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Exhibit 10.12    
    

 
 

RESTRICTED STOCK AGREEMENT    
    

        This restricted stock agreement (this "Agreement") is made as of March 27, 2006 (the
"Grant Date"), by Cellu Paper Holdings, Inc., a Delaware corporation, (the "Company") and Steven
Ziessler (the "Participant"). 

        WHEREAS,
the Company has adopted the Cellu Paper Holdings, Inc. 2001 Stock Incentive Plan (the "Plan"), pursuant to which the
Company may grant shares of the Company's common stock, par value $0.01 per share (the "Common Stock") which are restricted as to transfer; 

        WHEREAS,
the Company desires to grant to the Participant shares of restricted Common Stock on the terms and conditions provided for herein; and 

        NOW,
THEREFORE, the Company and the Participant agree as follows: 

        1.    Grant of Shares.    Subject to the restrictions, terms and conditions of this Agreement, the Plan and the
Stockholders Agreement, dated as of September 28, 2001, among the Company, Charterhouse Equity Partners III, L.P., Chef Nominees Limited, WAHYAM Capital, LLC and the other parties listed
therein (the "Stockholders Agreement"), the Company hereby grants to the Participant 170.65 shares of Common Stock. The purchase price for the shares of
Common Stock is zero. Pursuant to Sections 2 and 3 hereof, the shares of Common Stock are subject to certain restrictions, which restrictions relate to the passage of time as an employee of the
Company. While such restrictions are in effect, the shares of Common Stock subject to such restrictions shall be referred to herein as "Restricted
Stock." 

        2.    Restrictions on Transfer.    The Participant shall not sell, transfer, pledge, hypothecate, assign, exchange or
otherwise dispose of the Restricted Stock, except as set forth in the Plan or this Agreement. Any attempted sale, transfer, pledge, hypothecation, assignment, exchange or other disposition of the
Restricted Stock in violation of the Plan or this Agreement shall be void and of no effect and the
Company shall have the right to disregard the same on its books and records and to issue "stop transfer" instructions to its transfer agent. 

        3.    Restricted Stock.    

        3.1.    Retention of Certificates.    Promptly after the Grant Date, the Company shall issue stock certificates
representing the Restricted Stock. The stock certificates shall be registered in the Participant's name and shall bear any legend required by the Plan or this Agreement. Such stock certificates shall
be held in custody by the Company (or its designated agent) until the restrictions thereon shall have lapsed. Upon the Company's request, the Participant shall deliver to the Company a duly signed
stock power, endorsed in blank, relating to the Restricted Stock. If (a) the Participant receives a stock dividend on the Restricted Stock, (b) the shares of Common Stock are split, or
(c) the Participant receives any other shares, securities, moneys or property representing a dividend on the Restricted Stock (other than regular cash dividends on and after the Grant Date), or
representing a distribution or return of capital upon or in respect of, the Restricted Stock or any part thereof, or resulting from a split-up, reclassification or other like changes of
the Restricted Stock, or otherwise received in exchange therefore, and any warrants, rights or options issued to the Participant in respect of the Restricted Stock (collectively
"RS Property"), the Participant shall immediately deposit with and deliver to the Company any of such RS Property, including any certificates
representing shares duly endorsed in blank or accompanied by stock powers duly endorsed in blank, and such RS Property shall be subject to the same restrictions, including that of this
Section 3.1, as the Restricted Stock with regard to which they are issued and shall herein be encompassed within the term "Restricted Stock." 

        3.2.    Rights with Regard to Restricted Stock.    The Participant will have the right to vote the Restricted Stock,
to receive and retain all cash dividends payable to holders of shares of Common Stock of record on and after the Grant Date (although such dividends shall be treated, to the extent required by
applicable law, as additional compensation for tax purposes if paid on Restricted Stock), 

 

and
to exercise all other rights, powers and privileges of a holder of shares of Common Stock with respect to the Restricted Stock set forth in the Plan, with the exceptions that: 

        (a)   the
Participant will not be entitled to delivery of the stock certificate or certificates representing the shares of Common Stock until the Restriction Period (as
defined below) shall have expired; 

        (b)   the
Company (or its designated agent) will retain custody of the stock certificate or certificates representing the Restricted Stock and the other RS Property during the
Restriction Period; 

        (c)   no
RS Property shall bear interest or be segregated in separate accounts during the Restriction Period; 

        (d)   the
Participant may not sell, transfer, pledge, hypothecate, assign, exchange or otherwise dispose of the Restricted Stock during the Restriction Period; and 

        (e)   all
stock dividends and other non-cash distributions with respect to the Restricted Stock will be RS Property, as provided in Section 3.1, and held by
the Company until the Restricted Stock becomes vested, if at all, in accordance with Section 3.3(a). 

For
purposes of this Agreement, the "Restriction Period" for the Restricted Stock means the period commencing on the Grant Date and ending at the close
of business on the date the Restricted Stock becomes vested. 

        3.3.    Vesting.    

        (a)   The
Restricted Stock shall become vested and cease to be Restricted Stock (but shall remain subject to the terms of this Agreement and the Plan) as follows if the
Participant has been continuously employed by the Company or a Subsidiary until such date: 

	Vesting Date
	 	Percentage Vested/

Number of Shares Vested

	1st Anniversary of Grant Date	 	33.33%/56.88
	2nd Anniversary of Grant Date	 	33.33%/56.88
	3rd Anniversary of Grant Date	 	33.34%/56.89

        There
shall be no proportionate or partial vesting in the periods prior to the applicable vesting dates and all vesting shall occur only on the appropriate vesting date. 

        Notwithstanding
the foregoing, any Restricted Stock outstanding at the time of a Change in Control shall become vested and cease to be Restricted Stock (but shall remain subject to the
terms of this Agreement and the Plan). 

        (b)   When
the Restricted Stock becomes vested, the Company shall promptly issue and deliver to the Participant a new stock certificate registered in the name of the
Participant for such shares of Common Stock without the legend set forth in Section 4.1 hereof and deliver to the Participant any related other RS Property, subject to applicable federal, state
and local tax withholding. The Participant shall be permitted to transfer the shares of Common Stock following the expiration of the Restriction Period, to the extent permitted by applicable law,
subject to the terms and conditions of the Stockholders Agreement. 

        (c)   The
delivery of any certificate representing the Restricted Stock or other RS Property may be postponed by the Company for such period as may be required for it to
comply with any applicable federal or state securities law or any national securities exchange listing requirements and the Company is not obligated to issue or deliver any securities if, in the
opinion of counsel for the Company, the issuance of such shares of Common Stock shall constitute a violation by the 

2

 

Participant
or the Company of any provisions of any law or of any regulations of any governmental authority or any national securities exchange. 

        3.4.    Forfeiture.    The Participant shall forfeit to the Company, without compensation, any and all Restricted
Stock and RS Property upon the Participant's termination of employment with the Company and its subsidiaries during the Restriction Period for any reason. 

        4.    Legends.    

        4.1.  All
certificates or instruments representing Restricted Stock shall bear a legend in substantially the following form: 

"This
certificate and the shares of stock represented hereby are subject to the terms and conditions, including forfeiture provisions and restrictions against transfer, contained in the Cellu Paper
Holdings, Inc. 2001 Stock Incentive Plan and an agreement entered into between the registered owner and the Company. Any attempt to dispose of these shares in contravention of the Restrictions,
including by way of sale, assignment, transfer, pledge, hypothecation or otherwise, shall be null and void and with out effect." 

        4.2.  All
certificates evidencing Shares shall bear any legend required by the Stockholders Agreement. 

        5.    Representations and Warranties of Participant.    

        In
connection with the issuance and acquisition of shares of Common Stock, the Participant hereby represents and warrants to the Company as follows: 

        5.1.  The
Participant is acquiring and will hold the shares of Common Stock for investment for his account only and not with a view to, or for resale in connection with, any
"distribution" thereof within the meaning of the Securities Act of 1933, as amended (the "Securities Act") or other applicable securities laws. 

        5.2.  The
Participant understands that the shares of Common Stock have not been registered under the Securities Act or other applicable securities laws, on the ground that no
distribution or public offering of the shares of Common Stock is to be effected (it being understood, however, that the shares of Common Stock are being issued and sold in reliance on the exemption
provided under Rule 701 under the Securities Act), and that the shares of Common Stock must be held indefinitely, unless they are subsequently registered under the applicable securities laws or
the Participant obtains an opinion of counsel (in the form and substance satisfactory to the Company and its counsel) that registration is not required. In connection with the foregoing, the Company
is relying in part on the Participant's representations set forth in this Section. The Participant further acknowledges and understands that the Company is under no obligation hereunder to register
the shares of Common Stock. 

        5.3.  The
Participant is aware of the adoption of Rule 144 by the Securities and Exchange Commission under the Securities Act, which permits limited public resales of
securities acquired in a non-public offering, subject to the satisfaction of certain conditions. The Participant acknowledges that he is familiar with the conditions for resale set forth
in Rule 144 and acknowledges and understands that the conditions for resale set forth in Rule 144 have not been satisfied and that the Company has no plans to satisfy these conditions in
the foreseeable future. 

        5.4.  The
Participant will not sell, transfer or otherwise dispose of the shares of Common Stock in violation of the Plan, this Agreement, the Securities Act (or the rules
and regulations promulgated thereunder) or under any other applicable securities laws. The Participant is an "accredited investor" as defined in Rule 501(a) of Regulation D promulgated
under the Securities Act. 

3

 

        5.5.  The
Participant has been furnished with, and has had access to, such information as he considers necessary or appropriate for deciding whether to invest in the shares
of Common Stock, and the Participant has had an opportunity to ask questions and receive answers from the Company regarding the terms and conditions of the issuance of the shares of Common Stock. 

        5.6.  The
Participant is aware that his investment in the Company is a speculative investment that has limited liquidity and is subject to the risk of complete loss. The
Participant is able, without impairing his financial condition, to hold the shares of Common Stock for an indefinite period. 

        6.    Taxes: Section 83(b) Election.    

        6.1.  The
Participant agrees that, subject to Section 6.2 below, (a) no later than the date on which any Restricted Stock shall have become vested and prior to
the delivery of such stock certificates, the Participant will pay to the Company, or make arrangements satisfactory to the Company regarding payment of, any federal, state or local taxes of any kind
required by law to be withheld with respect to the Restricted Stock which shall have become so vested and (b) the Company shall, to the extent permitted by law, have the right to (but not be
obligated to) deduct from any payment of any kind (including shares of Common Stock hereunder) otherwise due to the Participant any federal, state or local taxes of any kind required by law to be
withheld with respect to the Restricted Stock which shall have become so vested. 

        6.2.  If
the Participant properly elects (as required by Section 83(b) of the Internal Revenue Code of 1986, as amended (the
"Code")) within 30 days after the issuance of the Restricted Stock to include in gross income for federal income tax purposes in the year of
issuance the fair market value of such Restricted Stock, the Participant shall pay to the Company or make arrangements satisfactory to the Company to pay to the Company upon such election, any
federal, state or local taxes required to be withheld with respect to the Restricted Stock. If the Participant shall fail to make such payment, the Company shall, to the extent permitted by law, have
the right to deduct from any payment of any kind otherwise due to the Participant any federal, state or local taxes of any kind required by law to be withheld with respect to the Restricted Stock. THE
PARTICIPANT SHOULD CONSULT WITH HIS TAX ADVISOR TO DETERMINE THE TAX CONSEQUENCES OF ACQUIRING THE SHARES OF COMMON STOCK AND THE ADVANTAGES AND DISADVANTAGES OF FILING THE SECTION 83(B) ELECTION. THE
PARTICIPANT ACKNOWLEDGES THAT IT IS HIS SOLE
RESPONSIBILITY, AND NOT THE EMPLOYER'S, TO FILE A TIMELY ELECTION UNDER SECTION 83(B) OF THE CODE. 

        6.3.  Notwithstanding
anything herein to the contrary, if the Participant timely makes a Section 83(b) election, the Company shall pay to the Participant an additional
amount (the "Gross-Up Payment") to fully gross up the Participant for the amount included in gross income for income tax purposes as a
result of making of a Section 83(b) election or the payment of the Gross-Up Payment. 

        7.    Not an Employment Agreement.    The issuance of the Shares hereunder does not constitute
an agreement by the Company to continue to employ the Participant during the entire, or any portion of, the term of this Agreement, including but not limited to any period during which the Restricted
Stock is outstanding. 

        8.    Power of Attorney.    The Company, its successors and assigns, is hereby appointed the
attorney-in-fact, with full power of substitution, of the Participant for the purpose of carrying out the provisions of this Agreement and taking any action and executing any
instruments which such attorney-in-fact may deem necessary or advisable to accomplish the purposes hereof, which appointment as attorney-in-fact is
irrevocable and coupled with an interest. In connection with actions permitted under the terms of this Agreement (including Sections 3.4 and 6), the Company, as 

4

 

attorney-in-fact
for the Participant, may in the name and stead of the Participant, make and execute all conveyances, assignments and transfers of the Restricted Stock, Shares
and property provided for herein, and the Participant hereby ratifies and confirms all that the Company, as said attorney-in-fact, shall do in good faith by virtue hereof.
Nevertheless, the Participant shall, if so requested by the Company, execute and deliver to the Company all such instruments as may, in the judgment of the Company, be advisable for such purpose. 

        9.    Miscellaneous.    

        9.1.  This
Agreement shall inure to the benefit of and be binding upon the parties hereto and their respective heirs, legal representatives, successors and assigns. 

        9.2.  No
modification or waiver of any of the provisions of this Agreement shall be effective unless in writing and signed by the party against whom it is sought to be
enforced. 

