Document:

Exhibit
10.7

GUARANTY

THIS
GUARANTY is made, executed and delivered this 21st day of March, 2007 (the “Guaranty”) by CELLU TISSUE HOLDINGS, INC., a Delaware
corporation (the “Guarantor”) in favor of ASSOCIATED BANK, NATIONAL
ASSOCIATION, a national banking association with an office at 200
North Adams Street, Green Bay, Wisconsin 54301 (the “Bank”).

RECITALS

A.          CityForest
Corporation, a Minnesota corporation (“CF Corporation”), and the Bank are the
parties to that certain Reimbursement Agreement dated as of June 29, 2005 (the “Original
Reimbursement Agreement”).

B.            On the date hereof, all of CF
Corporation’s issued and outstanding capital stock has been acquired by Cellu
City Acquisition Corporation (the “Cellu Tissue Merger Sub”), a wholly-owned
subsidiary of the Guarantor, pursuant to that certain Merger Agreement dated as
of February 26, 2007 (the “Cellu Tissue Merger Agreement”) among the Guarantor,
the Cellu Tissue Merger Sub, CF Corporation and Wayne Gullstad as
representative of the shareholders of CF Corporation (such shareholders being
the “CF Sellers”), and the Cellu Tissue Merger Sub has been merged (the “Cellu
Tissue Merger”) into CF Corporation with CF Corporation being the surviving
corporation and CF Corporation has been converted (the “CF Corporation
Conversion”) into Cellu Tissue-CityForest LLC, a Minnesota limited liability
company (the “Borrower”).

C.            The Borrower has requested that the
Bank consent to the Cellu Tissue Merger and the CF Corporation Conversion, and
agree to amend certain provisions of the Original Reimbursement Agreement
pursuant to that certain Amended and Restated Reimbursement Agreement dated as
of even date herewith (the Amended and Restated Reimbursement Agreement as it
may be amended, modified, supplemented, increased, restated or replaced from
time to time being the “Reimbursement Agreement”; capitalized terms not
otherwise defined herein being used herein as therein defined) between the
Borrower and the Bank.

D.            As a condition to the “Effective
Date” of the Reimbursement Agreement, the Bank has required that the Guarantor
execute and deliver this Guaranty.

E.             The Guarantor has determined that
the execution, delivery and performance of this Guaranty are in the Guarantor’s
best business and pecuniary interest.

NOW, THEREFORE, for good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged by
each of the parties hereto, and in order to induce the Bank to amend and
restate the Original Reimbursement Agreement pursuant to the Reimbursement Agreement,
the Guarantor hereby agrees with the Bank as follows:

1.             Guaranty of Payment.  The Guarantor hereby unconditionally
guarantee(s) the full and prompt payment when due, whether by acceleration or
otherwise, and at all times thereafter, of all obligations of the Borrower to
the Bank, howsoever created, arising or evidenced, whether direct or indirect,
absolute or contingent, or now or hereafter existing, or due or to become due,
including, without limitation, all Obligations of the Borrower to the Bank
arising under the Reimbursement Agreement or any other Loan Document (all such
obligations being hereinafter collectively called the “Guaranteed Obligations”)
and the Guarantor further agrees to pay all reasonable expenses, including
reasonable fees of attorneys (who may be employees of the Bank) and legal
expenses, paid or incurred by the Bank in endeavoring to collect the Guaranteed
Obligations, or any part thereof, and in enforcing this Guaranty.

2.             Representations and Warranties.  The Guarantor represents and warrants to the
Bank that:

(a)           Existence. Etc.
The Guarantor is a corporation duly formed and validly existing under the laws
of the State of Delaware.  The Guarantor
has all power and authority to do business in, and is in good standing in, all
other jurisdictions where the nature of its business or the nature of the
property owned or leased by it makes such qualification necessary, except where
the failure to effect such qualification could not reasonably be expected to
cause a Material Adverse Occurrence. The Guarantor has all power and authority
to own its properties.

(b)           Due Authorization, No
Breach, No Liens. The execution, delivery and performance by the
Guarantor of this Guaranty and each other Transaction Document to which the
Guarantor is a party are within the Guarantor’s powers, have been duly
authorized by all necessary action by the board of directors of the Guarantor,
and do not contravene (a) the Guarantor’s articles of incorporation or bylaws,
(b) any Governmental Rule or (c) any indenture, loan or credit agreement or any
other material agreement, lease or instrument to which the Guarantor is a party
or by which it or any of its properties may be bound including, without
limitation, the Cellu Tissue Credit Facility Loan Documents and the Cellu
Tissue Senior Secured Notes Loan Documents; and such execution, delivery and
performance do not result in or require the creation of any Lien upon or with
respect to any of the Guarantor’s properties.   The Guarantor is not in default under or in violation
of any such law, statute, rule or regulation, order, writ, judgment,
injunction, decree, determination or award or any such indenture, loan or
credit agreement or other material agreement, lease or instrument in any case
in which the consequences of such default or violation could reasonably be
expected to cause a Material Adverse Occurrence.

(c)           Governmental Approvals.  No Governmental Approval is required for the
due execution, delivery and performance by the Guarantor of this Guaranty or
any other Transaction Document to which it is a party, other than those already
obtained and those not yet required but obtainable in the ordinary course as
and when required.

(d)           Transaction Documents.  This Guaranty and the other Transaction
Documents to which the Guarantor is a party are the valid and binding
obligations of the Guarantor enforceable against the 

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Guarantor in
accordance with their respective terms, except as the enforceability thereof
may be limited by bankruptcy, insolvency, reorganization, moratorium or other
similar laws of general application affecting the enforcement of creditors’
rights or by general principles of equity limiting the availability of
equitable remedies. This Guaranty is in full force and effect in all material
respects and no default under this Guaranty has occurred and is
continuing.  To the knowledge of the
Guarantor, the other Transaction Documents to which the Guarantor is a party
are in full force and effect in all material respects and no default under any
such other Transaction Document to which the Guarantor is party has occurred
and is continuing.

(e)           Financial Condition.

(i)            The Guarantor has heretofore
furnished to the Bank its consolidated balance sheet and statements of income,
stockholders equity and cash flows (i) as of and for the fiscal year ended
February 28, 2006, reported on by Ernst & Young LLP, independent public
accountants, and (ii) as of and for the fiscal month ended February 28, 2007
and for the portion of the fiscal year elapsed since the end of the 2006 fiscal
year, certified by the chief financial officer of the Guarantor.  Such financial statements present fairly, in
all material respects, the financial position and results of operations and
cash flows of the Guarantor and its consolidated Subsidiaries as of such dates
and for such periods in accordance with GAAP, subject to year-end audit
adjustments and the absence of footnotes in the case of the statements referred
to in clause (ii) above.

(ii)           No event, change or condition has
occurred that has resulted in, or could reasonably be expected to result, in a
Material Adverse Occurrence since February 28, 2006.

(f)            Disclosure.  No exhibit, schedule, report or other
information (unless superseded by a subsequently provided, corrected exhibit,
schedule or report or by corrected information) provided by the Guarantor or
any of its Affiliates or their respective agents to the Bank in connection with
the negotiation and execution of the Transaction Documents to which the
Guarantor is party and otherwise in connection with the transactions
contemplated thereby contains any material misstatement of fact or omits to
state a material fact necessary to make the statements contained therein taken
as a whole not misleading, as of the date provided.

