.  CityForest is also obligated to pay acommitment fee in respect of any unused commitment under the Associated BankRevolving Credit Facility in an amount equal to 0.50% per annum.  In addition, subject to certain exceptions,if CityForest terminates the Associated Bank Revolving Credit Facility prior toFebruary 15, 2009, CityForest is obligated to pay to Associated Bank a feeequal to 1.00% of the commitment then being terminated. The maturity date ofthe Associated Bank Revolving Credit Facility is February 15, 2011.

 

TheReimbursement Agreement requires scheduled semi-annual payments of principal ofthe Bonds equal to approximately 2.00% of the principal amount outstanding asof the date of the CityForest Acquisition, with the balance payable at maturityof the Bonds on March 1, 2028. The

 

F-38

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Tableof Contents

 

Cellu Tissue Holdings, Inc. andSubsidiaries

 

Notes to Consolidated Financial Statements(continued)

 

**7.Long-Term Debt (continued)**

 

ReimbursementAgreement also contains a number of other provisions regarding reserve fundsand other mandatory and optional repayments in connection with the Bonds.  In connection therewith, the Company has $1.2million of reserved cash as of February 29, 2008, which is separatelystated on the balance sheet.  Inaddition, the Reimbursement Agreement provides that in certain circumstanceswhere the Company incurs indebtedness, as defined, in excess of amountscurrently permitted under the CityForest Indenture or refinances theindebtedness issued under the Indenture, Associated Bank may require CityForestto repay all of its obligations to Associated Bank under the ReimbursementAgreement and either to cause the Bonds to be redeemed or to replace theAssociated Bank Letter of Credit with a Substitute Credit Facility, as suchterm is defined in the CityForest Indenture.

 

TheReimbursement Agreement contains various affirmative and negative covenantscustomary for working capital and term credit facilities, as well as additionalcovenants relating to the Bonds.  Thenegative covenants include limitations on: indebtedness; liens; acquisitions,mergers and consolidations; investments; guarantees; asset sales; sale andleaseback transactions; dividends and distributions; transactions withaffiliates; capital expenditures; and changes to the status of the Bonds.CityForest is also required to comply on a quarterly basis with a maximum leveragecovenant and a minimum fixed charge coverage covenant.

 

TheReimbursement Agreement also contains customary events of default,including:  payment defaults; breaches ofrepresentations and warranties; covenant defaults; cross-defaults to certain otherdebt, including the Additional Notes and indebtedness under the Amended CreditAgreement; certain events of bankruptcy and insolvency; judgment defaults;certain defaults related to the Employee Retirement Income Security Act of1974, as amended; and a change of control of CityForest or the Company.

 

The Companyhas guaranteed all of the obligations of CityForest under the ReimbursementAgreement, pursuant to a Guaranty, dated March 21, 2007 (the “Cellu TissueGuaranty”), executed by the Company in favor of Associated Bank. In addition,the obligations of CityForest under the Reimbursement Agreement are secured byfirst-priority liens in favor of Associated Bank in all of CityForest’sassets.  The U.S. Administrative Agent,the Canadian Administrative Agent, Associated Bank and CityForest have enteredinto an Intercreditor Agreement, dated March 21, 2007, which sets forththe respective rights and priorities of Associated Bank, on the one hand, andthe U.S. Administrative Agent and the Canadian Administrative Agent, on theother hand, as to the collateral of CityForest securing the ReimbursementAgreement and the Amended Credit Agreement.

 

F-39

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Tableof Contents

 

Cellu Tissue Holdings, Inc. andSubsidiaries

 

Notes to Consolidated Financial Statements(continued)

 

**8. Income Taxes**

 

The components of pretax loss consist of thefollowing:

 
| ** **         | ** ** | **Year Ended  February 29, 2008** | ** ** | **For the Period  June 13, 2006-  February 28, 2007** | ** **       | ** **  | **For the Period  March 1, 2006-  June 12, 2006** | ** ** | **Year Ended  February 28,  2006** | ** ** |
|--------------------|------------|--------------------------------------------------|------------|-------------------------------------------------------------------------------------|------------------|-------------|---------------------------------------------------------------------------------|------------|----------------------------------------------|------------|
| ** **         | ** ** | **(Restated)**                                   | ** ** | **(Restated)**                                                                      | ** **       | ** **  | **(Restated)**                                                                  | ** ** | ** **                                   | ** ** |
| ** **         | ** ** | **(Post-Merger)**                                | ** ** | ** **                                                                          | **(Pre-Merger)** | ** **  |
| United  States     |       | $                                                | (2,750,715 | )                                                                                   | $                | (12,859,315 | )                                                                               |       | $                                            | (8,234,898 | ) | $ | (6,349,474 | ) |
| Foreign            |       | 2,543,057                                        |       | 2,020,465                                                                           |             |        | (98,016                                                                         | )          | 204,988                                      |       |
| Total pretax  loss |       | $                                                | (207,658   | )                                                                                   | $                | (10,838,850 | )                                                                               |       | $                                            | (8,332,914 | ) | $ | (6,144,486 | ) |

 