        9.3.  This
Agreement may be executed in one or more counterparts, all of which taken together shall constitute one contract. 

        9.4.  The
failure of any party hereto at any time to require performance by another party of any provision of this Agreement shall not affect the right of such party to
require performance of that provision, and any waiver by any party of any breach of any provision of this Agreement shall not be construed as a waiver of any continuing or succeeding breach of such
provision, a waiver of the provision itself, or a waiver of any right under this Agreement. 

        9.5.  The
headings of the sections of this Agreement have been inserted for convenience of reference only and shall in no way restrict or modify any of the terms or
provisions hereof. 

        9.6.  The
Company shall pay all fees and expenses necessarily incurred by the Company in connection with this Agreement. 

        9.7.  All
notices, consents, requests, approvals, instructions and other communications provided for herein shall be in writing and validly given or made (i) on the
date of delivery if delivered by hand, (ii) on the date of transmission, if delivered by confirmed facsimile, (iii) on the first business day following the date of deposit if delivered
by guaranteed overnight delivery service, or (iv) on the fourth business day following the date delivered or mailed by United States registered or certified mail, return receipt requested,
postage prepaid, addressed as follows: 

If
to the Participant: 

At
the address (or to the facsimile number) then shown

on the records of the Company 

If
to the Company: 

Cellu
Paper Holdings, Inc.

3442 Francis Road

Suite 220

Alpharetta, GA 30004-5932

Attention: Secretary 

or
to such other address as either party may have furnished to the other in writing in accordance herewith, except that notices of change of address shall be effective only upon receipt. 

        9.8.  This
Agreement and the award hereunder are subject to all of the restrictions, terms and provisions of the Plan and the Stockholders Agreement which are incorporated
herein by reference. In the event of an inconsistency between any provision of the Plan and this Agreement, the terms of the Plan shall control. The capitalized terms in this Agreement that are not
otherwise defined shall have the same meaning as set forth in the Plan. 

5

 

        9.9.  By
executing this Agreement within 60 days after the day and year first written above, the award of Restricted Stock shall be accepted by the Participant. 

        9.10. The
validity, interpretation, construction and performance of this Agreement shall be governed by the laws of the State of Delaware without regard to its conflicts of
law principles. 

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

	 	 	CELLU PAPER HOLDINGS, INC.
	

 	
 	
By:	

/s/  RUSSELL TAYLOR      
 Title: President /CEO
	

 	
 	

/s/  STEVEN ZIESSLER      
 Steven Ziessler

6

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Exhibit 10.12

RESTRICTED STOCK AGREEMENTExhibit 10.14

 

AGREEMENT AND PLAN OF MERGER

 

dated as of May 8, 2006

 

among

 

CELLU PARENT CORPORATION,

 

CELLU ACQUISITION CORPORATION,

 

 

and

 

CELLU PAPER HOLDINGS, INC.

 

 

TABLE OF CONTENTS

 

	
   

  	
   

  	
  Page

  
	
   

  	
   

  	
   

  
	
  ARTICLE I DEFINITIONS

  	
  1

  
	
   

  	
   

  	
   

  
	
  ARTICLE II THE MERGER

  	
  12

  
	
   

  	
   

  	
   

  
	
  Section 2.1.

  	
  Effective Time of the Merger

  	
  12

  
	
  Section 2.2.

  	
  Closing

  	
  12

  
	
  Section 2.3.

  	
  Effects of the Merger

  	
  12

  
	
  Section 2.4.

  	
  Directors and Officers

  	
  13

  
	
   

  	
   

  	
   

  
	
  ARTICLE III CONVERSION OF
  SECURITIES

  	
  13

  
	
   

  	
   

  	
   

  
	
  Section 3.1.

  	
  Merger Consideration

  	
  13

  
	
  Section 3.2.

  	
  Escrow Amount

  	
  13

  
	
  Section 3.3.

  	
  Conversion of Capital Stock

  	
  14

  
	
  Section 3.4.

  	
  Appraisal Rights

  	
  25

  
	
  Section 3.5.

  	
  Payment of Merger Consideration;
  Exchange of Certificates

  	
  26

  
	
   

  	
   

  	
   

  
	
  ARTICLE IV REPRESENTATIONS
  AND WARRANTIES OF THE COMPANY

  	
  28

  
	
   

  	
   

  	
   

  
	
  Section 4.1.

  	
  Organization of Company

  	
  28

  
	
  Section 4.2.

  	
  Capitalization; Subsidiaries

  	
  29

  
	
  Section 4.3.

  	
  Authority; No Conflict; Required
  Filings and Consents

  	
  31

  
	
  Section 4.4.

  	
  Financial Statements; Absence of
  Undisclosed Liabilities: Sarbanes-Oxley

  	
  32

  
	
  Section 4.5.

  	
  Tax Matters

  	
  33

  
	
  Section 4.6.

  	
  Absence of Certain Changes or
  Events

  	
  36

  
	
  Section 4.7.

  	
  Property

  	
  38

  
	
  Section 4.8.

  	
  Intellectual Property

  	
  39

  
	
  Section 4.9.

  	
  Employee Benefit Plans

  	
  40

  
	
  Section 4.10.

  	
  Contracts

  	
  42

  
	
  Section 4.11.

  	
  Compliance With Law

  	
  44

  
	
  Section 4.12.

  	
  Labor Matters

  	
  44

  
	
  Section 4.13.

  	
  Insurance

  	
  44

  
	
  Section 4.14.

  	
  Litigation

  	
  44

  
	
  Section 4.15.

  	
  Governmental Authorizations and
  Regulations

  	
  45

  
	
  Section 4.16.

  	
  Compliance with Environmental
  Requirements

  	
  45

  
	
  Section 4.17.

  	
  No Brokers

  	
  45

  
	
  Section 4.18.

  	
  Inventories

  	
  46

  
	
  Section 4.19.

  	
  Related Party Transactions

  	
  46

  
	
  Section 4.20.

  	
  Customers and Vendors

  	
  46

  
	
  Section 4.21.

  	
  Company SEC Documents

  	
  46

  
	
  Section 4.22.

  	
  Information Supplied to the
  Company’s Stockholders

  	
  47

  
	
  Section 4.23.

  	
  Indebtedness

  	
  47

  
	
   

  	
   

  	
   

  
	
  ARTICLE V REPRESENTATIONS
  AND WARRANTIES OF PARENT

  	
  47

  
	
   

  	
   

  	
   

  
	
  Section 5.1.

  	
  Organization of Parent

  	
  47

  
	
  Section 5.2.

  	
  Authority; No Conflict; Required
  Filings and Consents

  	
  47

  

 

i

 

	
  Section 5.3.

  	
  Capital
  Resources

  	
  48

  
	
  Section 5.4.

  	
  Litigation

  	
  48

  
	
  Section 5.5.

  	
  No Brokers

  	
  49

  
	
   

  	
   

  	
   

  
	
  ARTICLE VI PRE-CLOSING
  COVENANTS OF THE COMPANY

  	
  49

  
	
   

  	
   

  	
   

  
	
  Section 6.1.

  	
  Approval of Company Stockholders

  	
  49

  
	
  Section 6.2.

  	
  Conduct of Business Prior to the
  Effective Time

  	
  49

  
	
  Section 6.3.

  	
  Access to Information

  	
  51

  
	
  Section 6.4.

  	
  Satisfaction of Conditions
  Precedent

  	
  51

  
	
  Section 6.5.

  	
  No Solicitation

  	
  52

  
	
  Section 6.6.

  	
  Cooperation

  	
  53

  
	
  Section 6.7.

  	
  Information

  	
  54

  
	
  Section 6.8.

  	
  Tax Sharing

  	
  54

  
	
   

  	
   

  	
   

  
	
  ARTICLE VII PRE-CLOSING
  AND OTHER COVENANTS OF PARENT

  	
  55

  
	
   

  	
   

  	
   

  
	
  Section 7.1.

  	
  Satisfaction of Conditions
  Precedent

  	
  55

  
	
  Section 7.2.

  	
  Certain Employee Benefit Matters

  	
  55

  
	
   

  	
   

  	
   

  
	
  ARTICLE VIII OTHER
  AGREEMENTS

  	
  55

  
	
   

  	
   

  	
   

  
	
  Section 8.1.

  	
  Confidentiality

  	
  55

  
	
  Section 8.2.

  	
  No Public Announcement

  	
  55

  
	
  Section 8.3.

  	
  Regulatory Filings; Consents;
  Reasonable Efforts

  	
  56

  
	
  Section 8.4.

  	
  Further Assurances

  	
  57

  
	
  Section 8.5.

  	
  Director and Officer Liability

  	
  57

  
	
  Section 8.6.

  	
  East Hartford Facility

  	
  57

  
	
  Section 8.7.

  	
  Cooperation on Tax Matters

  	
  57

  
	
   

  	
   

  	
   

  
	
  ARTICLE IX CONDITIONS TO
  MERGER

  	
  58

  
	
   

  	
   

  	
   

  
	
  Section 9.1.

  	
  Conditions to Each Party’s
  Obligation to Effect the Merger

  	
  58

  
	
  Section 9.2.

  	
  Additional Conditions to
  Obligations of Parent

  	
  58

  
	
  Section 9.3.

  	
  Additional Conditions to
  Obligations of the Company

  	
  61

  
	
   

  	
   

  	
   

  
	
  ARTICLE X TERMINATION AND
  AMENDMENT

  	
  62

  
	
   

  	
   

  	
   

  
	
  Section 10.1.

  	
  Termination

  	
  62

  
	
  Section 10.2.

  	
  Effect of Termination

  	
  62

  
	
  Section 10.3.

  	
  Fees and Expenses

  	
  63

  
	
   

  	
   

  	
   

  
	
  ARTICLE XI INDEMNIFICATION

  	
  63

  
	
   

  	
   

  	
   

  
	
  Section 11.1.

  	
  Indemnification of the Surviving
  Corporation

  	
  63

  
	
  Section 11.2.

  	
  Indemnification of Former
  Company Stockholders

  	
  64

  
	
  Section 11.3.

  	
  Exclusive Remedies

  	
  65

  
	
  Section 11.4.

  	
  Deductible and Cap

  	
  65

  
	
  Section 11.5.

  	
  Survival of Indemnification
  Obligations

  	
  66

  
	
  Section 11.6.

  	
  Terms and Conditions of
  Indemnification; Resolution of Conflicts

  	
  66

  
	
  Section 11.7.

  	
  Former Company Stockholders’
  Agent

  	
  68

  
	
   

  	
   

  	
   

  
	
  ARTICLE XII MISCELLANEOUS

  	
  69

  
	
   

  	
   

  	
   

  
	
  Section 12.1.

  	
  Survival of Representations and
  Covenants

  	
  69

  

 

ii

 

	
  Section 12.2.

  	
  Notices

  	
  70

  
	
  Section 12.3.

  	
  Interpretation

  	
  71

  
	
  Section 12.4.

  	
  Counterparts

  	
  71

  
	
  Section 12.5.

  	
  Entire Agreement; No Third-Party
  Beneficiaries

  	
  71

  
	
  Section 12.6.

  	
  Governing Law

  	
  72

  
	
  Section 12.7.

  	
  Assignment

  	
  72

  
	
  Section 12.8.

  	
  Amendment

  	
  72

  
	
  Section 12.9.

  	
  Extension; Waiver

  	
  72

  
	
  Section 12.10.

  	
  Severability

  	
  73

  
	
  Section 12.11.

  	
  Jurisdiction; Venue; Service of
  Process

  	
  73

  
	
  Section 12.12.

  	
  Waiver of Jury Trial

  	
  74

  

 

	
  EXHIBIT INDEX

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Exhibit A

  	
   

  	
  -

  	
   

  	
  Company Disclosure Schedules

  
	
  Exhibit B

  	
   

  	
  -

  	
   

  	
  Former Company Stockholders

  
	
  Exhibit 2.3(a)(2)

  	
   

  	
  -

  	
   

  	
  Form of Charter

  
	
  Exhibit 2.3(a)(3)

  	
   

  	
  -

  	
   

  	
  Form of Bylaws

  
	
  Exhibit 3.2(a)

  	
   

  	
  -

  	
   

  	
  Form of Escrow Agreement

  
	
  Exhibit 3.2(b)

  	
   

  	
  -

  	
   

  	
  Form of Working Capital Escrow Agreement

  
	
  Exhibit 3.3(f)

  	
   

  	
  -

  	
   

  	
  Calculation of Working Capital

  
	
  Exhibit 3.3(i)

  	
   

  	
  -

  	
   

  	
  Numerical Example of Certain Earn-Out Calculations for Illustrative
  Purposes

  
	
  Exhibit 9.2(c)

  	
   

  	
  -

  	
   

  	
  Form of Opinion of Proskauer Rose LLP

  
	
  Exhibit 9.2(l)

  	
   

  	
  -

  	
   

  	
  Form of Former Company Stockholders Indemnification Agreement

  
	
  Exhibit 9.2(o)

  	
   

  	
  -

  	
   

  	
  Form of Confidentiality and Non-Solicit Agreement

  
	
  Exhibit 9.3(d)

  	
   

  	
  -

  	
   

  	
  Form of Opinion of Ropes & Gray LLP

  
	
  Exhibit 9.3(g)

  	
   

  	
  -

  	
   

  	
  Form of Limited Guaranty

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  SCHEDULES

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Schedule 6.1

  	
   

  	
  -

  	
   

  	
  List of Consenting Stockholders

  
	
  Schedule 6.2

  	
   

  	
  -

  	
   

  	
  Exception to Pre-Closing Operating Covenants

  
	
  Schedule 9.2(g)

  	
   

  	
  -

  	
   

  	
  List of Agreements to be Terminated

  
	
  Schedule 9.2(h)

  	
   

  	
  -

  	
   

  	
  Pre-Closing Indebtedness

  
	
  Schedule 9.2(n)

  	
   

  	
  -

  	
   

  	
  Rollover Shareholders

  
	
  Schedule 9.2(p)

  	
   

  	
  -

  	
   

  	
  List of Certain Ancillary Agreements

  
	
  Schedule 9.2(r)

  	
   

  	
  -

  	
   

  	
  Required Third Party Consents

  
	
  Schedule 11.1

  	
   

  	
  -

  	
   

  	
  List of Certain Matters Excluded from the Indemnity

  

 

iii

 

AGREEMENT AND PLAN OF MERGER

 

THIS
AGREEMENT AND PLAN OF MERGER, dated as of May 8, 2006 (this “Agreement”), is entered into by
and among Cellu Parent Corporation, a Delaware corporation (“Parent”), Cellu Acquisition
Corporation, a Delaware corporation (“Merger Sub”), and Cellu Paper Holdings, Inc., a Delaware
corporation (the “Company”).