(g)           Margin Stock.   The Guarantor is not engaged in the business
of extending credit for the purpose of buying or carrying margin stock (within
the meaning of Regulation U issued by the Federal Reserve Board).

(h)           Incorporation of Representations
and Warranties. 
Each of the representations and warranties of the Guarantor or
pertaining to the Guarantor or any of its properties in any Cellu Tissue Merger
Document were true and correct when made and if any such representation and
warranty is a continuing representation and warranty under the relevant Cellu
Tissue Merger Document as of the Effective Date, then such 

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continuing representation
and warranty is true and correct as of the Effective Date.  The Guarantor has no knowledge that any of
the representations and warranties made in the Transaction Documents by or on
behalf of any party thereto other than the Guarantor is untrue or incorrect in
any material respect.

(i)            Status.  The Guarantor is not an “investment company”
or a company “controlled” by an “investment company” within the meaning of the
Investment Company Act of 1940, as amended, or an “investment advisor” within
the meaning of the Investment Company Act of 1940, as amended.

(j)            Broker’s Fees.  Except as disclosed on Schedule
7.21 attached to the Reimbursement Agreement and incorporated
herein by reference, the Guarantor has not dealt with any Person who may be
entitled to any finder’s fee, brokerage commission, loan commission or other
sum in connection with the transactions contemplated by the Transaction Documents.
The Guarantor hereby agrees to indemnify, defend and hold harmless the Bank
against any and all loss, liability, cost or expense, including reasonable
attorneys’ fees, that such parties may suffer or sustain with respect to any
finder’s fee, brokerage commission or other sum due in connection with the
Reimbursement Agreement, the other Loan Documents or any other Transaction
Document.

(k)           Solvency.  The Guarantor is Solvent after giving effect
to the making of the Loans in the full amount available under the Reimbursement
Agreement, the issuance of the Bonds Letter of Credit, the incurrence of any
other Indebtedness pursuant to the Loan Documents, the incurrence of the
Indebtedness under the Second Cellu Tissue Senior Secured Notes Indenture
Supplement, and the incurrence of Indebtedness in the full amount of the “Commitments”
available under the Cellu Tissue JPMorgan Credit Agreement.

(l)            Trading with the Enemy Act.  The execution of this Guaranty and the use of
the proceeds of the Loans does not violate the Trading with the Enemy Act of
1917, as amended, nor any of the foreign assets control regulations promulgated
thereunder or the under the International Emergency Economic Powers Act or the
U.N. Participation Act of 1945. Neither the Guarantor nor any person who owns a
controlling interest in or otherwise controls the Guarantor or any Subsidiary
of the Guarantor is listed on the Specially Designated Nationals and Blocked
Person List or other similar lists maintained by the Office of Foreign Assets Control
(“OFAC”), the Department of the Treasury or included in any Executive Orders.

(m)          Survival of
Representations. All representations and warranties contained in
this Section 2 shall survive the delivery of this Guaranty, the making of the
Loans evidenced by the Notes, the issuance of the Bonds Letter of Credit and
any investigation at any time made by or on behalf of the Bank shall not
diminish the Bank’s rights to rely thereon.

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3.             Affirmative Covenants.  From the date of this Guaranty and thereafter
until this Guaranty is either terminated or performed, unless the Bank shall
otherwise expressly consent in writing, the Guarantor will do all of the
following:

(a)           Financial
Statements and Reports. 
Furnish to the Bank:

(i)            within
90 days after the end of each fiscal year of the Guarantor, its audited
consolidated balance sheet and related statements of operations, stockholders’
equity and cash flows as of the end of and for such year, setting forth in each
case in comparative form the figures for the previous fiscal year, all reported
on by Ernst & Young LLP or other nationally recognized auditors (without a “going
concern” or like qualification or exception and without any qualification or
exception as to the scope of such audit) to the effect that such consolidated
financial statements present fairly in all material respects the financial
condition and results of operations of the Guarantor and its consolidated
Subsidiaries on a consolidated basis in accordance with GAAP consistently
applied, accompanied by any management letter prepared by said accountants;

(ii)           within
45 days after the end of each of the first three fiscal quarters of the
Guarantor, its consolidated balance sheet and related statements of operations,
stockholders’ equity and cash flows as of the end of and for such fiscal
quarter and the then elapsed portion of the fiscal year, setting forth in each
case in comparative form the figures for the corresponding period or periods of
(or, in the case of the balance sheet, as of the end of) the previous fiscal
year, all certified by one of its Financial Officers as presenting fairly in
all material respects the financial condition and results of operations of the
Guarantor and its consolidated Subsidiaries on a consolidated basis in
accordance with GAAP consistently applied, subject to normal year-end audit
adjustments and the absence of footnotes;

(iii)          immediately
upon the Bank’s request, copies of all publicly available periodic and other
reports, proxy statements and other materials filed by the Guarantor or any of
its Subsidiaries with the Securities and Exchange Commission, or any
Governmental Authority succeeding to any or all of the functions of said
Commission, or with any national securities exchange; and

(iv)          promptly
following any request therefor, such other information regarding the
operations, business affairs and financial condition of the Guarantor or any of
its Subsidiaries, or compliance with the terms of any Loan Document, as the
Bank may reasonably request.

(b)          Notices
of Material Events.  Furnish to the Bank prompt written notice of
the following:

(i)            the
occurrence of any Default or Event of Default;

 5
 

(ii)           the
proposed consummation of any event described in clause (a) of the definition of
“Cellu Tissue Prepayment Event” in the Reimbursement Agreement, where
such notice shall be delivered by no later than five (5) Business Days prior to
the date of consummation and shall be accompanied by copies of the relevant
documentation governing such event; or

(iii)          any
other development that results in, or could reasonably be expected to result
in, a Material Adverse Occurrence.

(c)           Corporate
Existence.  Except as
provided by Section 4(a), maintain its corporate existence and good standing
under the laws of its jurisdiction of incorporation and its qualification to
transact business in each jurisdiction in which the character of the properties
owned, leased or operated by it or the business conducted by it makes such
qualification necessary and where the failure to so qualify results in, or could
reasonably be expected to result in, a Material Adverse Occurrence.

4.             Negative Covenants.  From the date of this Guaranty and thereafter
until this Guaranty is either terminated or performed, unless the Bank shall
otherwise expressly consent in writing, the Guarantor will not do any of the
following:

(a)          Merger.
 Liquidate or dissolve, or merge into
or consolidate with or into, any Person; provided that the Guarantor may enter
into any merger, consolidation, or other transaction permitted by Section 3.14
of the Cellu Tissue Senior Secured Notes Indenture so long as: (i) the
resulting, surviving or transferee entity (if not the Guarantor) shall assume
the obligations of the Guarantor under this Guaranty pursuant to a written
instrument of assumption that is reasonably satisfactory to the Bank; and (ii)
no Change of Control has resulted from such transaction.