The provision for income tax benefit consisted of the following:

 
| ** **          | ** ** | **Year Ended  February 29, 2008 ** | ** ** | **For the Period  June 13, 2006-  February 28, 2007** | ** **       | ** ** | **For the Period  March 1, 2006-  June 12, 2006** | ** ** | **Year Ended  February 28, 2006** | ** ** |
|---------------------|------------|--------------------------------------------------------|------------|-------------------------------------------------------------------------------------|------------------|------------|---------------------------------------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **          | ** ** | **(Restated)**                                         | ** ** | **(Restated)**                                                                      | ** **       | ** ** | **(Restated)**                                                                  | ** ** | ** **                                       | ** ** |
| ** **          | ** ** | **(Post-Merger)**                                      | ** ** | ** **                                                                          | **(Pre-Merger)** | ** ** |
| Current:            | ** ** | ** **                                             | ** ** | ** **                                                                          | ** **       | ** ** | ** **                                                                      | ** ** | ** **                                       | ** ** |
| Federal             |       | $                                                      | 1,753,405  |                                                                                | $                | 1,346,860  |                                                                            |       | $                                                | (1,449,814 | ) | $ | (1,029,216 | ) |
| State               |       | 49,000                                                 |       | 27,750                                                                              |             |       | 9,250                                                                           |       | 177,000                                          |       |
| Foreign             |       | 1,282,657                                              |       | 1,337,253                                                                           |             |       | (57,095                                                                         | )          | 232,465                                          |       |
|                |       | 3,085,062                                              |       | 2,711,863                                                                           |             |       | (1,497,659                                                                      | )          | (619,751                                         | )          |
| Deferred:           |       |                                                   |       |                                                                                |             |       |                                                                            |       |                                             |       |
| Federal             |       | (3,183,542                                             | )          | (5,885,474                                                                          | )                |       | (404,831                                                                        | )          | (2,569,061                                       | )          |
| State               |       | (2,053,590                                             | )          | (362,209                                                                            | )                |       | (14,288                                                                         | )          | (387,963                                         | )          |
| Foreign             |       | (1,757,344                                             | )          | (643,424                                                                            | )                |       | 23,095                                                                          |       | 36,459                                           |       |
|                |       | (6,994,476                                             | )          | (6,891,107                                                                          | )                |       | (396,024                                                                        | )          | (2,920,565                                       | )          |
| Valuation allowance |       | —                                                 |       | —                                                                              |             |       | —                                                                          |       | (34,816                                          | )          |
|                |       | $                                                      | (3,909,414 | )                                                                                   | $                | (4,179,244 | )                                                                               |       | $                                                | (1,893,683 | ) | $ | (3,575,132 | ) |

 

The foreign portion of the provision for income taxes is a result ofoperations at one of the Company’s subsidiaries, Interlake AcquisitionCorporation Limited, in Canada.  TheCompany provides tax on foreign earnings that are remitted or deemed to beremitted.

 

F-40

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Tableof Contents

 

Cellu Tissue Holdings, Inc. andSubsidiaries

 

Notes to Consolidated Financial Statements(continued)

 

**8. Income Taxes (continued)**

 

The reconciliation of income tax benefit onloss at the U.S. federal statutory tax rates to the effective income tax ratesis as follows:

 
| ** **                          | ** ** | **Year Ended  February 29, 2008** | ** ** | **For the Period  June 13, 2006-  February 28,2007** | ** **       | ** ** | **For the Period  March 1, 2006-  June 12, 2006** | ** ** | **Year Ended  February 28, 2006** | ** ** |
|-------------------------------------|------------|--------------------------------------------------|------------|-------------------------------------------------------------------------------|------------------|------------|---------------------------------------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                          | ** ** | **(Restated)**                                   | ** ** | **(Restated)**                                                                | ** **       | ** ** | **(Restated)**                                                                  | ** ** | ** **                                       | ** ** |
| ** **                          | ** ** | **(Post-Merger)**                                | ** ** | ** **                                                                    | **(Pre-Merger)** | ** ** |
| Tax at U.S. statutory rate          |       | $                                                | (955,416   | )                                                                             | $                | (4,405,542 | )                                                                               |       | $                                                | (2,793,026 | ) | $ | (2,089,125 | ) |
|                                |       |                                             |       |                                                                          |             |       |                                                                            |       |                                             |       |
| Tax at foreign statutory rate       |       | 867,691                                          |       | 707,163                                                                       |             |       | (34,306                                                                         | )          |                                             |       |
| State taxes, net of federal benefit |       | (521,065                                         | )          | (377,954                                                                      | )                |       | 24,994                                                                          |       | (210,963                                         | )          |
| Foreign non-deductible expense      |       | 1,024                                            |       | 525                                                                           |             |       | 175                                                                             |       | 680                                              |       |
| U.S. non-deductible items           |       | (148,240                                         | )          | 2,060                                                                         |             |       | 908,480                                                                         |       | 38,643                                           |       |
| Change in valuation allowance       |       |                                             |       |                                                                          |             |       |                                                                            |       | (34,816                                          | )          |
| Provision to return changes         |       | (867,460                                         | )          |                                                                          |             |       |                                                                            |       | (1,215,247                                       | )          |
| Canadian withholding tax            |       |                                             |       |                                                                          |             |       |                                                                            |       | 136,917                                          |       |
| AMT credit                          |       | (290,979                                         | )          |                                                                          |             |       |                                                                            |       |                                             |       |
| FIN 48 Provision                    |       | 845,668                                          |       |                                                                          |             |       |                                                                            |       |                                             |       |
| State deferred rate change          |       | (1,500,184                                       | )          |                                                                          |             |       |                                                                            |       |                                             |       |
| Canadian deferred rate change       |       | (1,383,386                                       | )          |                                                                          |             |       |                                                                            |       |                                             |       |
| Other                               |       | 42,933                                           |       | (105,496                                                                      | )                |       |                                                                            |       | (201,221                                         | )          |
| Income tax benefit                  |       | $                                                | (3,909,414 | )                                                                             | $                | (4,179,244 | )                                                                               |       | $                                                | (1,893,683 | ) | $ | (3,575,132 | ) |

 

Included inthe 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 ratesdue to legislative changes and changes in the Company’s effective state taxrates which are expected to be realized in the future.