 

RECITALS

 

WHEREAS,
the respective Boards of Directors of Parent, Merger Sub and the Company deem
it advisable and in the best interests of each corporation and their respective
stockholders that Parent acquire the Company on the terms and conditions set
forth in this Agreement;

 

WHEREAS,
the acquisition of the Company shall be effected by the terms of this Agreement
through a transaction in which Merger Sub will merge (the “Merger”) with
and into the Company, with the Company being the surviving corporation; the
Company will become a wholly owned subsidiary of Parent; and each issued and
outstanding share of capital stock of the Company not owned by Parent, Merger
Sub or the Company, other than the Dissenting Shares (as hereinafter defined),
shall be converted into the right to receive the Per Share Merger Consideration
(as hereinafter defined);

 

WHEREAS,
immediately prior to the Merger, pursuant to a Rollover Agreement (as defined
herein), the Rollover Shareholders shall contribute the Rollover Shares (as
defined herein) to Parent in exchange for Series A convertible preferred stock,
par value $0.001 per share, of Parent (the
“Series A Preferred Stock”) in a transaction pursuant to
Section 351 of the Code;

 

WHEREAS,
the Company, Parent and Merger Sub desire to make certain representations,
warranties, covenants and agreements pursuant to this Agreement;

 

NOW,
THEREFORE, in consideration of the foregoing and the respective
representations, warranties, covenants and agreements set forth in this
Agreement, the parties agree as follows:

 

ARTICLE I

 

DEFINITIONS

 

The
terms defined in this Article I, whenever used herein (including, without
limitation, the Exhibits and Schedules hereto), shall have the following
meanings for all purposes of this Agreement:

 

“Accountants”
has the meaning set forth in Section 3.3(i)(B)(iii).

 

“Acquisition
Proposal” has the meaning set forth in Section 6.5(c).

 

“Action
of Divesture” has the meaning set forth in Section 8.3(b).

 

1

 

“Actual
Net Cash” has the meaning set forth in Section 3.3(g)(iv).

 

“Actual
Net Working Capital” has the meaning set forth in Section 3.3(f)(iv).

 

“Affiliate”
of a Person means any other Person that directly or indirectly through one or
more intermediaries controls, is controlled by, or is under common control with
such Person.

 

“Aggregate
Earned Amount” shall mean the Proportionate Share of the Maximum Earn-Out
Payment; provided, however, that if a Change in Control occurs and the WP Exit
Consideration exceeds the WP Minimum Return Threshold, then the Aggregate
Earned Amount shall equal the maximum earn-out payment payable to the Former
Company Stockholders that would result in the WP Exit Consideration equaling
the applicable WP Minimum Return Threshold; provided further, however, that
such maximum earn-out payment, together with any prior Earn-Out payments to the
Former Company Stockholders’ Agent for distribution to the Former Company
Stockholders shall not in any event exceed the Maximum Earn-Out Payment.

 

“Agreement”
has the meaning set forth in the caption.

 

“Annual
Cap” means $15 million.

 

“Annual
EBITDA” means the EBITDA of the Parent and its Subsidiaries taken as a
whole in the fiscal year for which the calculation is done, measured on each
Measurement Date.

 

“Annual
Payment Earned” means an amount, not less than zero, equal to the Aggregate
Earned Amount less all amounts previously paid to the Former Company Stockholders
pursuant to Section 3.3(i).

 

“Antitrust
Laws” has the meaning set forth in Section 8.3(b).

 

“Assumed
Indebtedness” shall mean the $162,000,000 aggregate principal amount of the
Bonds.

 

“Bonds”
shall mean the $162,000,000 in aggregate principal amount of 9 3⁄4% senior
secured notes due 2010 of Cellu Tissue Holdings, Inc.

 

“Business
Day” means any day other than a Saturday, Sunday or other day on which
commercial banks in New York City are required or authorized by law to be
closed.

 

“Cap”
has the meaning set forth in Section 11.4.

 

“Capital
Lease” of any Person means any lease of any property by such Person as
lessee which would, in accordance with GAAP, be required to be accounted for as
a capital lease on the balance sheet of such Person.

 

“Cash
Shortfall” has the meaning set forth in Section 3.3(g)(iii).

 

“Certificate
of Merger” has the meaning set forth in Section 2.1(a).

 

“Certificates”
has the meaning set forth in Section 3.5(b).

 

2

 

“Change
in Control” means (i) any transaction or series of related transactions in
which any Person who is not an Affiliate of the Parent, or any two or more such
Persons acting as a group, and all Affiliates of such Person or Persons, who
prior to such time neither owned nor controlled (directly or indirectly) any
shares of the voting securities of the Parent or shares of the voting
securities of the Parent representing less than fifty percent (50%) of the
voting power at elections for the Board of Directors of the Parent, shall (A) either
directly or indirectly acquire, whether by purchase, exchange, tender offer,
merger, consolidation, recapitalization or otherwise, or (B) otherwise be the direct
or indirect owner of (as a result of a redemption of shares of the Parent’s
voting securities or otherwise), shares of the Parent’s voting securities (or
shares in a successor corporation by merger, consolidation or otherwise) such
that following such transaction or transactions, such Person or group and their
respective Affiliates directly or indirectly beneficially own or control fifty
percent (50%) or more of the voting power at elections for the board of
directors of the Parent or any successor corporation, or (ii) the sale or
transfer of all or a majority of the Parent’s assets (including without
limitation the stock or assets of its direct or indirect operating
subsidiaries) and following such sale or transfer, there is a distribution of proceeds
of such transaction to the Parent’s shareholders.

 

“Charterhouse
Management Agreement” means the Financial Advisory and Management Services
Agreement, dated as of September 30, 2002, between Cellu Tissue Holdings, Inc.
and Charterhouse Group International Inc.

 

“Charter
Non-Solicit” has the meaning set forth in Section 9.2(o).

 

“Closing”
has the meaning set forth in Section 2.2.

 

“Closing
Date” has the meaning set forth in Section 2.2.

 

“Code”
means the United States Internal Revenue Code of 1986, as amended.

 

“Company”
has the meaning set forth in the caption.

 

“Company
Audited Financials” has the meaning set forth in Section 4.4(a).

 

“Company Cash” means, as of
immediately prior to the Effective Time, all of the Company’s and its
Subsidiaries’ cash and cash equivalents and all checks and funds received by
the Company or its Subsidiaries or their banks (e.g., checks deposited or funds
paid to lock-box accounts), excluding (to
the extent included in the calculation of the Per Share Merger Consideration
pursuant to Section 3.3(c)) the
aggregate amount of the exercise prices payable in respect of all in-the-money
Company Options (including any unvested portion of such Company Options), in-the-money
Company Warrants and the amount of any checks written by the Company or its
Subsidiaries but not yet cleared.

 

“Company
Common Stock” has the meaning set forth in Section 3.3.

 

“Company
Disclosure Schedules” means the disclosure schedules attached hereto as
Exhibit A.

 

“Company
Employee Plans” has the meaning set forth in Section 4.9(a).

 

3

 

“Company
Financial Statements” has the meaning set forth in Section 4.4(a).

 

“Company
Indemnitees” has the meaning set forth in Section 8.5.

 

“Company
Material Adverse Effect” has the meaning set forth in Section 4.1.

 

“Company
Options” has the meaning set forth in Section 3.3(d).

 

“Company SEC Documents” means any
and all annual reports on Form 10-K, quarterly reports on Form 10-Q,
current reports on Form 8-K, and other reports, statements, schedules and
registration statements of the Company and its Subsidiaries filed or required
to be filed with the Securities and Exchange Commission since September 3,
2004, together with the Registration Statement filed on Form S-4 on September
3, 2004 by Cellu Tissue Holdings, Inc. (including all information contained in
such filings and all filings incorporated by reference therein).

 

“Company
Securities” has the meaning set forth in Section 4.2(a).

 

“Company
Stockholder Approval” has the meaning set forth in Section 4.3(a).

 

“Company
Transaction Expenses” means all fees and expenses incurred by the Company,
its Subsidiaries or any Former Company Stockholder in connection with this
Agreement and the transactions contemplated hereby; provided,
however, that, for the avoidance of doubt, Company Transaction
Expenses shall not include: (a) fifty percent (50%) of any filing fees payable
under the HSR Act (it being understood and agreed that the other fifty percent
(50%) of any filing fees payable under the HSR Act shall be considered a
Company Transaction Expense); (b) 50% of all excise, sales, use, value added,
registration stamp, recording, documentary, conveyancing, transfer and similar
Taxes, levies, charges and fees incurred in connection with the transactions
contemplated hereby; (c) any fees and expenses to the extent payable by Parent
pursuant to the terms of the Expense Letter; or (d) expenses related to
insurance coverage for the obligations pursuant to Section 8.5.

 

“Company
Unaudited Financials” has the meaning set forth in Section 4.4(a).

 

“Company
Warrants” has the meaning set forth in Section 3.3(e).

 

“Compensation
Deductions” has the meaning set forth in Section 3.3(h)(i).

 

“Confidentiality
Agreement” has the meaning set forth in Section 8.1.

 

“Consent
Materials” has the meaning set forth in Section 6.1.

 

“Consenting
Stockholders” has the meaning set forth in Section 6.1.

 

“Constituent
Corporations” has the meaning set forth in Section 2.3(a).

 

“Damages”
has the meaning set forth in Section 11.1.

 

“Deductible”
has the meaning set forth in Section 11.4.

 

4

 

“DGCL”
has the meaning set forth in Section 2.1(a).

 

“Dissenting
Shares” has the meaning set forth in Section 3.4(a).

 

“Earn-Out
Disagreement Notice” has the meaning set forth in Section 3.3(i)(B)(ii).

 

“Earn-Out
Financial Statements” has the meaning set forth in Section 3.3(i)(B)(i).

 

“Earn-Out
Payment Date” for any year during the Earn-Out Period shall mean a date
within six months after the end of the prior fiscal year or, in the event of a
Change in Control with respect to which any of the thresholds in clauses (i) or
(ii) of the definition of Aggregate Earned Amount have been met or exceeded, a
date that is no later than five (5) Business Days after the date of
consummation of such Change in Control.

 

“Earn-Out
Period” shall mean the period beginning on the first day of the fiscal year
ending February 2007 and ending on the last day of the fiscal year ending
February 2010; provided, that if there is a Change in Control, the Earn-Out
Period shall expire.

 

“Earn-Out
Statement” has the meaning set forth in Section 3.3(i)(B)(i).

 

“EBITDA”
means the net income of the Parent and its Subsidiaries taken on a consolidated
basis plus interest expense, taxes, depreciation expense and amortization
expense and calculated based on the following principles:

 

(a)           EBITDA shall exclude (i)
one-time costs and expenses incurred in connection with the transactions
contemplated by this Agreement, including any re-structuring costs, transaction
costs, severance costs, or other one-time carve-out costs and including the
amount of the Stay Bonuses (to the extent not forfeited) and (ii) Extraordinary
Items;

 

(b)           To the extent EBITDA
has been reduced thereby, EBITDA shall exclude (i) any management, transaction
or other fees charged by the WP Entities or other equity investors (excluding
present or former employees or individual consultants), (ii) any management or
similar fees charged by the Former Company Shareholders and their Affiliates
pursuant to the Charterhouse Management Agreement, or (iii) any non-cash
compensation charges related to equity compensation (including stock options
and restricted stock);

 

(c)           Income or expense
attributable to the operation of any other Related Business enterprise acquired
by the Parent or its subsidiaries subsequent to the Closing shall be included
in the computation of EBITDA; and

 

(d)           Any one-time gain or
loss from any sale, exchange or other disposition of assets (as well as the
related transaction expenses), other than in the ordinary course of business
consistent with past practice, shall be excluded from the computation of
EBITDA;

 

5

 

provided,
however, that if, during the Earn-Out Period, the Parent or
any of its Subsidiaries sells, leases, transfers or otherwise disposes of
assets to any unrelated third party, other than inventory in the ordinary
course of business, a fixed amount of EBITDA generated from such assets shall
be added through the Earn-Out Period.

 

“Effective
Time” has the meaning set forth in Section 2.1(b).

 

“Environmental
Laws” means all applicable federal, Canadian, state, provincial or local
statutes, laws, regulations, judgments and orders relating to protection of
human health or safety or the environment, including laws and regulations relating
to Releases or threatened Releases of Hazardous Substances, or otherwise
relating to the manufacture, processing, distribution, use, treatment, storage,
disposal, transport or handling of Hazardous Substances.

 

“ERISA”
has the meaning set forth in Section 4.9(a).

 

“ERISA
Affiliate” has the meaning set forth in Section 4.9(a).