(b)           Restricted Agreement.  Directly or indirectly, enter into, incur or
permit to exist any agreement or other arrangement that prohibits, restricts or
imposes any condition upon:

(i)            the ability of the Borrower to
create, incur or permit to exist any Lien in favor of the Bank upon any of the
Borrower’s property or assets;

(ii)           the Bank’s right to prohibit,
restrict or impose conditions upon the Borrower’s ability to pay dividends or
distributions with respect to its Equity Interests or to repay loans or
advances made to the Borrower by the Guarantor;

provided
that:

(A)           the foregoing shall not apply to:

(1)           restrictions and conditions imposed
by law or by any Loan Document,

 6
 

(2)           restrictions and conditions existing
on the date hereof identified on Schedule
9.13 attached to the Reimbursement Agreement including the Cellu
Tissue Senior Secured Notes Indenture and the Cellu Tissue JPMorgan Credit
Agreement; provided  further, that in no event shall any such
restriction or condition be breached or violated by: (a) the Borrower’s
incurrence of the Indebtedness under the Reimbursement  Agreement 
and the grant of Liens in its property pursuant to the Loan Documents;
or (b) the Borrower’s performance of its obligations under the Loan Documents;
or (c) the Borrower’s incurrence of any Indebtedness to refinance the
Indebtedness incurred under the Reimbursement Agreement so long as: (i) the
terms of such re-refinancing Indebtedness comply with any requirement then
imposed by the Cellu Tissue Senior Secured Notes Loan Documents and the Cellu
Tissue Credit Facility Loan Documents for permitted re-financing Indebtedness;
(ii) with respect to all Loans and Letter of Credit Obligations, the Liens
securing such re-financing Indebtedness shall be substantially the same as those created by the Security
Documents; and (3) the applicable restrictions described in Section
9.13(b) of the Reimbursement Agreement in the documentation for the
re-financing Indebtedness are not materially more restrictive, when taken as a
whole, than the applicable restrictions in the Reimbursement Agreement; and

(3) customary
restrictions and conditions contained in agreements relating to the sale of the
Borrower pending such sale; and

(B)            clause (b)(i) of the foregoing shall
not apply to: (1) restrictions or conditions imposed by any agreement relating
to secured Indebtedness permitted by this Agreement if such restrictions or
conditions apply only to the property or assets securing such Indebtedness; and
(2) customary provisions in leases and other contracts restricting the
assignment thereof.

5.             Continuing Guaranty.  This Guaranty shall in all respects be a
continuing, absolute and unconditional Guaranty, and shall remain in full force
and effect (notwithstanding, without limitation, the dissolution of the
Guarantor or that no Guaranteed Obligations may exist from time to time) until
payment in full of the Guaranteed Obligations following the Revolving Credit
Termination Date; subject, however, to reinstatement pursuant to
the Section 6 hereof.

6.             Rescission or Return of Payment
on Guaranteed Obligations.  The
Guarantor further agrees that, if at any time all or any part of any payment
theretofore applied by the Bank to any of the Guaranteed Obligations is or must
be rescinded or returned by such Person for any reason whatsoever (including,
without limitation, the insolvency, bankruptcy or reorganization of the
Borrower), such Guaranteed Obligations shall, for the purposes of this
Guaranty, to the extent that such payment is or must be rescinded or returned,
be deemed to have continued in existence, notwithstanding such application by
the Bank, and this Guaranty shall continue to be effective or be reinstated, as
the case may be, as to such Guaranteed Obligations, all as though such
application by such Person had not been made.

 7
 

7.             Bank Permitted to Take Certain
Actions.  The Bank may, from time to
time (but shall not be obligated to), whether before or after any
discontinuance of this Guaranty, at their sole discretion and without notice to
the Guarantor, take any or all of the following actions: (a) retain or obtain a
security interest in any property to secure any of the Obligations or any
obligation hereunder; (b) retain or obtain the primary or secondary obligation
of any obligor or obligors, in addition to the Guarantor, with respect to any
of the Obligations; (c) increase any of the Obligations or extend or renew for
one or more periods (whether or not longer than the original period), alter or
exchange any of the Obligations, or release or compromise any obligation of any
nature of any other obligor with respect to any of the Obligations; (d) release
its security interest in, or surrender, release or permit any substitution or
exchange for, all or any part of any property securing any of the Obligations
or any obligation hereunder, or extend or renew for one or more periods
(whether or not longer than the original period) or release, compromise, alter
or exchange, any Obligations of any nature of any obligor with respect to any
such property; and (e) resort to the Guarantor for payment of any of the
Guaranteed Obligations, whether or not the Bank: (i) shall have resorted to any
property securing any of the Obligations or any obligation hereunder or (ii)
shall have proceeded against any other obligor primarily or secondarily
obligated with respect to any of the Obligations (all of the actions referred
to in preceding clauses (i) and (ii) being hereby expressly waived by the
Guarantor).

8.             Subrogation.  The Guarantor hereby waives, until payment in
full of the Guaranteed Obligations, any claim, right or remedy which the
Guarantor may now have or hereafter acquire against the Borrower that arises
hereunder and/or from the performance by the Guarantor hereunder, including,
without limitation, any claim, remedy or right of subrogation, reimbursement,
exoneration, contribution, indemnification, or participation in any claim,
right or remedy of the Bank against the Borrower or any security which the Bank
now has or hereafter acquires, whether or not such claim, right or remedy
arises in equity, under contract, by statute, under common law, or otherwise.

9.             Waiver of Notice and Other
Matters.  The Guarantor hereby
expressly waives: (a) notice of the acceptance by the Bank of this Guaranty;
(b) notice of the existence or creation or non-payment of all or any of
the Guaranteed Obligations; (c) presentment, demand, notice of dishonor,
protest, and all other notices whatsoever; and (d) all diligence in collection
or protection of or realization upon the Obligations or any thereof, any
obligation hereunder, or any security for or guaranty of any of the foregoing.

10.           Additional Obligations of the
Borrower Permitted.  The creation or
existence from time to time of Obligations in excess of the Guaranteed
Obligations is hereby authorized, without notice to the Guarantor, and shall in
no way affect or impair the rights of the Bank and the obligations of the
Guarantor under this Guaranty.

11.           Assignment of Guaranteed
Obligations. The Bank may, from time to time, whether before or after any
discontinuance of this Guaranty, with notice to the Guarantor, and only in
connection with an assignment by the Bank of its rights and obligations in
accordance with Section 11.4 of the Reimbursement Agreement, assign or
transfer any or all of the Guaranteed Obligations owed to it or any interest
therein; and, notwithstanding any such 

 8
 

assignment or
transfer or any subsequent assignment or transfer thereof, such Guaranteed
Obligations shall be and remain Guaranteed Obligations for the purposes of this
Guaranty, and each and every immediate and successive assignee or transferee of
any of the Guaranteed Obligations or of any interest therein shall, to the
extent of the interest of such assignee or transferee in the Guaranteed
Obligations, be entitled to the benefits of this Guaranty to the same extent as
if such assignee or transferee were the assigning or transferring Bank.

12.           Information Concerning Borrower.  The Guarantor hereby warrants to the Bank
that the Guarantor now has and will continue to have independent means of
obtaining information concerning the affairs, financial condition and business
of the Borrower.  The Bank shall not have
any duty or responsibility to provide the Guarantor with any credit or other
information concerning the affairs, financial condition or business of the
Borrower which may come into the Bank’s possession.

13.           Waiver and Modifications.  No delay on the part of the Bank in the
exercise of any right or remedy shall operate as a waiver thereof, and no
single or partial exercise by the Bank of any right or remedy shall preclude
other or further exercise thereof or the exercise of any other right or remedy;
nor shall any modification or waiver of any of the provisions of this Guaranty
be binding upon the Bank except as expressly set forth in a writing duly signed
and delivered on behalf of the Bank.