 

The reductionin the valuation allowance during fiscal year 2006 relates to the utilizationof Canadian NOLs, as the subsidiary was profitable in fiscal year 2006.

 

F-41

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Tableof Contents

 

Cellu Tissue Holdings, Inc. andSubsidiaries

 

Notes to Consolidated Financial Statements(continued)

 

**8. Income Taxes (continued)**

 

Significant components of the Company’sdeferred tax assets and liabilities are as follows:

 
| ** **                                 | ** ** | **February 29  2008** | ** **  | **February 28  2007** | ** ** |
|--------------------------------------------|------------|----------------------------|-------------|----------------------------|------------|
| ** **                                 | ** ** | **(Restated)**             | ** **  | **(Restated)**             | ** ** |
|                                       |       |                       |        |                       |       |
| Deferred tax assets:                       |       |                       |        |                       |       |
| Compensation and benefits                  |       | $                          | 1,237,579   |                       | $          | 565,512 |   |
| NOL carryforward                           |       | 4,612,901                  |        | 5,574,218                  |       |
| Accounts receivable                        |       | 133,646                    |        | 189,630                    |       |
| Refinancing costs                          |       | 2,484,857                  |        | 2,199,924                  |       |
| Capitalized transaction costs              |       | 670,678                    |        |                       |       |
| AMT credit                                 |       | 334,979                    |        |                       |       |
| Other                                      |       | 196,663                    |        | 253,710                    |       |
| Total deferred tax assets                  |       | 9,671,303                  |        | 8,782,994                  |       |
|                                       |       |                       |        |                       |       |
| Deferred tax liabilities:                  |       |                       |        |                       |       |
| Goodwill/trademarks                        |       | (900,216                   | )           |                       |       |
| Restricted stock                           |       | (918,469                   | )           | (908,299                   | )          |
| Property, plant and equipment              |       | (82,511,728                | )           | (72,176,664                | )          |
| Other                                      |       | (123,781                   | )           | (206,771                   | )          |
| Total deferred tax liabilities             |       | (84,454,194                | )           | (73,291,734                | )          |
| Net deferred tax liability                 |       | $                          | (74,782,891 | )                          | $          | (64,508,740 | ) |
|                                       |       |                       |        |                       |       |
| ** **                                 | ** ** | **February 29  2008** | ** **  | **February 28  2007** | ** ** |
| Current deferred income tax assets         |       | $                          | 7,157,191   |                       | $          | 6,498,098 |   |
| Noncurrent deferred income tax liabilities |       | (81,940,082                | )           | (71,006,838                | )          |
|                                       |       | $                          | (74,782,891 | )                          | $          | (64,508,740 | ) |
|                                            |            |                            |             |                            |            |  |  |  |  |

** **

F-42

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Table of Contents

 

Cellu TissueHoldings, Inc. and Subsidiaries

 

Notes toConsolidated Financial Statements (continued)

 

**8. IncomeTaxes (continued)**

 

The temporarydifferences that give rise to significant portions of the deferred tax assetsand deferred tax liabilities are net operating loss carryforwards, differencesbetween financial statement and tax bases of property, plant and equipment, theallowance for doubtful accounts and other miscellaneous reserves.

 

As of February 29,2008, the Company had federal NOLs of approximately $9,804,000**,** which begin to expire in****2021****and state net NOLs of approximately $14,506,000, whichbegin to expire in 2019.

 

The Companyadopted FASB Interpretation 48, “*Accounting for Uncertaintyin Income Taxes*” (“FIN 48”), at the beginning of fiscal year2008.  The implementation of FIN 48 didnot have a material impact on the Company’s results of operations and financialposition.

 

The Companyrecognizes interest and penalties related to uncertain tax positions in incometax expense.  As of February 29,2008, the Company had accrued $1,552,000 related to uncertain tax positions.

 

The fiscal taxyears 2004 through 2008 remain open to examination by the major taxingjurisdictions to which the Company is subject. As of February 29, 2008, the Company does not expect any materialchanges to unrecognized tax positions within the next 12 months.

 

**9.Retirement Plan**

 

The Company has aSavings Incentive and Profit-Sharing Plan (the “Plan”) qualified under Section 401(k) ofthe Code. The Plan covers all employees who are 21 years of age or older withone or more years of service. Employees may contribute up to 20% of theirannual compensation (subject to certain statutory limitations) to the Planthrough voluntary salary deferred payments. The Company matches 100% of theemployees’ contribution up to 2% of the employees’ salary and 70% of theremaining employees’ contribution up to 6% of the employees’ salary. The Companycontributed $1,620,998, $1,096,118, $471,808 and $1,782,923 to the Plan forfiscal year 2008, from June 13, 2006 to February 28, 2007, from March 1,2006 to June 12, 2006 and for fiscal year 2006, respectively.