 

“Escrow
Agent” has the meaning set forth in Section 3.2(a).

 

“Escrow
Agreement” has the meaning set forth in Section 3.2(a).

 

“Escrow
Amount” has the meaning set forth in Section 3.2(a).

 

“Estimated
Net Cash” has the meaning set forth in Section 3.3(g)(i).

 

“Estimated
Net Working Capital” has the meaning set forth in Section 3.3(f)(i).

 

“Expense
Letter” has the meaning set forth in Section 6.6.

 

“Extraordinary
Items” means extraordinary items defined in accordance with GAAP; for the
avoidance of doubt, an item shall only be considered an Extraordinary Item if
such item is both unusual and infrequent in nature, determined in accordance
with GAAP.

 

“Fair Market Value” means, with respect to any non-cash
consideration, the fair market value thereof as determined by the WP Entities
acting in good faith, provided, that the Former Company Stockholders’ Agent may
object to such valuation by the WP Entities by giving written notice of such objection
to the WP Entities setting forth the valuation which the Former Company
Stockholders’ Agent proposes. If the WP Entities and such the Former Company
Stockholders’ Agent do not reach agreement within 30 days after the receipt of
such notice, the WP Entities and the Former Company Stockholders’ Agent will
each choose a third party appraiser, and these two appraisers will jointly
choose a third appraiser (each of which shall be an investment banking
institution of national reputation or an appraisal or valuation firm of
national standing). Thereafter, all three appraisers will independently
determine the fair market value for the consideration. Of these valuations, the
one that differs most from the other two will be discarded and the remaining
two will be averaged, which such average will be binding upon the WP Entities,
the Former Company Stockholders’ Agent and the Former Company Stockholders. The
fees and expenses of all three appraisers shall be born by the party whose
initial proposed valuation differs most from such average.

 

6

 

“Foreign
Employee Plan” has the meaning set forth in Section 4.9(e).

 

“Former
Company Stockholders” means the holders of shares of Company Common Stock
immediately prior to the Effective Time (including the Rollover Shareholders),
all holders of restricted stock which vest as of the Effective Time and all Optionholders
and Warrantholders set forth on Exhibit B hereto (as such Exhibit shall be
updated immediately prior to the Effective Time).

 

“Former
Company Stockholders’ Agent” has the meaning set forth in Section 11.7(a).

 

“Former
Company Stockholders Indemnification Agreement” has the meaning set forth
in Section 9.2(l).

 

“GAAP”
means generally accepted accounting principles in effect in the United States,
applied on a consistent basis.

 

“Governmental
Entity” has the meaning set forth in Section 4.3(c).

 

“Guarantee”
shall mean (i) any guarantee of the payment or performance of, or any
contingent obligation in respect of, any indebtedness or other obligation of
any other Person, (ii) any other arrangement whereby credit is extended to one
obligor on the basis of any promise or undertaking of another Person (A) to pay
the indebtedness of such obligor, (B) to purchase any obligation owed by such
obligor, (C) to purchase or lease assets (other than inventory in the ordinary
course of business consistent with past practices) under circumstances that
would enable such obligor to discharge one or more of its obligations, or (D)
to maintain the capital, working capital, solvency or general financial
condition of such obligor, and (iii) any liability as a general partner of a
partnership or as a venturer in a joint venture in respect of indebtedness or
other obligations of such partnership or joint venture.

 

“Hazardous
Substances” means any petroleum or fraction thereof, chemicals, materials
or substances which are now or ever have been defined as or included in the
definition of “hazardous substances,” “hazardous wastes,” “hazardous materials,”
“extremely hazardous wastes,” “restricted hazardous wastes,” “toxic substances,”
“toxic pollutants”, or other words of similar import, under any Environmental
Law.

 

“Highest
Annual EBITDA” means the highest Annual EBITDA during the Earn-Out Period.

 

“HSR
Act” has the meaning set forth in Section 4.3(c).

 

“Indebtedness”
means all of the Company’s and its Subsidiaries’ obligations (including all
obligations in respect of principal, accrued interest, penalties, fees and
premiums) (i) for borrowed money, (ii) evidenced by notes, bonds, debentures or
similar instruments, (iii) under Capital Leases, (iv) for the deferred purchase
price of property, goods or services heretofore actually received by the
Company or its Subsidiaries (excluding operating leases, accrued expenses,
accounts payable and Company Transaction Expenses); (v) any disbursements made
pursuant to letters of credit and bankers’ acceptances to the beneficiaries
thereof and not included 

 

7

 

in clause
(i) above, (vi) for actual obligations relating to interest rate protection and
interest rate swap agreements, (vii) in the nature of Guarantees of the
obligations described in clauses (i) through (vi) above of any other Person; provided,
however, that, any amounts paid or payable to holders of outstanding
Bonds in connection with the Consent Solicitation shall not constitute
Indebtedness if and to the extent such amounts constitute an expense payable by
Parent pursuant to the terms of the Expense Letter or constitute Company
Transaction Expenses.

 

“Indemnification
Matters Letter” has the meaning set forth in Section 11.1.

 

“Indenture”
means the Indenture dated as of March 12, 2004, among Cellu Tissue Holdings,
Inc., the subsidiary guarantors party thereto and The Bank of New York, as
Trustee, with respect to the 9 1⁄4% Senior Secured Notes due 2010, as amended.

 

“Independent
Auditor” has the meaning set forth in Section 3.3(f)(iv).

 

“Intellectual
Property” means all proprietary rights of every kind and nature, including:
(i) all trade and product names, foreign letters patent, patents, patent
applications, unpatented proprietary developmental records, trademarks, service
marks, trade dress, logos and copyrights, together with all translations,
adaptations, derivations, and combinations thereof and all goodwill associated
therewith; (ii) trade secrets, know-how and other proprietary or confidential
information; (iii) computer software and other intangible property and rights
(other than off-the-shelf computer software licensed under a “shrink wrap” or
similar license); and (iv) all registrations and applications for any of the
items described in (i) through (iii).

 

“IRR”
has the meaning set forth in Section 3.3(i)(B)(iii)(c).

 

“Leases”
has the meaning set forth in Section 4.7(b).

 

“Leased
Premises” has the meaning set forth in Section 4.7(b).

 

“Liens”
has the meaning set forth in Section 4.7(f).

 

“Material
Contracts” has the meaning set forth in Section 4.10(a).

 

“Maximum
Earn-Out Payment” means $35 million, without interest thereon.

 

“Measurement
Date” shall mean last day of the fiscal year in each of the fiscal years
ending February 2007, 2008, 2009 and 2010; provided, that
there shall be no Measurement Date after a Change in Control.

 

“Merger”
has the meaning set forth in the recitals.

 

“Merger
Consideration” has the meaning set forth in Section 3.1.

 

“Merger
Sub” has the meaning set forth in the caption.

 

“Most
Recent Balance Sheet” has the meaning set forth in Section 4.4(a).

 

8

 

“Net Cash” means the Company Cash
immediately prior to the Effective Time less Indebtedness (excluding the Assumed
Indebtedness), immediately prior to the Effective Time with such result
increased, without duplicating any cash amount, to the extent required by
Section 6.6(a) and Section 6.6(c).

 

“Net Working Capital” means, as of
immediately prior to the Effective Time, the current assets of the Company and
its Subsidiaries as of such time less the current liabilities of the Company and
its Subsidiaries as of such time, in each case determined in accordance with
the basis of presentation and accounting principles identified on, and subject
to certain limitations set forth in, Exhibit 3.3(f) attached
hereto.

 

“1933
Act” has the meaning set forth in Section 4.2(b).

 

“1934
Act” has the meaning set forth in Section 4.21.

 

“Option
Consideration” has the meaning set forth in Section 3.3(d).

 

“Optionholders”
means the Persons who hold Company Options, such Persons are listed in the
second column of Exhibit B hereto, (as such Exhibit shall be updated
immediately prior to the Effective Time).

 

“Order”
has the meaning set forth in Section 8.3(b).

 

“Owned
Premises” has the meaning set forth in Section 4.7(a).

 

“Parent”
has the meaning set forth in the caption.

 

“Parent
Indemnified Parties” has the meaning set forth in Section 11.1.

 

“Parent
Material Adverse Effect” has the meaning set forth in Section 5.1.

 

“Paying
Agent” has the meaning set forth in Section 3.5(a).

 

“Permit”
has the meaning set forth in Section 4.15.

 

“Per
Share Merger Consideration” has the meaning set forth in Section 3.3(c).

 

“Person”
means an individual, corporation, partnership, limited liability company, firm,
joint venture, association, joint stock company, trust, unincorporated
organization or other entity, or any Governmental Entity or quasi-governmental
body or regulatory authority.

 

“Pre-Closing
Period” has the meaning set forth in Section 6.5.

 

“Property”
(or “Properties” when the context requires) means any Real Property and any
personal or mixed property, whether tangible or intangible.

 

“Proportionate
Share” means: (a)  if the Highest
Annual EBITDA on any of the Measurement Dates is less than or equal to $40
million, then the Proportionate Share is 0%; (b) if the Highest Annual EBITDA
is greater than or equal to $50 million, then the Proportionate share

 

9

 

is
100%; and (c) if Highest Annual EBITDA is greater than $40 million and less
than $50 million then the Proportionate Share is (I) the difference between the
Highest Annual EBITDA and $40 million divided by (II) $10 million.

 

“Real
Property” means any real property presently or formerly owned, used,
leased, occupied, managed or operated by the Company or its Subsidiaries, as
the case may be.

 

“Related
Party” has the meaning set forth in Section 4.10(a)(xiii).

 

“Release”
means any release, spill, emission, emptying, leaking, injection, deposit,
disposal, discharge, dispersal, leaching, pumping, pouring, or migration into the
atmosphere, soil, surface water, groundwater or property.

 

“Returns”
has the meaning set forth in Section 4.5(a)(ii).

 

“Rollover
Agreement” means, in the case of each Rollover Shareholder, a Rollover
Agreement, dated the same date as this Agreement, among Parent and such
Rollover Shareholder, in the form reasonable acceptable to Parent.

 

“Rollover
Shareholders” shall have the meaning set forth in Section 9.2(n).

 

“Rollover Shares” shall mean those
shares, if any, of Company Common Stock owned by the Rollover Shareholders immediately
prior to the Effective Time which are exchanged immediately prior to the
Effective Time for shares in Parent (or an Affiliate of Parent) pursuant to the
terms and conditions of one or more Rollover Agreements between one or more of
the Rollover Shareholders, on the one hand, and Parent (or an Affiliate of
Parent), on the other hand.

 

“Sarbanes-Oxley
Act” has the meaning set forth in Section 4.4(e).

 

“SEC”
has the meaning set forth in Section 4.4(b).

 

“Shortfall”
has the meaning set forth in Section 3.3(f)(iii).

 

“Stay
Bonuses” means the bonuses paid to (i) Russell Taylor, pursuant to a letter
agreement by and between Mr. Taylor and Cellu Tissue Holdings, Inc. (“CTH”),
dated March 27, 2006, (ii) Steven Ziessler, pursuant to a letter agreement by
and between Mr. Ziessler and CTH, dated March 27, 2006, and (iii) Dianne Scheu,
pursuant to a letter agreement by and between Ms. Scheu and CTH, dated March 27,
2006, in the aggregate amount of $905,000

 

“Stockholder
Approval” has the meaning set forth in Section 6.1.

 

“Stockholders
Indemnified Parties” has the meaning set forth in Section 11.2.

 

“Subsidiary” of a Person means any corporation, partnership,
limited liability company or other entity in which such Person, (a) directly or
indirectly, owns or controls fifty percent (50%) or more of the voting stock or
other ownership interests, or (b) is a general partner or participant in a
joint venture without limited liability.

 

10

 

“Subsidiary
Securities” has the meaning set forth in Section 4.2(d).

 

“Surviving
Corporation” has the meaning set forth in Section 2.3(a).

 

“Tax”
or “Taxes” has the meaning set forth in Section 4.5(a)(i).

 

“Tax Benefit” has the meaning set
forth in Section 3.3(h)(i).

 

“Transaction
Documents” has the meaning set forth in Section 4.3(a).

 

“2005 Audited Financials”
has the meaning set forth in Section 4.4(a).

 

“2006 Audited Financials”
has the meaning set forth in Section 4.4(a).

 

“Warrant Consideration” has the meaning set forth in Section 3.3(e)

 

“Warrantholders”
means the Persons who own Company Warrants, such Persons are listed in the
third column of Exhibit B hereto (as such Exhibit shall be updated immediately
prior to the Effective Time).

 

“Working
Capital Escrow Agreement” has the meaning set forth in Section 3.2(b).

 

“Working
Capital Escrow Amount” has the meaning set forth in Section 3.2(b).

 

“WP
Entities” has the meaning set forth in Section 3.3(i)(B)(iii)(a).

 

“WP Exit Consideration” shall mean the cumulative aggregate fair
market value of the consideration actually received by the WP Entities (either
at the time of receipt or at any time prior thereto) for their WP Investment. For
purposes of the foregoing, the consideration actually received by the WP
Entities shall be deemed to include:

 

(x)            the aggregate amount
of all cash dividends, other distributions or management, transaction or other
fees with respect to the WP Investment received by the WP Entities at the time
of such Change in Control transaction or at any time prior thereto;

 

(y)           the Fair Market Value
of any promissory notes or other debt instruments, equity securities or other
securities convertible into or exchangeable for such notes, debt instruments or
equity securities received by the WP Entities in connection with the Change in
Control transaction (collectively, “Contingent Securities”), determined as of
the date of the receipt of such Contingent Securities;

 

(z)            cash received by the
WP Entities after the Change of Control in respect of any contingent
consideration (other than in respect of any Contingent Securities), but only if
and when such cash has been actually received by the WP Entities; and

 

(zz)          the
Fair Market Value of any Contingent Securities received by the WP Entities
after the Change of Control in respect of any contingent consideration (without
duplication of any amounts referred to in clauses (y) above), determined as of
the date of the receipt of such

 

11

 

Contingent Securities but only
if and when such Contingent Securities have been actually received by the WP
Entities.