14.           Obligations Under Guaranty.  No action of the Bank permitted hereunder
shall in any way affect or impair the rights of the Bank or the obligations of
the Guarantor under this Guaranty.  The
obligations of the Guarantor under this Guaranty shall be absolute and
unconditional irrespective of any circumstance whatsoever which might
constitute a legal or equitable discharge or defense of the Borrower or the
Guarantor.  The Guarantor hereby
acknowledges that there are no conditions to the effectiveness of this
Guaranty.

15.           Successors.  This Guaranty shall be binding upon the
parties, and upon the successors and assigns of the parties.

16.           Governing Law.  THE VALIDITY, CONSTRUCTION AND ENFORCEABILITY
OF THIS GUARANTY SHALL BE GOVERNED BY THE INTERNAL LAWS OF THE STATE OF
MINNESOTA, WITHOUT GIVING EFFECT TO CONFLICT OF LAWS PRINCIPLES THEREOF, BUT
GIVING EFFECT TO FEDERAL LAWS OF THE UNITED STATES APPLICABLE TO NATIONAL
BANKS.  Wherever possible each provision
of this Guaranty shall be interpreted in such manner as to be effective and valid
under applicable law, but if any provision of this Guaranty shall be prohibited
by or invalid under such law, such provision shall be ineffective to the extent
of such prohibition or invalidity, without invalidating the remainder of such
provision or the remaining provisions of this Guaranty.

17.            
Consent to Jurisdiction. 
AT THE OPTION OF THE BANK, THIS GUARANTY MAY BE ENFORCED IN ANY FEDERAL
COURT OR MINNESOTA STATE COURT SITTING IN MINNEAPOLIS OR ST. PAUL, MINNESOTA;
AND GUARANTOR CONSENTS TO THE JURISDICTION AND VENUE OF ANY SUCH COURT AND
WAIVES ANY ARGUMENT THAT VENUE IN SUCH FORUMS IS NOT CONVENIENT.  

 9
 

IN THE EVENT
GUARANTOR COMMENCES ANY ACTION IN ANOTHER JURISDICTION OR VENUE UNDER ANY TORT
OR CONTRACT THEORY ARISING DIRECTLY OR INDIRECTLY FROM THE RELATIONSHIP CREATED
BY THIS GUARANTY, THE BANK, AT ITS OPTION, SHALL BE ENTITLED TO HAVE THE CASE
TRANSFERRED TO ONE OF THE JURISDICTIONS AND VENUES ABOVE-DESCRIBED, OR IF
SUCH TRANSFER CANNOT BE ACCOMPLISHED UNDER APPLICABLE LAW, TO HAVE SUCH CASE
DISMISSED WITHOUT PREJUDICE.

18.           WAIVER OF JURY TRIAL.  GUARANTOR AND THE BANK WAIVE ANY RIGHT TO A
TRIAL BY JURY IN ANY ACTION OR PROCEEDING TO ENFORCE OR DEFEND ANY RIGHTS
(a) UNDER THIS GUARANTY OR UNDER ANY AMENDMENT, INSTRUMENT, DOCUMENT OR
AGREEMENT DELIVERED OR WHICH MAY IN THE FUTURE BE DELIVERED IN CONNECTION
HEREWITH, OR (b) ARISING FROM ANY BANKING RELATIONSHIP EXISTING IN
CONNECTION WITH THIS GUARANTY, AND AGREE THAT ANY SUCH ACTION OR PROCEEDING
SHALL BE TRIED BEFORE A COURT AND NOT BEFORE A JURY.

19.           Captions.  Section captions used in this Guaranty are
for convenience only, and shall not affect the construction of this Guaranty.

20.                                 Recitals.  The recitals to this Guaranty are
incorporated herein by reference.

[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]

 10

IN WITNESS
WHEREOF, the Guarantor has executed this Guaranty as of the date first above
written.

	
  

  	
  GUARANTOR:

  
	
   

  	
   

  
	
  

  	
  CELLU TISSUE HOLDINGS, INC.

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ Dianne M. Scheu

  
	
   

  	
  Name:

  	
  Dianne M. Scheu

  
	
   

  	
  Its: 

  	
  Senior Vice President and Chief Financial Officer 

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  

  	
  Address:

  	
   

  
	
   

  	
   

  	
  1855 Lockeway Drive, Suite 501

  
	
   

  	
   

  	
  Alpharetta, GA 30004

  
	
   

  	
  Attention: 

  	
  Chief Financial Officer

  
	
   

  	
  Telephone: 

  	
  (678) 393-2651

  
	
   

  	
  Telecopier: 

  	
  (678) 393-2657

  
					

BANK (solely
with respect to Section 18 hereof):

	
  ASSOCIATED BANK, NATIONAL ASSOCIATION

   

  	
   

  
	
  By: 

  	
  /s/ Thomas M. Toerpe

  	
   

  
	
  Name:

  	
  Thomas M. Toerpe

  	
   

  
	
  Title:

  	
  Vice President

  	
   

  
				

 

SIGNATURE PAGE: 
CELLU TISSUE GUARANTYExhibit 10.1

EMPLOYMENT AGREEMENT

THIS AGREEMENT is made and entered into as of the 23rd
day of March, 2007, by and between NEOPHARM, INC., a Delaware corporation (the
“Company”) and LAURENCE P. BIRCH (“Executive”).

 

WITNESSETH:

WHEREAS, the Company desires to employ Executive and
Executive desires to accept such employment, upon the terms and conditions
hereinafter set forth;

NOW, THEREFORE, in consideration of the covenants and
mutual agreements set forth herein and other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the parties hereto do
hereby agree as follows:

 

1.                                       Employment.  Throughout the Term (as defined in Section 2
below), the Company shall employ Executive as provided herein, and Executive
hereby accepts such employment.  In
accepting such employment, Executive states that, to the best of his knowledge,
(i) he is not now, and by accepting such employment, will not be, under any
restrictions in the performance of the duties contemplated under this Agreement
as a result of the provisions of any prior employment agreement or non-compete
or similar agreement to which Executive is or was a party; and (ii) he will not
make use of or reveal to anyone employed by or affiliated with the Company any
information that is of a confidential or proprietary nature which he has
obtained or which has been disclosed to him as a result of his position with
any entity with which he has been previously employed or affiliated.

 

2.                                       Term
of Employment.  The term of
Executive’s employment by the Company hereunder shall commence on
March 23, 2007, or such earlier or later date as Executive and the Company
may mutually agree (the “Effective Date”) and shall continue thereafter unless
sooner terminated as a result of Executive’s death or in accordance with the
provisions of Section 7 below (the “Term”).

3.                                       Duties.  Throughout the Term, and except as otherwise
expressly provided herein, Executive shall be employed by the Company as the
President and Chief Executive Officer (“CEO”) of the Company and shall report
to the Board of Directors.  In such
capacity, Executive shall devote his full time to the performance of his duties
as President and CEO of the Company in accordance with the Company’s By-laws,
this Agreement and the directions of the Company’s Board of Directors.  In addition, the Company shall promptly
appoint Executive to the Board and thereafter nominate Executive as a nominee
for election to the Board and solicit proxies for his election for so long as
this Agreement is in effect.  Without
limiting the generality of the foregoing, throughout the Term, Executive shall
use his best efforts to faithfully perform his duties as President and CEO at
all times so as to promote the best interests of the Company.  Further, Executive, with the prior approval
of the Board, may serve as a director of other business entities, provided that
such service does not interfere with Executive’s duties hereunder or violate
the terms of Executive’s covenants contained in Sections 9 and 10 hereof.