 

F-43

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Table of Contents

 

Cellu TissueHoldings, Inc. and Subsidiaries

 

Notes toConsolidated Financial Statements (continued)

 

**10.Commitments and Contingencies**

 

The Company leasescertain warehouses, vehicles and equipment under noncancelable operatingleases, which expire at varying times through February 2012**.** Future minimum lease obligations at February 29, 2008are as follows:

 
| **Year ending:** | ** ** | ** ** | ** ** |
|-----------------------|------------|------------|------------|
| 2009                  |       | $          | 1,140,500  |   |
| 2010                  |       | 668,139    |       |
| 2011                  |       | 593,551    |       |
| 2012                  |       | 427,441    |       |
|                  |       | $          | 2,829,631  |   |

 

Operating leaseand rental expenses aggregated $2,667,485, $1,918,784, $764,573 and $3,160,316for fiscal year 2008, from June 13, 2006 to February 28, 2007, from March 1,2006 to June 12, 2006 and for fiscal year 2006, respectively.

 

In December 2007,the Company purchased machinery and equipment for $5.5 million that it had beenleasing under a 10-year operating lease. The lease had a remaining term of two years and lease payments were approximately$1.5 million a year.

 

In the normalcourse of business, the Company is involved in various claims. The Company’s policy is to accrueenvironmental investigatory and remediation costs for identified sites when itis probable that a liability has been incurred and the amount of the loss canbe reasonably estimated. The amount recorded for identified contingentliabilities is based on estimates and is not material.

 

The Company entersinto agreements with various pulp vendors to purchase various amounts of pulpover the next two to three years.  Thesecommitments require purchases of pulp up to approximately 169,000 metric tonsper year, at pulp prices below published list prices and allow the Company toshift a portion of its pulp purchases to the spot market to take advantage ofmore favorable spot market prices when such prices fall. The Company believesthat its current commitment under these arrangements or their equivalentapproximates****50% of its annual budgeted pulpneeds.  The future purchase value of thecontracts, valued at the February 29, 2008 price, is $106,119,300.

 

**11.Related Party Transactions**

 

On June 12,2006, the Company, Cellu Parent and Merger Sub entered into a ManagementAgreement with Weston Presidio Service Company, LLC (“Weston Presidio ServiceCompany”),

 

F-44

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Table of Contents

 

Cellu TissueHoldings, Inc. and Subsidiaries

 

Notes toConsolidated Financial Statements (continued)

 

**11.Related Party Transactions (continued)**

 

pursuant to whichWeston Presidio Service Company has agreed to provide the Company with certainmanagement, consulting and financial and other advisory services.  Weston Presidio Service Company is anaffiliate of Weston Presidio, which is the controlling shareholder of CelluParent, which is the sole shareholder of the Parent.   In consideration for such services, theCompany and Cellu Parent have jointly and severally agreed to pay WestonPresidio Service Company an annual fee of $450,000, to be paid in equalquarterly installments, and to reimburse out-of-pocket expenses of WestonPresidio Service Company and its affiliates. In addition, in connection with the consummation of the Merger and asrequired by the Management Agreement, the Company paid Weston Presidio ServiceCompany a fee in the amount of $2,000,000. This amount has been capitalized through purchase accounting as part oftotal merger consideration.  TheManagement Agreement expires on June 12, 2016, but will be automaticallyextended on each anniversary of such date for an additional year, unless one ofthe parties provides written notice of its desire not to automatically extendthe term at least 90 days prior to such anniversary.

 

Management feespaid to Weston Presidio Service Company of $450,000 for fiscal year 2008 and$302,812 for the period June 13, 2006 to February 28, 2007 arereflected in selling, general and administrative expenses.

 

Management feesand out-of-pocket expenses paid to Charterhouse Group International, Inc.(“Charterhouse”) (the former majority stockholder of the Parent) of $153,482and $450,768 for the period March 1, 2006 to June 12, 2006 and infiscal year 2006, respectively, are reflected in selling, general andadministrative expenses.

 

**12.Business Segments**

 

The Company operates in two reportable business segments: tissue andmachine-glazed paper. The Company assesses the performance of its reportablebusiness segments using income from operations. Income from operations excludesinterest income, interest expense, income tax expense (benefit), the impact offoreign currency gains and losses and gain and loss on sale of equipment. Aportion of corporate and shared expenses is allocated to each segment. Includedin income from operations for fiscal year 2008 is $2,078,212 of terminatedacquisition 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 forfiscal year 2008 is $808,111 of compensation charges related to non-cashcompensation expense related to the vesting of restricted stock and stockoption awards.  Of this amount, $525,272and $282,839 impacts the tissue segment and machine-glazed paper segment,respectively.  Included in loss fromoperations for the period June 13, 2006 to February 28, 2007 is$142,079 of merger-related transaction costs, $240,218 of restructuring costsand $909,264 for a non-cash charge to cost of goods sold related to excesspurchase price allocated to inventory.