 

“WP
Investment” has the meaning set forth in Section 3.3(i)(B)(iii)(b).

 

“WP
Minimum Return Threshold” shall have the meaning set forth in Schedule
3.3(i) hereto.

 

ARTICLE II

 

THE MERGER

 

Section 2.1.            Effective
Time of the Merger.

 

(a)           Upon
the terms and subject to the conditions set forth in this Agreement, a
certificate of merger (the “Certificate of Merger”) meeting the
requirements of Section 251 of the Delaware General Corporation Law (the “DGCL”)
shall be duly executed and delivered by the Company and Merger Sub and
thereafter delivered to the Secretary of State of the State of Delaware for
filing on the Closing Date.

 

(b)           The
Merger shall become effective at the time of the filing of the Certificate of
Merger with the Secretary of State of the State of Delaware or at such time
thereafter which the parties hereto shall have agreed upon as is provided in
the Certificate of Merger (the “Effective Time”).

 

Section 2.2.            Closing.

 

Upon the terms and subject to the conditions of this
Agreement, the closing of the Merger (the “Closing”) will take place at
a time and on a date (the “Closing Date”) to be specified by Parent and
the Company, at the offices of Ropes & Gray LLP, 45 Rockefeller Plaza, New
York, New York 10111, or such other time, date and place as the parties shall
agree.

 

Section 2.3.            Effects
of the Merger.

 

(a)           Upon
the terms and subject to the conditions of this Agreement, at the Effective
Time (i) Merger Sub shall be merged with and into the Company and the separate
existence of Merger Sub shall cease (Merger Sub and the Company are sometimes
referred to herein as the “Constituent Corporations” and the Company
following consummation of the Merger is sometimes referred to herein as the “Surviving
Corporation”), (ii) the certificate of incorporation of Merger Sub, as
amended and restated, in substantially the form attached hereto as
Exhibit 2.3(a)(2), shall be the certificate of incorporation of the
Surviving Corporation, except that Article I shall state that the name of the
Surviving Corporation is Cellu Paper Holdings, Inc., and (iii) the bylaws of Merger
Sub as in effect immediately prior to the Effective Time, in the form attached
hereto as Exhibit 2.3(a)(3), shall become the bylaws of the Surviving
Corporation, except that Article I shall state that the name of the Surviving
Corporation is Cellu Paper Holdings, Inc.

 

12

 

(b)           At
the Effective Time, the effect of the Merger shall be as provided in this
Agreement, the Certificate of Merger and the applicable provisions of the DGCL.
Without limiting the generality of the foregoing, at and after the Effective
Time, the Surviving Corporation shall possess all of the rights, privileges,
powers and franchises, and be subject to all the restrictions, disabilities and
duties of each of the Constituent Corporations.

 

Section 2.4.            Directors
and Officers.

 

At and after the Effective Time, (i) the directors of Merger
Sub immediately prior to the Effective Time shall be the directors of the
Surviving Corporation as of the Effective Time, and (ii) the officers of the
Company immediately prior to the Effective Time shall be the officers of the
Surviving Corporation as of the Effective Time.

 

ARTICLE III

 

CONVERSION OF SECURITIES

 

Section 3.1.            Merger
Consideration.

 

Subject to adjustment as set forth in Sections 3.3(f),
3.3(g), 3.3(h) and 3.3(i) below, the aggregate consideration to be paid by
Parent for all of the outstanding capital stock of the Company, Company Options
and Company Warrants shall be an amount equal to (i) $189,000,000 minus
(ii) Assumed Indebtedness, plus (iii) the Estimated Net Cash, minus
(iv) the amount of any Company Transaction Expenses to the extent not
actually paid prior to the Effective Time, plus (v) the aggregate amount
of the Stay Bonuses (to the extent not forfeited prior to Closing).  The
result of the calculation in the preceding sentence shall be increased by (i) the
amount, if any, by which the Estimated Net Working Capital exceeds $34,700,000 or
decreased by the amount, if any, by which $34,700,000 exceeds the Estimated Net
Working Capital (such consideration in the aggregate, as determined pursuant to
this sentence and the immediately preceding sentence, as further adjusted
pursuant to the terms of this Agreement, including, without limitation any
adjustments pursuant to Section 3.3(g), the right to receive the Tax Benefit,
if any, in accordance with the provisions of Section 3.3(h), and (ii) the right
to receive Earn-Out payments, if any, in accordance with the provisions of
Section 3.3(i), the “Merger Consideration”).

 

Section 3.2.            Escrow
Amount.

 

Notwithstanding anything to the contrary contained
herein:

 

(a)           Parent
shall withhold from the Merger Consideration otherwise payable at Closing an
amount of $8,220,000 (the “Escrow Amount”). On the Closing Date, Parent
shall cause the Escrow Amount to be delivered to an escrow agent reasonably
satisfactory to Parent and the Company (the “Escrow Agent”), pursuant to
an escrow agreement by and among Parent, the Company and the Former Company
Stockholders’ Agent and Escrow Agent (the “Escrow Agreement”)
substantially in the form annexed hereto as Exhibit 3.2(a). Such
sum shall be paid to the Escrow Agent on the Closing Date by wire transfer of
immediately available funds to the account designated in writing by the Escrow
Agent. The Escrow Amount will be held by the Escrow Agent as partial security
for the obligations of the Former Company Stockholders to the 

 

13

 

Parent Indemnified Parties pursuant to the terms of Article XI of
this Agreement. The Escrow Amount shall be disbursed by the Escrow Agent
pursuant to the terms of the Escrow Agreement.

 

(b)           In
addition to the Escrow Amount set forth in Section 3.2(a) above,
Parent shall withhold from the Merger Consideration otherwise payable at
Closing an amount of $2,050,000 (the “Working Capital Escrow Amount”). On
the Closing Date, Parent shall cause the Working Capital Escrow Amount to be
delivered to the Escrow Agent pursuant to an escrow agreement by and among
Parent, the Company, the Former Company Stockholders’ Agent and the Escrow
Agent (the “Working Capital Escrow Agreement”) substantially in the form
annexed hereto as Exhibit 3.2(b). Such sum shall be paid to the
Escrow Agent on the Closing Date by wire transfer of immediately available
funds to the account designated in writing by the Escrow Agent. The Working
Capital Escrow Amount will be held by the Escrow Agent as partial security for
the obligations, if any, of the Former Company Stockholders to Parent pursuant
to the terms of Section 3.3(f) and 3.3(g) of this Agreement. The Working
Capital Escrow Amount shall be disbursed by the Escrow Agent pursuant to the
terms of the Working Capital Escrow Agreement.

 

(c)           Notwithstanding
anything to the contrary in this Section 3.2, a portion of each of the Escrow
Amount and the Working Capital Escrow Amount shall consist of shares of capital
stock of the Parent, in lieu of cash, with such portion equal, in each case, to
the proportion that (i) the aggregate amount of Merger Consideration which
would have been payable as of the Effective Time to the Rollover Shareholders,
collectively, had such Persons not contributed shares of Company Common Stock
or shares of restricted Company capital stock to the Parent prior to the
Effective Time bears to (ii) the aggregate amount of Merger Consideration
payable as of the Effective Time. The Parent shall deliver certificates
representing such shares of its capital stock to the Former Company
Stockholders’ Agent which shall deliver such certificates to the Escrow Agent
at the Closing, to be held by the Escrow Agent as partial security for the
obligations, if any, of the Rollover Shareholders to the Parent Indemnified
Parties pursuant to the terms of Article XI of this Agreement or to Parent
pursuant to the terms of Section 3.3(f) and 3.3(g) of this Agreement,
respectively. Such shares so deposited shall be disbursed to the applicable
Rollover Shareholder or the Parent by the Escrow Agent pursuant to the terms of
the Escrow Agreement and the Working Capital Escrow Agreement, respectively.

 

Section 3.3.            Conversion
of Capital Stock.

 

At the Effective Time, by virtue of the Merger and
without any action on the part of the holders of any shares of common stock of
the Company, par value $0.01 per share (“Company Common Stock”), or
shares of capital stock of Merger Sub:

 

(a)           Capital
Stock of Parent. Each issued and outstanding share of common stock of Merger
Sub shall be converted into and become one fully paid and nonassessable share
of common stock, $0.01 par value per share, of the Company, as the Surviving
Corporation with the same rights, powers and privileges as the common stock of Merger
Sub so converted.

 

(b)           Cancellation
of Company-Owned Stock. Any shares of Company Common Stock that are owned
by the Company, any of its Subsidiaries or Parent immediately prior to the
Effective Time shall be canceled and retired and shall cease to exist without
any conversion thereof and no consideration shall be delivered or deliverable
therefor.

 

14

 

(c)           Capital
Stock of the Company. At the Effective Time, each issued and outstanding
share of Company Common Stock (other than the Rollover Shares or shares to be
canceled in accordance with Section 3.3(b), any Dissenting Shares as defined in
and to the extent provided in Section 3.4) shall, by virtue of the Merger and
without any action on the part of the holder thereof, be converted into the
right to receive, in cash, an amount equal to the result of (i) the sum of (A)
the Merger Consideration and (B) the aggregate amount of the exercise prices
payable in respect of all in-the-money Company Options (including any unvested
portion of such Company Options) and in-the-money Company Warrants, divided by
(ii) the sum of (X) the aggregate number of shares of Company Common Stock
outstanding immediately prior to the Effective Time (including any Rollover
Shares), (Y) the aggregate number of shares of Company Common Stock issuable
upon exercise of in-the-money Company Options (including any unvested portion
of such Company Options), and (Z) the aggregate number of shares of Company
Common Stock issuable upon exercise of in-the-money Company Warrants (the “Per
Share Merger Consideration”). All such shares of Company Common Stock, when
so converted, shall no longer be outstanding and shall automatically be
canceled and retired and shall cease to exist, and each holder of a certificate
representing any such shares shall cease to have any rights with respect
thereto, except the right to receive the Per Share Merger Consideration in
consideration therefor upon the surrender of such certificate in accordance
with and subject to the applicable terms and conditions of Section 3.5, without
any interest thereon.

 

(d)           Company
Options. At the Effective Time, all then outstanding options to purchase
Company Common Stock, whether vested or unvested (“Company Options”),
will be cancelled and automatically converted into the right to receive,
subject to the applicable terms and conditions of Section 3.5, an amount in
cash (without any interest thereon), if positive, equal to the difference
between (1) the Per Share Merger Consideration multiplied by the number of
shares of Company Common Stock theretofore issuable upon exercise of such
Company Option, reduced by (2) the aggregate exercise price of such Company
Option for such shares, subject to applicable withholdings (the “Option
Consideration”). Any payment required pursuant to this Section 3.3(d) in
connection with any Company Options shall constitute a part of the Merger
Consideration.

 

(e)           Company
Warrants. At the Effective Time, all then outstanding warrants to purchase
Company Common Stock (“Company Warrants”) which remain unexercised
immediately prior to the Effective Time will be cancelled and automatically
converted into the right to receive, upon surrender in accordance with and
subject to the applicable terms and conditions of Section 3.5, in lieu of the
Company Common Stock theretofore issuable upon exercise of each such Company
Warrant, an amount in cash (without any interest thereon), if positive, equal
to the difference between (i) the Per Share Merger Consideration multiplied by
the number of shares of Company Common Stock theretofore issuable upon exercise
of such Company Warrant, reduced by (ii) the aggregate exercise price of such
Company Warrant (the “Warrant Consideration”). Any payment required
pursuant to this Section 3.3(e) in connection with any Company Warrants shall
constitute a part of the Merger Consideration.

 

(f)            Net
Working Capital Adjustment.

 

(i)            No
later than three (3) Business Days prior to the Closing Date, the Company shall
deliver to Parent a certificate signed by an officer of the Company setting
forth 

 

15

 

the Company’s good faith determination of the estimated Net Working
Capital (“Estimated Net Working Capital”). The Company shall provide
Parent access to such working papers and other information reasonably available
supporting such calculation of Estimated Net Working Capital.

 

(ii)           If
Actual Net Working Capital (as defined below) is less than the Estimated Net
Working Capital, then the Merger Consideration shall be reduced
dollar-for-dollar by the amount of such shortfall. If Actual Net Working
Capital is greater than the Estimated Net Working Capital, then the Merger
Consideration shall be increased dollar-for-dollar by the amount of such
difference.

 

(iii)          Within
thirty (30) days after the Closing Date, the Parent shall prepare or cause to
be prepared a calculation of Net Working Capital and deliver to the Former
Company Stockholders’ Agent the calculation of Net Working Capital and the
adjustments, if any, required to be made to the Merger Consideration pursuant
to Section 3.3(f)(ii).  The Parent shall provide the Former Company
Stockholders’ Agent access to such working papers and other information
reasonably available supporting such calculation of Net Working Capital. 
If the calculation of the Net Working Capital delivered to the Former Company
Stockholders’ Agent is equal to or greater than the Estimated Net Working
Capital, the Parent shall promptly prepare and execute an instruction to the
Escrow Agent to remit the full Working Capital Escrow Amount to the Former
Company Stockholders’ Agent to be disbursed to the Former Company Stockholders.
If the calculation of the Net Working Capital delivered to the Former Company
Stockholders’ Agent is less than the Estimated Net Working Capital (the
difference of such amounts being hereinafter referred to as the “Shortfall”),
the Parent shall promptly prepare and execute an instruction to the Escrow
Agent to remit the difference, if positive, between (A) $2,050,000 and (B) the
Shortfall together with any Cash Shortfall, to the Former Company Stockholders’
Agent to be disbursed to the Former Company Stockholders, and the balance of
the Working Capital Escrow Amount shall remain with the Escrow Agent pursuant
to the terms of the Working Capital Escrow Agreement and this Section 3.3(f)
and Section 3.3(g).