4.             Compensation.

 

(a)                                  Base
Salary.  For any and all services
performed by Executive under this Agreement during the Term, in whatever
capacity, the Company shall pay to Executive an annual salary of Two Hundred
Seventy-Five Thousand Dollars ($275,000) per year (the “Base Salary”), less any
and all applicable federal, state and local payroll and withholding taxes.  The Base Salary shall be paid in the same
increments as the Company’s normal payroll, but no less frequent than monthly
and prorated, however, for any period of less than a full month.  The Salary will be reviewed annually by the
Compensation Committee of the Board of Directors and a determination shall be
made at that time as to the appropriateness of an increase, if any, thereto.

(b)                                 Bonus.  In addition to the Base Salary, Executive
shall be eligible to receive from the Company an annual incentive compensation
bonus (the “Bonus”) based on a percentage of his Base Salary.  The Bonus, if any, shall be determined based
on the achievement of certain specific strategic plans and goals for the
Company and the Executive (the “Performance Goals”) during the preceding
calendar year (the “Measurement Period”) as shall be determined by the Board in
consultation with Executive.  The
Performance Goals for each Measurement Period, beginning with the 2008
Measurement Period, shall be established as promptly as possible in each such
Measurement Period, with the expectation that the Performance Goals be in place
within sixty (60) days after year-end. 
For the 2007 Measurement Period, the Performance Goals will be

established within
sixty (60) days of the Effective Date, and the Bonus for the 2007 Measurement
Period shall be a full bonus (i.e., not pro rated based on Executive’s period
of employment during the Measurement Period). 
Following each Measurement Period, the Compensation Committee of the
Board shall review the Performance Goals for the prior Measurement Period in
light of the Company’s actual performance during such Measurement Period as
reflected on the Company’s financial statements.  Achievement by the Company and the Executive
of various levels of the Performance Goals shall result in the following
payments as a percentage of Base Salary:

	
  Level of Achievement

  	
   

  	
  Bonus as Percent of Salary

  
	
  Below Target

  	
  0%

  
	
  Target Goal

  	
  50%

  
	
  Overachievement Goal

  	
  50-100%

  

 

Payment of each
year’s Bonus, if any, shall be made within thirty (30) days after the Company’s
performance for the Measurement Period is established on the basis of the
Company’s financial statements.

5.                                       Benefits
and Other Rights.  In consideration
for Executive’s performance under this Agreement, the Company shall provide to
Executive the following benefits:

(a)                                  The
Company will provide Executive with cash advances for or reimbursement of all
reasonable out-of-pocket business expenses incurred by Executive in connection
with his employment hereunder including, but not limited to, reimbursement for
the reasonable attorney fees incurred by Executive in negotiating this
Agreement; provided, however, Executive adheres to any and all reasonable
policies established by the Company from time to time with respect to such
reimbursements or advances, including, but not limited to, a requirement that
Executive submit supporting evidence of any such expenses to the Company.

(b)                                 During
the Term, Executive shall be entitled to participate in and have the benefits
of all present and future holiday, sick leave, paid leave, unpaid leave, life,
accident, disability, dental, vision and health plans, pension, profit-sharing
and savings plans and all other plans and benefits which Company now or in the
future from time to time makes available to executive management employees.

(c)                                  During
the Term Executive shall be entitled to four (4) weeks paid vacation, it being
understood and agreed that unused vacation shall not be carried over from one
year to the next.

6.             Equity Awards.

 

(a)                                  The
Company shall grant to Executive, pursuant to the Company’s 2006 Equity
Incentive Plan (the “Plan”), the following Awards (as defined in the
Plan):  (i) options for Three Hundred
Thousand (300,000) shares of the Company’s common stock (the “Options”) at an
option exercise price equal to the Fair Market Value (as determined under the Plan)
of the Company’s common stock as of the Effective Date, which date shall be the
grant date of the Options for purposes of the Plan (the “Grant Date”); and (ii)
a commitment to grant to Executive a Restricted Stock Award consisting of One
Hundred Eighty Thousand Six Hundred Sixty-Five (180,665) shares of the
Company’s Common Stock (the “Restricted Stock”) under the Plan on the earlier
of the date (the “Restricted Stock Grant Date”) that the Company obtains
approval from the Company’s shareholders to increase the number of shares
available for Awards under the Plan to a level sufficient to fund the
Restricted Stock Award or the date when sufficient shares otherwise became
available under the Plan to fully fund the Restricted Stock Award; it being
agreed, however, that approval to increase the number of available shares under
the Plan will be sought by the Company at the 2007 Annual Meeting of
Shareholders.  Subject to the foregoing,
the Options shall vest in equal installments per year on each of the first four
anniversaries of the Grant Date and 25% of the shares of Restricted Stock shall
vest on the first anniversary of the Restricted Stock Grant Date with an
additional 25% of the Restricted Stock vesting on the next three anniversaries
of the Effective Date of this Agreement. 
The Options shall not be exercisable subsequent to the date ten (10)
years after the Grant Date.  In all other
respects the Options and the Restricted Stock shall be governed by the terms
and conditions of the Plan.

 2
 

(b)                                 Executive
shall be eligible to receive future equity awards in a manner and on terms
consistent with awards granted generally to other executive management
employees of the Company.

7.             Termination of
the Term.

 

(a)                                  The
Company shall have the right to terminate the Term under the following
circumstances:  (i) Executive shall die
or suffer a Disability, as herein defined; (ii) With or without Cause, as
herein defined, effective upon written notice to Executive by the Company; or,
(iii) Upon or within one (1) year following a Change of Control, as herein defined,
effective upon written notice to Executive from the Company.

(b)                                 Executive
shall have the right to terminate the Term under the following
circumstances:  (i) At any time upon
thirty (30) days prior written notice to the Company; or (ii) For Good Reason,
as herein defined, upon or within one (1) year following a Change of Control.

(c)                                  For
purposes of this Agreement, “Cause” shall mean: 
(i) Executive shall be indicted for or convicted of the commission of a
felony or a crime involving dishonesty, fraud or moral turpitude; (ii)
Executive has engaged in acts of fraud, misappropriation, embezzlement, theft
or other dishonest acts with respect to the Company or any affiliate of the
Company; (iii) Executive violates the Company’s Code of Business Conduct and Ethics
or any statutory or common law duty of loyalty to the Company or its
subsidiaries, which violation is willful and deliberate on Executive’s part;
(iv) Executive’s gross neglect or willful misconduct in the discharge of his
duties and responsibilities;  (v)
Executive’s failure to follow the lawful direction of the Board of Directors or
supervising officers which failure continues for five (5) days after written
notice of the failure has been given to Executive by the Company; or (vi)
Executive’s material breach of any restrictive covenant set forth in Section 9
or Section 10 of this Agreement.

(d)                                 For
purposes of this Agreement, “Change of Control” shall mean the occurrence of
any of the following:  (i) The
acquisition (other than by a direct purchase of shares from the Company) by any
“person,” including a “syndication” or “group”, as those terms are used in
Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934, as amended
(other than by any such person currently owning in excess of 15% of the type of
securities hereafter described), of securities representing 50% or more of the
combined voting power of the Company’s then outstanding voting securities,
which is any security that ordinarily possesses the power to vote in the
election of the Board of Directors of a corporation without the happening of
any precondition or contingency; (ii) The Company is merged or consolidated
with another corporation and immediately after giving effect to the merger or
consolidation less than 50% of the outstanding voting securities of the
surviving or resulting entity are then beneficially owned in the aggregate by
(x) the stockholders of the Company immediately prior to such merger or
consolidation, or (y) if a record date has been set to determinate the stockholders
of the Company entitled to vote on such merger or consolidation, the
stockholders of the Company as of such record date; (iii) If at any time during
a calendar year a majority of the directors of the Company are not persons who
were directors at the beginning of the calendar year or are not persons who
were nominated or approved for election by a majority of directors who were
directors at the beginning of the year (or are deemed to have been in office as
of such date through the prior operation of this provision); or (iv) The
Company transfers substantially all of its assets to another corporation which
is a less than 80% owned subsidiary of the Company.