 

F-45

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Table of Contents

 

Cellu TissueHoldings, Inc. and Subsidiaries

 

Notes to ConsolidatedFinancial Statements (continued)

 

**12.Business Segments (continued)**

 

Of these amounts, $92,351, $156,142 and $591,022, respectively, impactsthe tissue segment and $49,728, $84,076 and $318,242, respectively impacts themachine-glazed paper segment.  Includedin loss from operations for the period June 13, 2006 to February 28,2007 are compensation charges of $3,825,939 related to non-cash compensationexpense related to the vestingof restricted stock awards, payments of taxes associated with such awards andother compensation expense related to the Merger.  Of this amount, $2,486,867 impacts the tissuesegment and $1,339,072 impacts the machine-glazed paper segment.  Included in loss from operations for theperiod March 1, 2006 to June 12, 2006 is $5,933,265 of merger-relatedtransaction costs.  Of this amount,$3,856,622 impacts the tissue segment and $2,076,643 impacts the machine-glazedpaper segment.  Also included in lossfrom operations for the period March 1, 2006 to June 12, 2006 are compensationcharges of $923,580 related to restricted stock grants prior to the Merger thatvested immediately upon the Merger and normal vesting related to restrictedstock grants made after the Merger.  Ofthis amount, $323,253 impacts the machine-glazed paper segment and $600,327impacts the tissue segment

 

Segment assets primarily include mill property, plantand equipment, raw material, packaging and finished product inventories andaccounts receivable. Corporate assets primarily include prepaid expenses andother current assets, income taxes, goodwill and trademarks.

 

F-46

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Table of Contents

 

Cellu TissueHoldings, Inc. and Subsidiaries

 

Notes toConsolidated Financial Statements (continued)

 

**12.Business Segments (continued)**

 
| ** **                                   | ** ** | **Year Ended  February 29, 2008** | ** **  | **For the Period  June 13, 2006-  February 28, 2007** | ** ** | ** **  | **For the Period  March 1, 2006-  June 12, 2006** | ** ** | **Year Ended  February 28, 2006** | ** ** |
|----------------------------------------------|------------|--------------------------------------------------|-------------|-------------------------------------------------------------------------------------|------------|-------------|---------------------------------------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                   | ** ** | **(Restated)**                                   | ** **  | **(Restated)**                                                                      | ** ** | ** **  | **(Restated)**                                                                  | ** ** | ** **                                       | ** ** |
| **Net Sales**                                | ** ** | ** **                                       |        |                                                                                |       |        |                                                                            |       |                                             |       |
| Tissue                                       |       | $                                                | 333,341,679 |                                                                                | $          | 174,073,458 |                                                                            |       | $                                                | 68,714,100 |   | $ | 237,997,670 |   |
| Machine-glazed paper                         |       | 109,739,451                                      |        | 73,338,402                                                                          |       |        | 28,029,712                                                                      |       | 99,365,612                                       |       |
| Consolidated                                 |       | $                                                | 443,081,130 |                                                                                | $          | 247,411,860 |                                                                            |       | $                                                | 96,743,812 |   | $ | 337,363,282 |   |
| **Income (Loss) from Operations**            |       |                                             |        |                                                                                |       |        |                                                                            |       |                                             |       |
| Tissue                                       |       | $                                                | 19,775,402  |                                                                                | $          | 1,917,384   |                                                                            |       | $                                                | (1,210,487 | ) | $ | 8,372,803 |   |
| Machine-glazed paper                         |       | (145,319                                         | )           | (1,306,588                                                                          | )          |        | (2,119,523                                                                      | )          | 3,060,238                                        |       |
| Consolidated                                 |       | 19,630,083                                       |        | 610,796                                                                             |       |        | (3,330,010                                                                      | )          | 11,433,041                                       |       |
| Interest expense, net                        |       | (19,870,029                                      | )           | (11,468,975                                                                         | )          |        | (4,896,355                                                                      | )          | (17,076,757                                      | )          |
| Net foreign currency transaction (loss) gain |       | (100,335                                         | )           | 4,802                                                                               |       |        | (133,598                                                                        | )          | (503,262                                         | )          |
| Other income                                 |       | 132,623                                          |        | 14,527                                                                              |       |        | 27,049                                                                          |       | 2,492                                            |       |
| Pretax loss                                  |       | $                                                | (207,658    | )                                                                                   | $          | (10,838,850 | )                                                                               |       | $                                                | (8,332,914 | ) | $ | (6,144,486 | ) |
| ** **                                   | ** ** | ** **                                       | ** **  | ** **                                                                          |       |        |                                                                            |       |                                             |       |
| **Capital Expenditures**                     | ** ** | ** **                                       | ** **  | ** **                                                                          |       |        |                                                                            |       |                                             |       |
| Tissue                                       |       | 18,415,312                                       |        | $                                                                                   | 6,079,263  |        |                                                                            | $          | 1,355,009                                        |       | $ | 11,770,818 |   |
| Machine-glazed paper                         |       | 2,062,114                                        |        | 1,597,878                                                                           |       |        | 582,601                                                                         |       | 1,279,348                                        |       |
| Consolidated                                 |       | $                                                | 20,477,426  |                                                                                | $          | 7,677,141   |                                                                            |       | $                                                | 1,937,610  |   | $ | 13,050,166 |   |
|                                         | ** ** | ** **                                       |        |                                                                                |       |        |                                                                            |       |                                             |       |
| **Depreciation**                             | ** ** | ** **                                       |        |                                                                                |       |        |                                                                            |       |                                             |       |
| Tissue                                       |       | $                                                | 17,512,477  |                                                                                | $          | 11,655,304  |                                                                            |       | $                                                | 2,981,837  |   | $ | 9,686,799 |   |
| Machine-glazed paper                         |       | 5,977,162                                        |        | 4,777,553                                                                           |       |        | 1,129,705                                                                       |       | 4,757,120                                        |       |
| Corporate                                    |       | 656,498                                          |        | 325,648                                                                             |       |        | 115,101                                                                         |       | 410,102                                          |       |
| Consolidated                                 |       | $                                                | 24,146,137  |                                                                                | $          | 16,758,505  |                                                                            |       | $                                                | 4,226,643  |   | $ | 14,854,021 |   |