 

(iv)          The
Former Company Stockholders’ Agent will have a period of thirty (30) days
following the delivery of the Parent’s calculation of Net Working Capital to
notify the Parent in writing of any disagreements with such calculation
specifying in reasonable detail the nature and amount of any such disagreement.
Any item or amount not specifically objected to in such notification shall be
binding and conclusive on the parties. In the event the Former Company
Stockholders’ Agent timely notifies the Parent of any disagreement, the Parent
and the Former Company Stockholders’ Agent shall attempt in good faith to
resolve such disagreement. If within thirty (30) days after delivery to the Parent
of the notification by the Former Company Stockholders’ Agent of a
disagreement, the parties are unable to resolve such disagreement, either the
Former Company Stockholders’ Agent, on the one hand, or the Parent, on the
other hand, shall have the right to submit the determination of such matters to
KPMG LLP or, in the event such accountant is unwilling or unable to so serve, another
independent accountant of national standing reasonably acceptable to the Parent
and the Former Company Stockholders’ Agent (the “Independent Auditor”),
whose decision shall be binding on the parties. The cost of the Independent
Auditor and reasonable attorneys’ fees of the other party shall be paid by the
party whose aggregate estimate of the disputed amount differs most greatly from
the determination of the Independent Auditor. If the Former Company
Stockholders are required to pay the cost of the Independent Auditor then such
costs shall be satisfied by payment solely from 

 

16

 

the Working Capital Escrow Amount. Notwithstanding anything herein to
the contrary, the dispute resolution mechanism contained in this Section 3.3(f)
shall be the exclusive mechanism for resolving disputes regarding the Net
Working Capital adjustment, if any. For purposes of this Section 3.3(f), “Actual
Net Working Capital” shall mean the Net Working Capital as finally
determined in accordance with this Section 3.3(f)(iv).

 

(v)           If
it is finally determined pursuant to Section 3.3(f)(iv) that the
Merger Consideration paid at the Closing is less than the Merger Consideration
as adjusted pursuant to this Section 3.3(f), the Parent shall remit such
difference to the Paying Agent to be disbursed to the Former Company
Stockholders plus the Parent shall immediately prepare and execute an
instruction to the Escrow Agent to remit the Working Capital Escrow Amount, if
any, to the Paying Agent to be disbursed to the Former Company Stockholders.

 

(vi)          If
it is finally determined pursuant to Section 3.3(f)(iv) that the Merger
Consideration paid at the Closing is greater than the Merger Consideration as
adjusted pursuant to this Section 3.3(f), the amount of such difference shall
be satisfied first by payment to the Parent from the Working Capital Escrow Amount
with any shortfall to be satisfied by payment from the Former Company
Stockholders, on a several (but not joint) basis. If after such satisfaction
out of the Working Capital Escrow Amount, if any, there is a balance remaining
in the Working Capital Escrow Amount, the Parent shall immediately prepare and
execute an instruction to the Escrow Agent to remit such balance to the Paying
Agent to be disbursed to the Former Company Stockholders.

 

(vii)         Any
cash payment to be made as a result of adjustments made in accordance with this
Section 3.3(f), shall be paid within five (5) Business Days of the final
determination of such adjustments by wire transfer of immediately available
funds. Any such payment shall be made to such account or accounts as may be
designated by the party entitled to such payment at least two (2) Business Days
prior to the date that such payment is to be made.

 

(viii)        Notwithstanding
anything to the contrary in this Section 3.3(f), payments under this Section
3.3(f) to be made in respect of any Rollover Shareholder shall be satisfied in
shares of capital stock of the Parent, as and to the extent provided in the
Rollover Agreement with such Rollover Shareholder.

 

(g)           Net
Cash Adjustment.

 

(i)            No
later than three (3) Business Days prior to the Closing Date, the Company shall
deliver to Parent a certificate signed by an officer of the Company setting
forth the Company’s good faith determination of the estimated Net Cash (“Estimated
Net Cash”). The Company shall provide Parent access to such working papers
and other information reasonably available supporting such calculation of
Estimated Net Cash.

 

(ii)           If
Actual Net Cash (as defined below) is less than the Estimated Net Cash, then
the Merger Consideration shall be reduced dollar-for-dollar by the amount of
such difference. If Actual Net Cash is greater than the Estimated Net Cash,
then the Merger Consideration shall be increased dollar-for-dollar by the
amount of such difference.

 

17

 

(iii)          Within
thirty (30) days after the Closing Date, the Parent shall prepare or cause to
be prepared a calculation of Net Cash and deliver to the Former Company
Stockholders’ Agent the calculation of Net Cash and the adjustments, if any,
required to be made to the Merger Consideration pursuant to
Section 3.3(g)(ii).  The Parent shall provide the Former Company
Stockholders’ Agent access to such working papers and other information
reasonably available supporting such calculation of Net Cash.  If the
calculation of the Net Cash delivered to the Former Company Stockholders’ Agent
is equal to or greater than the Estimated Net Cash, the Parent shall promptly
remit the full amount of such difference to the Former Company Stockholders’
Agent to be disbursed to the Former Company Stockholders.  If the
calculation of the Net Cash delivered to the Former Company Stockholders’ Agent
is less than the Estimated Cash (the difference of such amounts being
hereinafter referred to as the “Cash Shortfall”), the Parent shall
immediately prepare and execute an instruction to the Escrow Agent to remit the
Cash Shortfall out of the Working Capital Escrow Amount to the Parent, and the
balance of the Working Capital Escrow Amount, if any, shall remain with the
Escrow Agent pursuant to the terms of the Working Capital Escrow Agreement,
Section 3.3(f) and this Section 3.3(g).

 

(iv)          The
Former Company Stockholders’ Agent will have a period of thirty (30) days
following the delivery of the Parent’s calculation of Net Cash to notify the Parent
in writing of any disagreements with such calculation specifying in reasonable
detail the nature and amount of any such disagreement. Any item or amount not
specifically objected to in such notification shall be binding and conclusive
on the parties. In the event the Former Company Stockholders’ Agent timely
notifies the Parent of any disagreement, the Parent and the Former Company
Stockholders’ Agent shall attempt in good faith to resolve such disagreement. If
within thirty (30) days after delivery to the Parent of the notification by the
Former Company Stockholders’ Agent of a disagreement, the parties are unable to
resolve such disagreement, either the Former Company Stockholders’ Agent, on
the one hand, or the Parent, on the other hand, shall have the right to submit
the determination of such matters to the Independent Auditor, whose decision
shall be binding on the parties. The cost of the Independent Auditor and
reasonable attorneys’ fees of the other party shall be paid by the party whose
aggregate estimate of the disputed amount differs most greatly from the
determination of the Independent Auditor. If the Former Company Stockholders
are required to pay the cost of the Independent Auditor then such costs shall
be satisfied by payment solely from the Working Capital Escrow Amount.
Notwithstanding anything herein to the contrary, the dispute resolution
mechanism contained in this Section 3.3(g) shall be the exclusive mechanism for
resolving disputes regarding the Net Cash adjustment, if any. For purposes of
this Section 3.3(g), “Actual Net Cash” shall mean the Net Cash as
finally determined in accordance with this Section 3.3(g)(iv).

 

(v)           If
it is finally determined pursuant to Section 3.3(g)(iv) that the
Merger Consideration paid at the Closing is less than the Merger Consideration
as adjusted pursuant to this Section 3.3(g), the Parent shall remit such
difference to the Paying Agent to be disbursed to the Former Company
Stockholders.

 

(vi)          If
it is finally determined pursuant to Section 3.3(g)(iv) that the Merger
Consideration paid at the Closing is greater than the Merger Consideration as
adjusted pursuant to this Section 3.3(g), such amount shall be satisfied first
by payment to the Parent from the Working Capital Escrow Amount with any
shortfall to be satisfied by payment from the Former Company Stockholders, on a
several (but not joint) basis.

 

18

 

(vii)         Any
cash payment to be made as a result of adjustments made in accordance with this
Section 3.3(g), shall be paid within five (5) Business Days of the final
determination of such adjustments by wire transfer of immediately available
funds. Any such payment shall be made to such account or accounts as may be
designated by the party entitled to such payment at least two (2) Business Days
prior to the date that such payment is to be made.

 

(viii)        Notwithstanding
anything to the contrary in this Section 3.3(g), payments under this Section
3.3(g) to be made in respect of any Rollover Shareholder shall be satisfied in shares
of capital stock of the Parent, as and to the extent provided in the Rollover
Agreement with such Rollover Shareholder.

 

(h)           Tax
Benefit Adjustment.

 

(i)            No
later than 15 Business Days after the Parent files or causes to be filed the
U.S. federal, state and local income tax returns for itself, the Company and
its Subsidiaries for the tax period ended February 28, 2007, the Parent shall
prepare or cause to be prepared a calculation of the tax benefit derived by the
Parent with respect to such tax period arising from tax deductions attributable
to payments made in connection with the cancellation of the Company Options and
the vesting of any restricted stock in the Merger (the “Compensation
Deductions”), which tax benefits shall be determined in the manner provided
in the immediately following sentence. The amount of such tax benefit shall
equal the excess, if any, of (x) the U.S. federal, state and local income tax
liability for the tax period beginning on the date immediately after the
Closing Date and ending on February 28, 2007 of the Parent and its Subsidiaries
calculated hypothetically assuming that no Compensation Deductions are claimed
in such tax period and that there are no carryovers from prior tax periods to
such tax period or carrybacks from future tax periods to such tax period of any
losses, deductions or credits over (y) the U.S. federal, state and local income
tax liability for the tax period ended February 28, 2007 of the Parent and its
Subsidiaries calculated assuming that any Compensation Deductions available to
be claimed in such tax period are claimed and hypothetically assuming that
there are no carryovers from prior tax periods to such tax period or carrybacks
from future tax periods to such tax period of any losses, deductions or credits
(any such excess, the “Tax Benefit”).  The Parent shall provide the
Former Company Stockholders’ Agent access to its working papers and other
information reasonably available supporting such calculation of the Tax
Benefit.

 

(ii)           If
the Tax Benefit is greater than zero, then the Merger Consideration shall be
increased dollar-for-dollar by the amount of such difference and the Parent
shall remit such difference to the Former Company Stockholders’ Agent to be
disbursed to the Former Company Stockholders promptly upon determination of
such Tax Benefit by the Parent in connection with preparation and filing of the
federal income tax return for the tax period ended February 28, 2007 of the Parent
and its Subsidiaries.  If there is no Tax Benefit then the Merger
Consideration shall not be adjusted pursuant to this Section 3.3(h).

 

(iii)          The
Former Company Stockholders’ Agent will have a period of 20 Business Days
following the delivery of the Parent’s calculation of the Tax Benefit to notify
the Parent in writing of any disagreements with such calculation specifying in
reasonable detail the nature and amount of any such disagreement. Any item or
amount not specifically objected to in such notification shall be binding and
conclusive on the parties. In the event the Former 

 

19

 

Company Stockholders’ Agent timely notifies the Parent of any
disagreement, the Parent and the Former Company Stockholders’ Agent shall
attempt in good faith to resolve such disagreement. If within thirty (30) days
after delivery to the Parent of the notification by the Former Company
Stockholders’ Agent of a disagreement, the parties are unable to resolve such
disagreement, either the Former Company Stockholders’ Agent, on the one hand,
or the Parent, on the other hand, shall have the right to submit the
determination of such matters to an Independent Auditor, whose decision shall
be binding on the parties. The cost of the Independent Auditor and reasonable
attorneys’ fees of the other party shall be paid by the party whose aggregate
estimate of the disputed amount differs most greatly from the determination of
the Independent Auditor. Notwithstanding anything herein to the contrary, the
dispute resolution mechanism contained in this Section 3.3(h) shall be the
exclusive mechanism for resolving disputes regarding the Tax Benefit.

 

(iv)          Any
cash payments to be made as a result of this Section 3.3(h) shall be
paid within five (5) Business Days of the final determination of such
amounts by wire transfer of immediately available funds.  Any such payment
shall be made to such account or accounts as may be designated by the party
entitled to such payment at least two (2) Business Days prior to the date
that such payment is to be made.

 

(v)           Notwithstanding
anything to the contrary in this Section 3.3(h), payments under this Section
3.3(h) to be made in respect of any Rollover Shareholder shall be satisfied in
shares of capital stock of the Parent, as and to the extent provided in the
Rollover Agreement with such Rollover Shareholder.

 

(i)            Earn-Out
Payment.