(e)                                  For
purposes of this Agreement, “Good Reason” shall mean the occurrence of any one
or more of the following events which continues uncured for a period of not
less than thirty (30) days following written notice given by Executive to the
Company within fifteen (15) days following the occurrence of such event, unless
Executive specifically agrees in writing that such event shall not be Good
Reason:  (i) Any material breach of this
Agreement by the Company; (ii) Any failure to continue Executive as an
executive officer of the Company; (iii) The requirement by the Company that
Executive perform his services hereunder primarily at a location outside of the
metropolitan Chicago, Illinois area; or (iv) The reduction of the Employee’s
Base Salary below the amount set forth in Section 4(a) above without the
written consent of Executive.

(f)                                    For
purposes of this Agreement, “Disability” shall mean (i) Executive becomes
eligible for full benefits under a long-term disability policy provided by the
Company or (ii) Executive has been unable, due to physical or mental illness or
incapacity, as verified by a licensed physician selected by the Company, to 

 3
 

substantially perform the
essential duties of his employment for a continuous period of ninety (90) days
or an aggregate of one-hundred eighty (180) days during any consecutive twelve
(12)-month period.

 

8.                                       Effect
of Expiration or Termination of the Term. 
Promptly following the termination of the Term, and except as otherwise
expressly agreed to in writing by the Company, and as a condition to receiving
Salary Continuance, if any, Executive shall:

(a)                                  Immediately
resign, effective as of the date of termination, from any and all other
positions or committees which Executive holds or is a member of with the
Company or any subsidiary of the Company, including, but not limited to, as an
officer and director of the Company or any subsidiary of the Company.  Executive hereby agrees to execute any and
all reasonable documentation evidencing such resignation upon request of the
Company, but he shall be treated for all purposes as having so resigned upon
termination of his employment regardless of when or whether he executes any
such documentation.

(b)                                 Provide
the Company with all reasonable assistance necessary to permit the Company to
continue its business operations without interruption and in a manner
consistent with reasonable business practices; provided, however, that such
transition period shall not exceed thirty (30) days after termination nor
require more than twenty (20) hours of Executive’s time per week and Executive
shall be promptly reimbursed for all out-of-pocket expenses.

(c)                                  Deliver
to the Company possession of any and all property owned or leased by the
Company which may then be in Executive’s possession or under his control,
including, without limitation, any and all such keys, credit cards,
automobiles, equipment, supplies, books, records, files, computer equipment,
computer software and other such tangible and intangible property of any
description whatsoever.

(d)                                 Other
than as specifically provided in this Section 8, upon a termination of
employment all other benefits and/or entitlements to participate in programs or
benefits, if any, will cease as of the effective date of such termination.

(e)                                  Upon
termination of Executive pursuant to § 7(a)(ii), without Cause, following the
six (6) month anniversary of the Effective Date, the Company shall provide
Executive with Base Salary continuance, subject to § 8(h), for twelve (12)
months (a “Salary Continuance”) at the rate in effect immediately prior to
termination.

(f)                                    Upon
termination of Executive pursuant to §7(a)(i), 7(a)(ii), with Cause, or §
7(b)(i), the Company shall pay Executive or Executive’s estate all Base Salary
accrued, but unpaid, as of the date of such termination.

(g)                                 Upon
termination of Executive pursuant to 7(a)(iii) or § 7(b)(ii), the Company shall:  (i) provide Executive with Salary Continuance
for twelve (12) months at the rate in effect immediately prior to termination,
plus (ii) make a lump sum payment equal to one hundred percent (100%) of the
Bonus, if any, paid to Executive for the calendar year preceding such
termination, plus (iii) shall provide Executive and his eligible dependents
with health, dental and vision coverage at the Company’s expense for twelve
(12) months following termination, plus (iv) all of Executive’s then unvested options,
restricted shares, and other equity awards, if any, previously issued pursuant
to the Option Plan (or any successor thereto) shall immediately vest and
options shall be exercisable as provided in the Option Plan (or any successor
thereto).

(h)                                 In
the event that Executive shall be entitled to receive a Salary Continuance
pursuant to § 8(e), such Salary Continuance shall continue only while Executive
is in compliance with the covenants set forth in Sections 9 and 10 of this
Agreement and only until such time as Executive shall have accepted another
full-time position.  Failure of Executive
to observe the provisions of Sections 9 and 10 of this Agreement or to promptly
report the acceptance of a new full-time position shall entitle the Company to
terminate all remaining Salary Continuance and to seek restitution for any
payments made to Executive subsequent to such breach or job acceptance.

(i)                                     Any
Salary Continuance payments shall be made in accordance with the usual payroll
practices which were applicable prior to termination. Except as otherwise
specifically set forth herein, any and all payments made 

 4
 

pursuant to this
Agreement shall be net of any and all applicable federal, state and local
payroll and withholding taxes.