 

F-47

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Table of Contents

 

Cellu TissueHoldings, Inc. and Subsidiaries

 

Notes toConsolidated Financial Statements (continued)

 

**12.Business Segments (continued)**

 
| ** **           | ** ** | **February 29** | ** **  | **February 28** | ** ** |
|----------------------|------------|----------------------|-------------|----------------------|------------|
| ** **           | ** ** | **2008**             | ** **  | **2007**             | ** ** |
| ** **           | ** ** | **(Restated)**       | ** **  | **(Restated)**       | ** ** |
| **Segment assets**   | ** ** | ** **           |        |                 |       |
| Tissue               |       | $                    | 325,526,456 |                 | $          | 227,506,307 |   |
| Machine-glazed paper |       | 91,007,538           |        | 85,885,109           |       |
| Corporate assets     |       | 6,682,685            |        | 31,951,675           |       |
| Consolidated         |       | $                    | 423,216,679 |                 | $          | 345,343,091 |   |
|                 |       |                 |        |                 |       |
| **Goodwill**         |       |                 |        |                 |       |
| Tissue               |       | $                    | 10,249,752  |                 | $          | 3,279,751 |   |
| Machine-glazed paper |       | 1,085,003            |        | 1,085,003            |       |
| Consolidated         |       | $                    | 11,334,755  |                 | $          | 4,364,754 |   |

 

**13. Geographic Data**

 

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

 
| ** **                        | ** ** | **Year Ended  February 29, 2008** | ** **  | **For the Period June  13, 2006-February  28, 2007** | ** ** | ** **  | **For the Period  March 1, 2006-  June 12, 2006** | ** ** | **Year Ended  February 28,  2006** | ** ** |
|-----------------------------------|------------|--------------------------------------------------|-------------|-------------------------------------------------------------------------------|------------|-------------|---------------------------------------------------------------------------------|------------|----------------------------------------------|------------|
| ** **                        | ** ** | **(Restated)**                                   | ** **  | **(Restated)**                                                                | ** ** | ** **  | **(Restated)**                                                                  | ** ** | ** **                                   | ** ** |
|                              |       |                                             |        |                                                                          |       |        |                                                                            |       |                                         |       |
| **Net Sales**                     |       |                                             |        |                                                                          |       |        |                                                                            |       |                                         |       |
| United States                     |       | $                                                | 394,019,201 |                                                                          | $          | 208,880,170 |                                                                            |       | $                                            | 80,395,283 |   | $ | 284,737,873 |   |
| Other                             |       | 56,994,578                                       |        | 42,990,743                                                                    |       |        | 17,787,863                                                                      |       | 58,461,671                                   |       |
| Sub-total                         |       | 451,013,779                                      |        | 251,870,913                                                                   |       |        | 98,183,146                                                                      |       | 343,199,544                                  |       |
|                              |       |                                             |        |                                                                          |       |        |                                                                            |       |                                         |       |
| Sales deductions                  |       | 7,932,649                                        |        | 4,459,053                                                                     |       |        | 1,439,334                                                                       |       | 5,836,262                                    |       |
| Consolidated                      |       | $                                                | 443,081,130 |                                                                          | $          | 247,411,860 |                                                                            |       | $                                            | 96,743,812 |   | $ | 337,363,282 |   |
|                              |       |                                             |        |                                                                          |       |        |                                                                            |       |                                         |
| ** **                        | ** ** | **February 29**                             | ** **  | **February 28**                                                          | ** ** | ** **  |                                                                            |       |                                         |
| ** **                        | ** ** | **2008**                                         | ** **  | **2007**                                                                      | ** ** | ** **  |                                                                            |       |                                         |
| ** **                        | ** ** | **(Restated)**                                   | ** **  | **(Restated)**                                                                | ** ** | ** **  |                                                                            |       |                                         |
| **Property, Plant and Equipment** |       |                                             |        |                                                                          |       |        |                                                                            |       |                                         |
| United States                     |       | $                                                | 278,010,209 |                                                                          | $          | 212,975,154 |                                                                            |       |                                         |       |   |
| Other                             |       | 32,477,872                                       |        | 30,806,650                                                                    |       |        |                                                                            |       |                                         |
| Consolidated                      |       | $                                                | 310,488,081 |                                                                          | $          | 243,781,804 |                                                                            |       |                                         |       |   |

 

F-48

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Table ofContents

 

Cellu Tissue Holdings, Inc. andSubsidiaries

 

Notes to Consolidated Financial Statements(continued)

 

**14.  OtherCosts**

 

During fiscal year 2008, the Company incurred $2.1 million in costsassociated with a potential acquisition that did not transpire.  This amount is shown as a separate line itemon the fiscal year 2008 statement of operations.