 

A.                                   Contingent
Payment. As additional consideration and as an adjustment to Merger
Consideration, on each Earn-Out Payment Date the Parent shall pay to the Former
Company Stockholders’ Agent, for distribution to the Former Company
Stockholders, the Annual Payment Earned, if any, upon the terms and subject to
the conditions set forth in this Section 3.3(i); provided, that, in no
event shall the amount of any annual payment under this Section 3.3(i) exceed
the Annual Cap, unless such payment is made following a Change in Control, in
which case the Parent shall pay to the Former Company Stockholders’ Agent, for
distribution to the Former Company Stockholders, the Aggregate Earned Amount
less all amounts previously paid to or for the benefit of the Former Company
Stockholders under this Section 3.3(i). If the Annual Payment Earned exceeds
the Annual Cap on the final Earn-Out Payment Date with respect to the final year
in the Earn-Out Period then the difference between the Annual Payment Earned for
such period and the Annual Cap shall be paid, without interest, in the
subsequent fiscal year or years, up to the Annual Cap each year, until the
Aggregate Earned Amount is paid in full, without interest; provided that
following the consummation of a Change in Control that meets the requirements
of clauses (i) or (ii) of the definition of Aggregate Earned Amount, the Parent
shall pay to the Former Company Stockholders’ Agent, for distribution to the
Former Company 

 

20

 

Stockholders,
the Aggregate Earned Amount less all amounts previously paid to or for the
benefit of the Former Company Stockholders under this Section 3.3(i). Notwithstanding
anything in this Agreement to the contrary, in no event shall the aggregate
amount of payments payable under or by reason of this Section 3.3(i) exceed the
Maximum Earn-Out Payment. Attached hereto as Exhibit 3.3(i), for illustrative
purposes only, are examples of the calculation of the Aggregate Earned Amount
following a hypothetical Change in Control transaction in which the return on
the WP Investment is at least equal to 1.75 times the WP Investment (it being
expressly acknowledged and agreed that in the event of any conflict between
Exhibit 3.3(i) and the terms and conditions of this Agreement, the terms and
conditions of this Agreement shall control).

 

B.                                     Annual
Earn-Out Statement.

 

(i)                                     As
soon as practicable and in any event not later than 75 days after each
Measurement Date, the Parent shall, at the Parent’s expense, cause to be
prepared and delivered to the Former Company Stockholders’ Agent the audited consolidated balance sheet for the fiscal year ended the
Measurement Date, and the related audited statements of income, change in
stockholders’ equity and cash flow for the fiscal year for the Parent and its Subsidiaries
ended on the Measurement Date (the “Earn-Out Financial Statements”),
together with an unaudited statement (the “Earn-Out Statement”) setting
forth in reasonable detail the determination of Annual EBITDA in accordance
with the terms of this Agreement. The Earn-Out Financial Statements and the Earn-Out
Statement shall be prepared in accordance with GAAP, applied in a manner
consistent with the principles set forth in this Section 3.3(i). The
determination of Annual EBITDA set forth in the Earn-Out Statement shall be
final and binding on the Parent and the Former Company Shareholders, subject to
the process of objection provided below.

 

(ii)                                  The
Parent shall cooperate with the Former Company Stockholders’ Agent to provide,
or cause the Company to provide, promptly to the Former Company Stockholders’
Agent and its certified public accountants information used to prepare the Earn-Out
Financial Statements and the Earn-Out Statement. If the Former Company
Stockholders’ Agent disagrees with the calculation of Annual EBITDA, it may
within thirty (30) days after having received both the Earn-Out Statement and
the Earn-Out Financial Statements, deliver a notice to the Parent (the “Earn-Out
Disagreement Notice”), setting forth the Former Company Stockholders’ Agent’s
calculation of Annual EBITDA and specifying, in reasonable detail, those items
or amounts in the Earn-Out Period Financial Statements and the Earn-Out
Statement 

 

21

 

affecting the
calculation of Annual EBITDA as to which it disagrees and the reasons for such
disagreement. If no Earn-Out Disagreement Notice is delivered within such
30-day period, Annual EBITDA for such year shall become final, conclusive and
binding on the parties hereto for all purposes of this Section 3.3(i).

 

(iii)                               If
the Former Company Stockholders’ Agent delivers an Earn-Out Disagreement Notice
to the Parent within the 30-day period described above, the parties shall use
their reasonable efforts to reach agreement on the disputed items or amounts in
order to determine Annual EBITDA. If Former Company Stockholders’ Agent and the
Parent do not resolve all disputed items or amounts set forth in the Earn-Out
Disagreement Notice within fifteen (15) business days after delivery of an Earn-Out
Disagreement Notice, this Agreement and the remaining disputed items and
amounts will be submitted to a nationally recognized independent accounting
firm in the U.S. with international expertise mutually agreed to by the Former
Company Stockholders’ Agent and the Parent (the “Accountants”) for
resolution of such disputed items and amounts. The parties will have the
opportunity to present their positions with respect to such disputed items and
amounts to the Accountants, and such disputed items and amounts shall be
resolved by the Accountants in accordance with Commercial Arbitration Rules of
the American Arbitration Association. The Accountants shall prepare a written
report setting forth the resolution of the disputes concerning Annual EBITDA,
which shall be delivered to each of the Former Company Stockholders’ Agent and the
Parent promptly, but in no event later than thirty (30) business days after
such disputed items are submitted to the Accountants, and shall be final,
conclusive and binding upon each of the Former Company Stockholders’ Agent and the
Parent. The procedures set forth in this Agreement for resolution of disputes
concerning the Annual EBITDA shall be final and binding on all of the parties,
and shall not be subject to appeal of any kind. The fees and expenses of the
Accountants shall be borne by the party whose calculation of Annual EBITDA
differs most from those of the Accountants. Each of the Former Company
Stockholders’ Agent and the Parent shall execute a reasonably acceptable
engagement letter, if requested to do so by the Accountants, and shall provide
reasonable access to the Accountants to the books and records of the Parent and
its Subsidiaries and to their employees who are responsible for financial
matters.

 

(a)                                  “WP Entities”
shall mean Weston Presidio V, L.P. or any of its affiliated funds or their
management company.

 

22

 

(b)                                 “WP Investment”
shall mean, at the time of determination, the aggregate cash consideration paid
by the WP Entities to acquire any shares of capital stock or options or
warrants for shares of capital stock of Parent (or any successor) from time to
time until such time of determination, or any other securities or equity
interests into which such securities may be converted or exchanged pursuant to
a merger, recapitalization or other transaction (and appropriate adjustments
will be made in any calculations pursuant to this Section 3.3(i) to eliminate
the effect of such transactions), without giving effect to any reduction
resulting from any sale or other disposition of such securities; provided,
however, that (i) the aggregate consideration paid by the WP Entities
for any debt of Parent (or any successor) or (ii) any debt security of Parent (or
any successor) which by its terms is convertible to an equity security of
Parent (or any successor)  shall be
excluded from the amount of the WP Investment.

 

(c)                                  “IRR” shall
mean an annual pre-tax internal rate of return calculated by taking into
account (i) the date or dates of payment by the WP Entities for the WP
Investment, (ii) the date or dates on which the WP Entities receive or are
deemed to have received proceeds from any sale or other transaction in which
the WP Investment is sold or otherwise disposed of or received dividends, other
distributions or management, transaction or other fees with respect to the WP
Investment, and (iii) the amounts of such proceeds from such sale or disposition
or of such dividends, other distributions or management, transaction or other
fees with respect to the WP Investment. For purposes of calculating the IRR,
all determinations shall be made on a time-weighted basis for the WP Investment
actually or deemed to be sold or otherwise transferred for value; provided,
however, that the amounts of any payments to the WP Entities in
connection with any sales or dispositions shall be calculated net of any
payments to the Former Company Stockholders that would otherwise be required
pursuant to this Section 3.3(i).

 

(d)                                 “Related Business”
means the manufacture, processing, sales, marketing and/or distribution of
paper and paper-related products.

 

The Parent shall give the
Former Company Stockholders’ Agent written notice of the occurrence of any
Change in Control transaction, including (A) a reasonably detailed description
of the 

 

23

 

terms thereof and (B) the
Parent’s determinations and calculations of the applicable IRR and amounts
payable to the Former Company Stockholders, if any, as a result of the Change
in Control. The Parent shall, and shall cause its affiliates to, afford to the
Former Company Stockholders’ Agent and its representatives reasonable access
during normal business hours to (a) the financial records of the Parent and its
Subsidiaries and (b) such other information relating to the Parent which may be
reasonably helpful to the Former Company Stockholders’ Agent in reviewing the Parent’s
determinations of such IRR and amounts payable under this Section 3.3(i). Any
disagreements the Former Company Stockholders’ Agent shall have with the
calculations set forth by the Parent shall be resolved in accordance with the
procedures set forth in Section 3.3(i)(B)(iii) above, to the extent applicable.

 

C.                                     Payment
of Earn-Out Amount. Any payments required to be made pursuant to this
Section 3.3(i) shall be paid by the Parent to the Former Company Stockholders’
Agent for distribution to the Former Company Stockholders no later than each
Earn-Out Payment Date; provided, however, that if the Former
Company Stockholders’ Agent delivers an Earn-Out Disagreement Notice to the Parent
within the 30-day period described above, then the portion of the relevant Aggregate
Earned Amount or Annual Payment Earned that is in dispute and the subject of
such Earn-Out Disagreement Notice shall not be due and payable unless and until
all disputes with respect thereto are resolved in the manner described in
clause (B)(iii) above. In the event that the resolution of such dispute is that
any portion of the disputed amount is determined to be payable to the Former
Company Stockholders’ Agent for distribution to the Former Company
Stockholders, then such payment shall be made by the Parent or caused to be
made by the Parent, with interest thereon accruing from the date of the
relevant Earn-Out Disagreement Notice to the day before the date of payment at
a rate of seven and one-half percent (7.5%) per annum, compounded annually, no
later than the date which is ten (10) Business Days after the date of such
resolution.

 

D.                                    Operations
of the Business. The Former Company Stockholders acknowledge that the
Parent is entitled to manage its business and the business of its Subsidiaries,
including the Company, as it may determine in its sole discretion, provided,
that (x) the Parent shall not nor shall the Parent cause or permit the Parent
or any of its Subsidiaries to take any action or to make any operational
changes for the purpose of intentionally reducing or eliminating any Earn-Out
payments pursuant to this Section 3.3(i) (whether during the Earn-Out Period or
thereafter) otherwise payable to the Former Company Stockholders and (y) until
the date on which the aggregate amount of payments made pursuant to this
Section 3.3(i) equal the Maximum Earn-Out Payment, the Parent shall not own,
directly or indirectly, any Person whose business does not consist of a 

 

24

 

Related
Business. The Former Company Stockholders further acknowledge and agree that
(i) the provisions of this Section 3.3(i) do not create in the Former Company
Stockholders any right to control or direct the management of the business of
the Parent and its Subsidiaries, including the Company, following the Closing,
(ii) actions and operational changes not made for the purpose of intentionally
reducing or eliminating any Earn-Out payments may nonetheless have the effect
of reducing or eliminating any Earn-Out payments and (iii) other than the
contract provisions of this Agreement, the Parent shall not have any
obligations or duties, regardless of the basis or legal theory therefore, to
the Former Company Stockholders with respect to the Earn-Out payments.

 

E.                                      Rollover
Shareholders. Notwithstanding anything to the contrary in this Section
3.3(i), in the case of each Rollover Shareholder, in the event any amounts
become payable to the Rollover Shareholder pursuant to this Section 3.3(i) (any
such payment, a “Rollover Shareholder Payment”), such payment shall be
made by issuance of shares of Series A Preferred Stock of the Parent (or such
other securities of the Parent into which such stock shall have been converted
or otherwise exchanged by virtue of any recapitalization, restructuring,
merger, consolidation or other event or transaction) and not by payment of cash
as provided in this Section 3.3(i), and the aggregate amount of cash payable to
Former Company Stockholders (other than Rollover Shareholders) shall be reduced
by the aggregate amount of payments to be made to the Rollover Shareholders in
stock in accordance with this clause (E). The number of such additional shares
of stock shall be equal, in the case of any Rollover Shareholder Payment, to
the aggregate amount of the portion of such Rollover Shareholder Payment which
would have been payable in cash to the Rollover Shareholder, as the case may
be, in the absence of this clause (E) divided by the
Preferred Stock Per Share Price. The “Preferred Stock Per Share Price”
shall mean the amount per share of Series A Preferred Stock paid by the WP
Entities in connection with the closing of the transactions contemplated by
this Agreement (as equitably adjusted for stock splits, reverse stock splits or
other similar changes in the capitalization of the Company). In the event that
a Rollover Shareholder Payment is required to be made to a Rollover Shareholder
at a time at which such Rollover Shareholder is no longer employed by the
Company or any of its Subsidiaries, the Parent, in its sole discretion, may
elect to pay the portion of the Rollover Shareholder Payment payable to such Rollover
Shareholder in cash, in lieu of payment by issuance of additional shares of
stock.

 

Section 3.4.            Appraisal
Rights.

 

(a)           Notwithstanding
any provision of this Agreement to the contrary, any shares of Company Common
Stock held by a holder who has exercised such holder’s appraisal rights in
accordance with Section 262 of the DGCL, and who, as of the Effective Time, has
not 

 

25

 

effectively withdrawn or lost such appraisal rights (“Dissenting
Shares”), shall not be converted into or represent a right to receive the
Per Share Merger Consideration pursuant to Section 3.3(a), but the holder
of the Dissenting Shares shall only be entitled to such appraisal rights as are
granted by the DGCL.

 

(b)           Notwithstanding
the provisions of Section 3.4(a), if any holder of shares of Company Common
Stock who demands his, her or its appraisal rights with respect to such shares
shall effectively withdraw or lose (through failure to perfect or otherwise)
his, her or its rights to receive payment for the fair market value of such
shares under Section 262 of the DGCL, then, as of the later of the Effective
Time or the occurrence of such event, such holder’s shares shall automatically
be converted into and represent only the right to receive the Per Share Merger
Consideration (less the applicable portion of the Escrow Amount and the Working
Capital Escrow Amount), without any interest thereon, as provided in Section
3.3(c) upon surrender of the certificate or certificates representing such
shares. The Company shall give Parent prompt notice of any demands received by
the Company for appraisal of shares of Company Common Stock, and Parent shall
have the right to participate in all negotiations and proceedings with respect
to such demands. Except with the prior written consent of Parent, the Company
shall not make any payment with respect to, or settle or offer to settle, any
such demands.