(j)                                     If
the Company or the Company’s accountants determine that the payments called for
under Section 8(g) of this Agreement either alone or in conjunction
with any other payments or benefits made available to Executive by the Company
will result in Executive being subject to an excise tax (“Excise Tax”) under
Section 4999 of the Internal Revenue Code of 1986, as amended (the
“Code”), or if an Excise Tax is assessed against Executive as a result of such
payments or other benefits, the Company shall make a Gross-Up Payment (as defined
below) to or on behalf of Executive as and when such determination(s) and
assessments(s), as appropriate, are made, subject to the conditions of this
subsection (j).  A “Gross-Up Payment” shall mean a payment to or on
behalf of Executive that shall be sufficient to pay (i) any Excise Tax in
full, (ii) any federal, state and local income tax and Social Security or
other employment tax on the payment made to pay such Excise Tax as well as any
additional Excise Tax on the Gross-Up Payment, and (iii) any interest or
penalties assessed by the Internal Revenue Service on Executive if such
interest or penalties are attributable to the Company’s failure to comply with
its obligations under this subsection (j) or applicable law.  Any
determination under this subsection (j) by the Company or the Company’s
accountants shall be made in accordance with Section 280G of the Code, any
applicable related regulations (whether proposed, temporary or final), any
related Internal Revenue Service rulings and any related case law, and shall
assume that Executive shall pay Federal income taxes at the highest marginal
rate in effect for the year in which the Gross-Up Payment is made and state and
local income taxes at the highest marginal rate in effect in the state of
Executive’s residence for such year.  Executive shall take such action
(other than waiving Executive’s right to any payments or benefits) as the
Company reasonably requests under the circumstances to mitigate or challenge
such tax.  If the Company reasonably requests that Executive take action
to mitigate or challenge, or to mitigate and challenge, any such tax or
assessment and Executive complies with such request, the Company shall provide
Executive with such information and such expert advice and assistance from the
Company’s accountants, lawyers and other advisors as Executive may reasonably
request and shall pay for all expenses incurred in effecting such compliance
and any related fines, penalties, interest and other assessments.  Subject
to the provisions of this subsection (j), all determinations required to
be made under this subsection (j), including whether and when a Gross-Up
Payment is required and the amount of such Gross-Up Payment and the assumptions
to be utilized in arriving at such determination, shall be made, after
receiving the prior approval of the Audit Committee of the Board of Directors,
by the public accounting firm that is retained by the Company as of the date
immediately prior to the Change of Control (the “Accounting Firm”) which shall
provide detailed supporting calculations both to the Company and Executive
within thirty (30) business days of receipt of notice from the Company or
Executive that there has been a payment that could trigger a Gross-Up Payment,
or such earlier time as is requested by the Company (collectively the
“Determination”).  In the event that the Accounting Firm is serving as
accountant or auditor for the individual, entity or group effecting the Change
of Control, or in the event that the Audit Committee of the Board of Directors
shall not approve of the accountants’ performing such services, Executive may
appoint another nationally recognized public accounting firm to make the
determinations required hereunder (which accounting firm shall then be referred
to as the Accounting Firm hereunder).  All fees and expenses of the
Accounting Firm shall be borne solely by the Company and the Company shall
enter into any agreement requested by the Accounting Firm in connection with
the performance of the services hereunder.  The Gross-Up Payment under
this subsection (j) with respect to any payments shall be made no later
than sixty (60) days following such payments.  If the Accounting Firm
determines that no Excise Tax is payable by Executive, it shall furnish
Executive with a written opinion to such effect, and to the effect that failure
to report the Excise Tax, if any, on Executive’s applicable federal income tax
return will not result in the imposition of a negligence or similar
penalty.  The Determination by the Accounting Firm shall be binding upon
the Company and Executive.  As a result of the uncertainty in the
application of Section 4999 of the Code at the time of the Determination,
it is possible that the Gross-Up Payments which will not have been made by the
Company should have been made (“Underpayment”) or Gross-Up Payments are made by
the Company which should not have been made (“Overpayment”), consistent with
the calculations required to be made hereunder.  In the event that
Executive thereafter is required to make payment of any additional Excise Tax,
the Accounting Firm shall determine the amount of the Underpayment that has
occurred and any such Underpayment (together with interest at the rate provided
in Section 1274(b)(2)(B) of the Code) shall be promptly paid by the
Company to or for the benefit of Executive.  In the event the amount of
the Gross-Up Payment exceeds the amount necessary to reimburse 

 5
 

Executive for his Excise
Tax as herein set forth, the Accounting Firm shall determine the amount of the
Overpayment that has been made and any such Overpayment (together with interest
at the rate provided in Section 1274(b)(2) of the Code) shall be
promptly paid by Executive to or for the benefit of the Company. 
Executive shall cooperate, to the extent Executive’s expenses are reimbursed by
the Company, with any reasonable requests by the Company in connection with any
contests or disputes with the Internal Revenue Service in connection with the
Excise Tax.

 

9.                                       Restrictive
Covenants for Executive.  Executive
hereby covenants and agrees with the Company that for so long as Executive is
employed by the Company and for a period (the “Restricted Period”) of twelve
(12) months after the termination of such employment for any reason, Executive
shall not, without the prior written consent of the Company, which consent
shall be within the sole and exclusive discretion of the Board of Directors,
but which consent shall not unreasonably be withheld, either directly or
indirectly, on his own account or as an executive, consultant, agent, partner,
joint venturer, owner, officer, director or shareholder of any other person,
firm, corporation, partnership, limited liability company or other entity:

(a)                                  Perform
services for a Competing Business, as hereinafter defined, that are
substantially similar in whole or in part to those that he performed for the
Company in his role as President and CEO, including specifically, but not
limited to, the research, development, sale or marketing of drug or non-drug
products or the management of individuals involved in the research,
development, sale or marketing of drug or non-drug products.  For purposes of this covenant, the term
“Competing Business” shall mean any entity engaged in the research,
development, marketing or sale of drug and nondrug products which are
competitive with:  (1) those products
being marketed by the Company at the time of Executive’s termination; or (2)
those products that Executive was aware were under research and development by
the Company and expected to be marketed within four years of Executive’s
termination.  This covenant shall apply
only within the “Territory” which is defined as the fifty states of the United
States.  Executive recognizes and agrees
that in capacity of President and CEO, his duties extend throughout the entire
service area of the Company which includes, at a minimum, the Territory and
that, because of the executive nature of Executive’s position with the Company,
in order to afford the Company protection from unfair competition by Executive
following his termination of employment, this covenant must extend throughout
the stated Territory.  Executive further
acknowledges that this covenant does not prohibit him from engaging in his
entire trade or business but only a very limited segment of the pharmaceuticals
industry;

(b)                                 Solicit
any current supplier, customer, employee, or client of the Company with whom
Executive dealt, or with whom anyone in Executive’s direct chain of command
dealt, on behalf of the Company within the year preceding Executive’s
termination of employment, for the purpose of researching, developing or
purchasing, selling or marketing drug or non-drug products, which are
competitive with:  (1) those products
being marketed by the Company at the time of Executive’s termination; or (2)
those products that Executive was aware were under development by the Company
and expected to be marketed within four years of Executive’s termination;

(c)                                  All
ideas, inventions, trademarks, and other developments or improvements conceived
or developed by Executive, alone or with others, during the term of this
Agreement, whether or not during working hours that are within the scope of the
Company’s business operations, or that relate to any Company work or projects,
shall be conclusively presumed to have been created for or on behalf of the
Company as part of Executive’s services to the Company (“Development”).  Executive shall disclose promptly to Company
any and all such Developments.  Such Developments
are the exclusive property of the Company without the payment of consideration
therefore, and Executive hereby transfers, assigns and conveys all of
Executive’s right, title and interest in any such Developments to the Company
and agrees to execute and deliver any documents that the Company deems
necessary to effect such transfer on the demand of the Company.  Executive agrees to assist the Company, at
its expense, to obtain patents on any such patentable Developments, and agrees
to execute all documents necessary to obtain such patents in the name of the
Company.  This Agreement does not apply
to any invention for which no equipment, supplies, facility or trade secret
information of the Company was used and which was developed entirely on
Executive’s own time unless:  (1) the
invention relates (a) to the business of the Company or (b) to the Company’s
actual demonstratively anticipated research and development, or (2) the
invention results from any work performed by Executive for the Company.

 6
 

(d)                                 Executive
recognizes and understands that Executive’s duties at the Company may include
the preparation of materials, including written or graphic materials and other
Developments, and that any such materials conceived or written by Executive
shall be deemed a “work made for hire” as defined and used in the Federal
Copyright Act, 17 U.S.C. § 101.  In the
event of publication of such materials, Executive understands that since such
work is “work made for hire,” the Company shall solely retain and own all
rights in such materials, including any right of copyright.

(e)                                  Executive,
during the Term and at all times thereafter, shall not (i) make any public
derogatory comment concerning the Company or its affiliates or anyone whom
Executive knows to be a current or former director, officer, or employee of the
Company or (ii) publish or produce any information or write any book, article,
screenplay, teleplay or similar type of publication relating to the Company or
its affiliates or anyone whom Executive knows to be a current or former
director, officer, or employee.