 

During fiscal year 2006, the Company idled one of its paper machines atits Interlake facility in Ontario, Canada. This decision was due to significant increases in manufacturing coststhat the Company was unable to pass on to the machine-glazed segment market.  As a result, 48 employees were terminated andthe Company recorded $625,476 of severance costs.  Also during fiscal year 2006, the Companyrecorded $424,887 related to severance costs associated with a change in thecorporate organizational structure of the Company. Accordingly, for fiscal year2006 restructuring costs of $1,050,363 million were recorded as a separate lineitem in the Company’s statement of operations.

 

In the fourth quarter of fiscal year 2007, the Company shut down theInterlake paper machine permanently and, accordingly, has recorded animpairment charge of $488,274, which is reflected as a separate line item inthe Company’s statement of operations for fiscal year 2007.

 

**15. Quarterly Results of Operations (Unaudited)**

 
| **Year Ended**    | ** ** | ** **                           | ** ** | **As restated**   | ** ** | ** **                           | ** ** | **As restated**    | ** ** | ** **                           | ** ** | **As restated**   | ** ** | **As previously reported** | ** ** | **As restated**    | ** ** | ** **                           | ** ** | **As restated** | ** ** |
|------------------------|------------|--------------------------------------|------------|------------------------|------------|--------------------------------------|------------|-------------------------|------------|--------------------------------------|------------|------------------------|------------|--------------------------------------|------------|-------------------------|------------|--------------------------------------|------------|----------------------|------------|
| **February 29,**  | ** ** | **As previously reported** | ** ** | **First Quarter** | ** ** | **As previously reported** | ** ** | **Second Quarter** | ** ** | **As previously reported** | ** ** | **Third Quarter** | ** ** | **Fourth Quarter**              | ** ** | **Fourth Quarter** | ** ** | **As previously reported** | ** ** | **Year**             | ** ** |
| **2008**               | ** ** | **First Quarter**               | ** ** | **(2)**                | ** ** | **Second Quarter**              | ** ** | **(2)**                 | ** ** | **Third Quarter**               | ** ** | **(2)**                | ** ** | **(1)**                              | ** ** | **(1) (2)**             | ** ** | **Year**                             | ** ** | **(2)**              | ** ** |
| Net sales              |       | 103,200,786                          |       | 106,226,949            |       | 109,000,321                          |       | 112,026,009             |       | 109,161,988                          |       | 112,194,182            |       | 109,659,334                          |       | 112,633,990             |       | 431,022,429                          |       | 443,081,130          |       |
| Gross profit           |       | 8,292,118                            |       | 7,885,765              |       | 11,766,537                           |       | 10,864,996              |       | 11,515,878                           |       | 11,716,337             |       | 11,189,398                           |       | 11,262,016              |       | 42,763,931                           |       | 41,729,114           |       |
| Income from operations |       | 3,576,262                            |       | 3,169,909              |       | 7,060,342                            |       | 6,158,801               |       | 5,965,851                            |       | 6,166,310              |       | 4,062,445                            |       | 4,135,063               |       | 20,664,900                           |       | 19,630,083           |       |
| Net (loss)income       |       | (1,110,484                           | )          | (1,141,841             | )          | 1,069,830                            |       | 541,149                 |       | 1,375,672                            |       | 1,645,049              |       | 2,657,733                            |       | 2,657,399               |       | 3,992,751                            |       | 3,701,756            |       |

 

----

(1)  Income from operations for fiscal year 2008includes $2.1 million related to the write-off of terminated acquisition-relatedtransaction costs.  Net income for fiscalyear 2008 includes an income tax benefit of $3.9 million.

(2)  See Note 2 to the consolidated financialstatements for discussion of restatement.

 

F-49

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Table ofContents

 

Cellu Tissue Holdings, Inc. and Subsidiaries

 

Notes to Consolidated Financial Statements (continued)

 