(f)                                    If
any restrictions on competition or other activities contained in this Section 9
shall for any reason be held by a court of competent jurisdiction to be
excessively broad as to duration, geographical scope, activity or subject, such
restrictions shall be construed so as thereafter to be limited or reduced to be
enforceable to the extent compatible with the applicable law; it being
understood that by the execution of this Agreement, (i) the parties hereto
regard the current restrictions as reasonable and compatible with their
respective rights and (ii) Executive acknowledges and agrees that the
restrictions will not prevent him from obtaining gainful employment subsequent
to the termination of his employment.

10.                                 Confidentiality.  Executive acknowledges that during the period
of his employment by the Company, and in his performance of services hereunder,
he will be placed in a relationship of trust and confidence regarding the
Company and its affairs.  In the course
of and due to that relationship he will have contact with the Company’s
customers, suppliers, affiliates, and distributors and their personnel.  In the course of the aforesaid relationship,
he will have access to and will acquire confidential information relating to
the business and operations of the Company, including, without limitation,
information relating to financial plans, transactions, collaborations, clinical
trials, processes, drug product development plans and methods of operation of
the Company.  Executive acknowledges that
any such information that is not a trade secret, nonetheless constitutes
confidential information as between himself and the Company, that the
disclosure thereof (or of any information which he knows relates to
confidential, trade, or other secret aspects of the Company’s business) would
cause substantial loss to the goodwill of the Company, and will continue to be
made known to Executive only because of the position of trust and confidence
which he will continue to occupy hereunder. 
In view of the foregoing, and in consideration of the covenants and
premises of this Agreement, Executive agrees that he will not, at any time
during the term of his employment, and for a period of twelve (12) months
thereafter, disclose to any person, firm or company any trade secrets or
confidential information or such ideas which he may have acquired or developed
or may acquire or develop relating to the business of the Company while serving
the Company as an executive.

11.           Remedies.

 

(a)                                  The
covenants of Executive set forth in Sections 9 and 10 are separate and
independent covenants for which valuable consideration has been paid, the
receipt, adequacy and sufficiency of which are acknowledged by Executive, and
have also been made by Executive to induce the Company to enter into this
Agreement.  Each of the aforesaid
covenants may be availed of, or relied upon, by the Company in any court of
competent jurisdiction, and shall form the basis of injunctive relief and
damages including expenses of litigation (including, but not limited to,
reasonable attorney’s fees upon trial and appeal) suffered by the Company
arising out of any breach of the aforesaid covenants by Executive.  The covenants of Executive set forth in this
Agreement are cumulative to each other and to all other covenants of Executive
in favor of the Company contained in this Agreement and shall survive the
termination of this Agreement for the purposes intended.

(b)                                 Each
of the covenants contained in Sections 9 and 10 above shall be construed as
agreements which are independent of any other provision of this Agreement, and
the existence of any claim or cause of action by any party hereto against any
other party hereto, of whatever nature, shall not constitute a defense to the
enforcement of such covenants.

 7
 

12.                                 Enforcement
Costs.  If any legal action or other
proceeding is brought for the enforcement of this Agreement, or because of an
alleged dispute, breach, default or misrepresentation in connection with any
provisions of this Agreement, the successful or prevailing party or parties
shall be entitled to recover reasonable attorney’s fees, court costs and all
expenses even if not taxable as court costs (including, without limitation, all
such fees, costs and expenses incident to appeal and other post-judgment
proceedings), incurred in that action or proceeding, in addition to any other
relief to which such party or parties may be entitled.  Attorney’s fees shall include, without
limitation, paralegal fees, investigative fees, administrative costs, sales and
use taxes and all other charges billed by the attorney to the prevailing party.

13.                                 Indemnification.  The Company shall indemnify, hold harmless
and defend the Executive from all expenditures and losses incurred by him in
direct consequences of the good faith discharge of his duties or by virtue of
his employment and position with the Company, and agrees that it shall continue
to indemnify him and hold him harmless, and defend him against such claims, and
against all claims that have been, are or may be made against him on account of
the discharge of his duties, or by virtue of his employment and position with
the Company, or alleged actions or omissions by him occurring within the course
and scope of his employment, at all times. 
The Company  shall see that the
Executive is added as a named insured on its directors and officers liability
indemnity policy, and on any other policy of insurance now or later purchased
by the Company to indemnify its directors and officers against errors or
omissions committed or occurring  within
the course and scope of their employment.

14.           Notices.  Any and all notices necessary or desirable to
be served hereunder shall be in writing and shall be:

 

(a)                                  personally
delivered, or sent by certified mail, postage prepaid, return receipt
requested, or guaranteed overnight delivery by a nationally recognized express
delivery company, in each case addressed to the intended recipient at the
address set forth below.

 

(b)                                 For
notices sent to the Company:

                                                NeoPharm,
Inc.

                                                1850
Lakeside Drive

                                                Waukegan,
Illinois 60085

                                                Attention:  Office of the Secretary

                                                Telephone
No.: (847) 887-0800

                                                Facsimile
No.: (847) 295-8654

 

(c)                                  For
notices sent to Executive:

At the most recent
address on file with the Company

Either party hereto may
amend the addresses for notices to such party hereunder by delivery of a
written notice thereof served upon the other party hereto as provided
herein.  Any notice sent by certified
mail as provided above shall be deemed delivered on the third (3rd) business
day next following the postmark date which it bears.

15.                                 Entire
Agreement.  This Agreement sets forth
the entire agreement of the parties hereto with respect to the subject matter
hereof, and all prior negotiations, agreements and understandings are merged
herein.  This Agreement may not be
modified or revised except pursuant to a written instrument signed by the party
against whom enforcement is sought.

16.                                 Severability.  The invalidity or unenforceability of any
provision hereof shall not  affect  the 
enforceability of any other provision hereof, and except as otherwise
provided in  Section 11 above, any such
invalid or unenforceable provision shall be severed from this Agreement.

17.                                 Waiver.
Failure to insist upon strict compliance with any of the terms or conditions
hereof shall not be deemed a waiver or such term or condition, and the waiver
or relinquishment of any right or remedy hereunder at any one or more times
shall not be deemed a waiver or relinquishment of such right or remedy at any
other time or times.

18.                                 Governing
Law.  This Agreement and the rights
and obligations of the parties hereto shall be governed by and construed in
accordance with the laws of the State of Illinois, without regard to its
conflicts of laws provisions.  Each

 8
 

party hereto hereby (a)
agrees that any litigation which may be initiated with respect to this
Agreement or to enforce rights granted hereunder shall be initiated exclusively
in a court located in Cook County, Illinois and (b) consents to personal
jurisdiction of such courts for such purpose.

19.                                 Compliance
with Code Section 409A.  To the
extent that there is a material risk that any payments under this Agreement may
not comply with the requirements of Section 409A of the Code, the parties shall
reasonably cooperate with each other to arrange such payments in a manner that
complies with Section 409A.

20.                                 Benefit
and Assignability. This Agreement shall inure to the benefit of and be
binding upon the Company and its successors and assigns.  The rights and obligations of Executive
hereunder are personal to him, and are not subject to voluntary or involuntary
alienation, transfer, delegation or assignment.

[SIGNATURE PAGE FOLLOWS]

 9
 

IN WITNESS
WHEREOF, the parties hereto have executed this Employment Agreement as of the
day and year first above written.

	
  

  	
  NEOPHARM, INC.

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:  

  	
  /s/ John N. Kapoor

  
	
   

  	
  Its:  

  	
  Chairman of the Board

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  EXECUTIVE:

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  /s/ Laurence P. Birch

  
	
   

  	
  LAURENCE P. BIRCH

  

 

 

 10

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