**15. Quarterly Results of Operations (Unaudited) (continued)**

 
| ** **                        | ** ** | ** **                           | ** ** | ** **             | ** ** | ** **                           | ** ** | **As restated**  | ** ** | ** ** | ** **                           | ** ** | **As restated**    | ** ** | ** **                           | ** ** | ** **             | ** ** | ** **                           | ** ** | ** **              | ** ** | ** **                           | ** ** | ** **           | ** ** |
|-----------------------------------|------------|--------------------------------------|------------|------------------------|------------|--------------------------------------|------------|-----------------------|------------|------------|--------------------------------------|------------|-------------------------|------------|--------------------------------------|------------|------------------------|------------|--------------------------------------|------------|-------------------------|------------|--------------------------------------|------------|----------------------|------------|
| **Year Ended**               | ** ** | ** **                           | ** ** | **As restated**   | ** ** | **As previously reported** | ** ** | **May 26,2006-** | ** ** | ** ** | **As previously reported** | ** ** | **June 13,2006-**  | ** ** | ** **                           | ** ** | **As restated**   | ** ** | **As previously reported** | ** ** | **As restated**    | ** ** | ** **                           | ** ** | **As restated** | ** ** |
| **February 28,**             | ** ** | **As previously reported** | ** ** | **First Quarter** | ** ** | **May 26,2006-**                | ** ** | **June 12,2006** | ** ** | ** ** | **June 13,2006-**               | ** ** | **August 23,2006** | ** ** | **As previously reported** | ** ** | **Third Quarter** | ** ** | **Fourth Quarter**              | ** ** | **Fourth Quarter** | ** ** | **As previously reported** | ** ** | **Year**             | ** ** |
| **2007**                          | ** ** | **First Quarter**               | ** ** | **(3)**                | ** ** | **June 12,2006**                | ** ** | **(3)**               | ** ** | ** ** | **August 23,2006**              | ** ** | **(3)**                 | ** ** | **Third Quarter**               | ** ** | **(3)**                | ** ** | **(1)**                              | ** ** | **(1) (3)**             | ** ** | **Year**                             | ** ** | **(3)**              | ** ** |
| Net sales                         |       | 78,641,977                           |       | 80,920,227             |       | 15,599,955                           |       | 15,823,585            |       |       | 68,562,386                           |       | 70,471,571              |       | 83,281,206                           |       | 85,393,555             |       | 89,393,000                           |       | 91,546,734              |       | 335,478,524                          |       | 344,155,672          |       |
| Gross profit (1)                  |       | 6,850,819                            |       | 6,850,819              |       | 1,337,301                            |       | 1,337,301             |       |       | 3,344,627                            |       | 3,034,076               |       | 5,890,779                            |       | 5,699,873              |       | 3,683,031                            |       | 3,780,414               |       | 21,106,557                           |       | 20,702,483           |       |
| Income (loss) from operations (2) |       | 3,576,308                            |       | 3,576,308              |       | (6,906,318                           | )          | (6,906,318            | )          |       | (912,630                             | )          | (1,223,178              | )          | 2,426,928                            |       | 2,236,022              |       | (499,428                             | )          | (402,048                | )          | (2,315,140                           | )          | (2,719,214           | )          |
| Net loss                          |       | (475,652                             | )          | (475,652               | )          | (6,059,312                           | )          | (5,963,579            | )          |       | (2,619,388                           | )          | (2,826,710              | )          | (1,074,735                           | )          | (1,275,472             | )          | (2,498,243                           | )          | (2,557,424              | )          | (12,727,330                          | )          | (13,098,837          | )          |

 

----

(1)                                  Grossprofit for the period from June 13, 2006 to August 23, 2006 and forthe third and fourth quarters of fiscal year 2007 includes $1.6 million, $2.1million and $2.3 million, respectively, for additional depreciation expenserelated to excess purchase price allocated to property, plant andequipment.  Also, included in grossprofit for the period from June 13, 2006 to August 23, 2006 is a $.9million non-cash charge to cost of goods sold related to excess purchase priceallocated to inventory.

 

(2)                                  Incomefrom operations for the period March 1, 2006 to June 12, 2006, forthe period June 13, 2006 to August 23, 2006, for the third and fourthquarters of fiscal year 2007 includes $1.3 million, $1.8 million, $.4 millionand $.3 million, respectively, related to non-cash compensation expense relatedto the vesting of restricted stock awards, payments of taxes associated withsuch awards and other compensation expense related to the Merger.

 

(3)                                  SeeNote 2 to the consolidated financial statements for discussion of restatement.

 

F-50

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Table of Contents

 

**ScheduleII—Valuation and Qualifying Accounts**

**CelluTissue Holdings, Inc.**

**Fiscalyears ended February 29, 2008 and February 28, 2007 and 2006**

** **
| **Description**                   | ** ** | **Balance at  Beginning  of Year** | ** ** | **Charged  to Costs  and  Expenses** | ** ** | **Deductions** | ** ** | **Balance at  End of  Year** | ** ** |
|-----------------------------------|------------|----------------------------------------------|------------|-------------------------------------------|------------|----------------|------------|----------------------------------------|------------|
| Allowance for Doubtful  Accounts: | ** ** | ** **                                   | ** ** | ** **                                | ** ** | ** **     | ** ** | ** **                             | ** ** |
| February 29, 2008            |       | $                                            | 408,314    |                                      | $          | 202,064        |       | $                                      | 440,567    |   | $ | 169,811 |   |
| February 28, 2007            |       | 300,314                                      |       | 328,405                                   |       | 220,405        |       | 408,314                                |       |
| February 28, 2006            |       | 398,749                                      |       | 115,269                                   |       | 213,704        |       | 300,314                                |       |
| ** **                        | ** ** | ** **                                   | ** ** | ** **                                | ** ** | ** **     | ** ** | ** **                             | ** ** |
| Inventory Obsolescence  Reserve:  | ** ** | ** **                                   | ** ** | ** **                                | ** ** | ** **     | ** ** | ** **                             | ** ** |
| February 29, 2008            |       | $                                            | 133,588    |                                      | $          | 113,996        |       | $                                      | 126,498    |   | $ | 121,086 |   |
| February 28, 2007            |       | 223,218                                      |       | 50,841                                    |       | 140,471        |       | 133,588                                |       |
| February 28, 2006            |       | 114,015                                      |       | 144,427                                   |       | 35,224         |       | 223,218                                |       |

 

S-1

----