 

Section 3.5.            Payment
of Merger Consideration; Exchange of Certificates.

 

(a)           Prior
to the Effective Time, the Former Company Stockholders’ Agent shall designate,
or shall cause to be designated, a bank or trust company reasonably acceptable
to Parent to act as agent (the “Paying Agent”), pursuant to a paying
agent agreement in form and substance reasonably acceptable to Parent, for the
payment of the Merger Consideration (less the Escrow Amount, the Working
Capital Escrow Amount and the portion of the Merger Consideration allocable to
the Rollover Shares), and, at the Effective Time, Parent shall provide to the
Paying Agent, by wire transfer of immediately available funds, the amounts
necessary for the payment of the Merger Consideration which is payable at
Closing hereunder (less the Escrow Amount and the Working Capital Escrow Amount
and the portion of the Merger Consideration allocable to the Rollover Shares). Any
and all interest or income earned on funds made available to the Paying Agent
pursuant to this Agreement shall be turned over to Parent.

 

(b)           From
and after the Effective Time, each holder of a certificate or certificates (“Certificates”)
which represented shares of Company Common Stock outstanding immediately prior
to the Effective Time shall surrender each Certificate to the Paying Agent, and
receive promptly in exchange therefor the applicable Per Share Merger
Consideration (less the applicable portion of the Escrow Amount and the Working
Capital Escrow Amount) into which the Company Common Stock evidenced by the Certificates
so surrendered shall have been converted pursuant, and subject to, the
provisions of Article III of this Agreement. The surrender of Certificates
shall be accompanied by duly completed and executed letters of transmittal in
such customary form as may reasonably be agreed to by the Company and Parent. Until
surrendered, each outstanding Certificate shall be deemed for all corporate
purposes from and after the Effective Time to evidence the right to receive the
Per Share Merger Consideration but shall, subject to applicable appraisal
rights under the DGCL and Section 3.4 of this Agreement, have no other rights. From
and after the Effective Time, there shall be no further registration of 

 

26

 

transfers on the records of the Company of shares of Company Common
Stock outstanding immediately prior to the Effective Time.

 

(c)           In
the event any Certificate shall have been lost, stolen or destroyed, upon the
making of an affidavit of that fact by the Person claiming such Certificate to
be lost, stolen or destroyed, Paying Agent shall pay the applicable Per Share
Merger Consideration (less the applicable portion of the Escrow Amount and the
Working Capital Escrow Amount) in exchange therefor pursuant to the provisions
of Article III of this Agreement; provided, however,
that the Parent may, in its sole discretion and as a condition precedent to the
issuance thereof, require the owner of such lost, stolen or destroyed
Certificate to deliver an agreement of indemnification (but without having to
post a bond), in form reasonably satisfactory to the Parent, against any claim
that may be made against the Parent, the Surviving Corporation or the Paying
Agent with respect to the Certificate alleged to have been lost, stolen or
destroyed.

 

(d)           At
the Effective Time, each Optionholder shall receive from the Paying Agent the
applicable Option Consideration (less the applicable portion of the Escrow
Amount and the Working Capital Escrow Amount) into which the Company Options shall
have been converted pursuant, and subject to, the provisions of Article III of
this Agreement.

 

(e)           From
and after the Effective Time, each Warrantholder shall surrender each Company
Warrant to the Paying Agent, and receive promptly in exchange therefor the
applicable Warrant Consideration (less the applicable Escrow Amount and the
Working Capital Escrow Amount) into which the Company Warrant so surrendered
shall have been converted pursuant, and subject to, the provisions of Article
III of this Agreement. The surrender of Company Warrants shall be accompanied
by duly completed and executed letters of transmittal in such customary form as
may reasonably be agreed to by the Company and Parent. Until surrendered, each
outstanding Company Warrant shall be deemed for all corporate purposes from and
after the Effective Time to evidence the right to receive the applicable
Warrant Consideration but shall have no other rights. From and after the
Effective Time, there shall be no further registration of transfers on the
records of the Company of the Company Warrants outstanding immediately prior to
the Effective Time.

 

(f)            In
the event any Company Warrant shall have been lost, stolen or destroyed, upon
the making of an affidavit of that fact by the Person claiming such Company
Warrant to be lost, stolen or destroyed, Paying Agent shall pay the applicable
Warrant Consideration (less the applicable portion of the Escrow Amount and the
Working Capital Escrow Amount) in exchange therefor pursuant to the provisions
of Article III of this Agreement; provided, however,
that the Parent may, in its sole discretion and as a condition precedent to the
issuance thereof, require the owner of such lost, stolen or destroyed Company
Warrant to deliver an agreement of indemnification (but without having to post
a bond), in form reasonably satisfactory to the Parent, against any claim that
may be made against the Parent, the Surviving Corporation or the Paying Agent
with respect to the Warrant Certificate alleged to have been lost, stolen or
destroyed.

 

(g)           If
any portion of the Per Share Merger Consideration or Warrant Consideration is
to be paid to a Person (other than the Escrow Agent) other than the Person in
whose name the applicable Certificate or Company Warrant, as the case may be,
is registered, it shall be a 

 

27

 

condition to such payment that the Certificate or Company Warrant so
surrendered shall be properly endorsed or otherwise be in proper form for
transfer and that the Person requesting such payment shall pay to the Paying
Agent any transfer or other Taxes required as a result of such payment to a
Person other than the registered holder of such Certificate or Company Warrant
or establish to the satisfaction of the Paying Agent that such Tax has been
paid or is not payable.

 

(h)           Any
portion of the Merger Consideration made available to the Paying Agent pursuant
to Section 3.5(a) that remains unclaimed six months after the Effective Time
shall be returned to the Parent, upon demand, and any holder who has not
surrendered Certificates or Company Warrants for the applicable Per Share
Merger Consideration or Warrant Consideration in accordance with this Section
3.5 prior to that time shall thereafter look only to the Parent for payment of
such applicable consideration, without any interest thereon. Notwithstanding
the foregoing, none of Parent, Merger Sub, the Company, the Surviving
Corporation nor the Paying Agent shall be liable to any such holder for any
amounts paid to a Governmental Entity pursuant to applicable law relating to
abandoned property, escheat or similar laws. Any amounts remaining unclaimed by
holders two years after the Effective Time (or such earlier date, immediately
prior to such time when the amounts would otherwise escheat to or become the
property of any Governmental Entity) shall become, to the extent permitted by
applicable law, the property of the Parent, free and clear of any Liens of any
Person previously entitled thereto. Any portion of the Merger Consideration
made available to the Paying Agent pursuant to Section 3.5(a) to pay for shares
of Company Common Stock for which appraisal rights have been perfected shall be
returned to the Parent upon demand.

 

(i)            Each
of the Surviving Corporation, Parent and the Paying Agent shall be entitled to
deduct and withhold from the consideration otherwise payable to any Person
pursuant to this Article III such amounts as it is required to deduct and
withhold with respect to the making of such payment under any provision of
federal, state, local or foreign Tax law. If the Surviving Corporation, Parent
or the Paying Agent so withholds amounts, such amounts shall be treated for all
purposes of this Agreement as having been paid to the holder of shares of
Company Common Stock, Company Options or Company Warrants, as the case may be,
in respect of which the Surviving Corporation, Parent or the Paying Agent made
such deduction or withholding.

 

ARTICLE IV

 

REPRESENTATIONS AND WARRANTIES OF THE COMPANY

 

The
Company represents and warrants to Parent as follows:

 

Section 4.1.            Organization
of Company.

 

The Company is a corporation duly organized, validly
existing and in good standing under the laws of the State of Delaware, has all
requisite corporate power to own, lease and operate its property and to carry
on its business as now being conducted. The Company is duly qualified or
licensed to do business and is in good standing as a foreign corporation in
each jurisdiction in which the nature of its business or ownership or leasing
of Properties makes such qualification or licensing necessary and where the
failure to be so qualified or licensed would reasonably be expected to result
in a Company Material Adverse Effect.  For purposes of this 

 

28

 

Agreement, “Company
Material Adverse Effect” shall mean a material adverse effect on the
business, assets, liabilities, condition (financial or otherwise), property or
results of operations of the Company and its Subsidiaries (taken as a
whole).  Company Material Adverse Effect shall not include any event,
situation, change, development, condition or circumstance:  (i) relating to or resulting from the economy
in general, (ii) relating to or resulting from the industry in which the
Company or any of its Subsidiaries operates and not uniquely relating to the
Company or any of its Subsidiaries, (iii) resulting from the announcement or
existence of this Agreement or the transactions contemplated hereby, (iv)
resulting from actions or omissions of the Company or any of its Subsidiaries
taken with the prior written consent of the other party hereto or pursuant to
the terms of this Agreement (including the Company Disclosure Schedules) or the
other Transaction Documents, (v) resulting from compliance with this Agreement
or the other Transaction Documents, (vi) resulting from any worldwide, national
or local conditions or circumstances (political, economic, financial,
regulatory or otherwise), including, without limitation, an outbreak or
escalation or war, armed hostilities, acts of terrorism, political instability
or other national or international calamity, crisis or emergency occurring
within or outside of the United States, or (vii) in existence as of the date
hereof and actually known and understood by Parent (including potential
consequences thereof).

 

Section 4.2.            Capitalization;
Subsidiaries.

 

(a)           The
authorized capital stock of the Company consists of 150,000 shares of Company
Common Stock and 65,000 shares of preferred stock of the Company, par value
$0.01. No shares of such preferred stock are issued or outstanding. The number
of issued and outstanding shares of Company Common Stock is as described on
Schedule 4.2(a) of the Company Disclosure Schedules. All such issued and
outstanding shares of Company Common Stock have been, and all shares of Company
Common Stock that may be issued pursuant to outstanding options and warrants to
purchase Company Common Stock will be, when issued in accordance with the
respective terms thereof, duly authorized, validly issued and are fully paid
and nonassessable. Except as described in Schedule 4.2(a) of the Company
Disclosure Schedules, (a) there are no issued or outstanding shares of capital
stock of the Company, (b) no shares of capital stock of the Company are held in
treasury, (c) no preferred stock or other equity securities of any kind of the
Company are issued or outstanding, (d) there are no other issued or outstanding
securities of the Company convertible into or exchangeable or exercisable for
at any time capital stock of the Company, and (e) there are no subscriptions,
options, “phantom” stock rights, stock appreciation rights, warrants or other
rights of any kind entitling any Person to acquire or otherwise receive from
the Company any shares of capital stock or securities of the Company
convertible into or exchangeable or exercisable for at any time capital stock
of the Company (collectively, the “Company Securities”). Except as
described in Schedule 4.2(a) of the Company Disclosure Schedules, there are no
contracts, commitments, agreements, understandings or arrangements of any kind
relating to the grant, issuance, repurchase, redemption or other acquisition by
the Company of any Company Securities. Except as described in Schedule 4.2(a)
of the Company Disclosure Schedules, there are no voting trusts, shareholder
agreements, commitments, undertakings, understandings, proxies or other
restrictions that directly or indirectly restrict or limit, or otherwise relate
to, the voting, sale or other disposition of any shares of Company Common Stock
or the rights of any shareholder of the Company. The Company Securities were
not issued in violation of the Securities Act of 1933, as amended (the “1933
Act”), any state “blue sky” or securities laws, any other similar 

 

29

 

legal requirement or any preemptive or other similar rights of any
Person. All of the outstanding Company Securities are held of record by the
Persons and in the respective amounts set forth in the Schedule 4.2(a) of
the Company Disclosure Schedules.

 

(b)           Schedule
4.2(b) of the Company Disclosure Schedules sets forth the names of each of the
Company’s Subsidiaries and shows for each such Subsidiary: (i) its jurisdiction
of organization and each other jurisdiction in which it is qualified to do
business; (ii) the authorized and outstanding capital stock or other ownership
interests of each Subsidiary; and (iii) the identity of and number of shares of
such capital stock or other ownership interests owned (of record and
beneficially) by each holder thereof. Except as set forth on Schedule 4.2(b)(i)
of the Company Disclosure Schedules, all of the outstanding capital stock or
other ownership interests of each Subsidiary are owned free and clear of any
Lien and free and clear of any other limitation or restriction (including any
restriction on the right to vote, sell or otherwise dispose of such capital
stock or other ownership interests). Other than the capital stock and ownership
interests of the Subsidiaries described on Schedule 4.2(b)(ii) of the Company
Disclosure Schedules, the Company does not have any direct or indirect
ownership or investment interest in any Person. The capital stock and ownership
interests of the Company’s Subsidiaries were not issued in violation of the
1933 Act, any state “blue sky” or securities laws, any other similar legal
requirement or any preemptive or other similar rights of any Person.

 

(c)           Each
of the Company’s Subsidiaries is duly organized, validly existing and in good
standing in its jurisdiction of organization, with all requisite corporate,
partnership, membership or limited liability company power, as the case may be,
to own, lease and operate its Property and to carry on its business as now
being conducted, and is duly qualified and/or licensed to do business and is in
good standing as a foreign corporation in each jurisdiction in which the nature
of its business or ownership or leasing of Properties makes such qualification
or licensing necessary and where the failure to be so qualified or licensed
could reasonably be expected to result in a Company Material Adverse Effect.

 

(d)           Except
as described in Schedule 4.2(d) of the Company Disclosure Schedules, (a) there
are no issued or outstanding shares of capital stock or other ownership
interests of any of the Company’s Subsidiaries, (b) no shares of capital stock
or other ownership interests of any of the Company’s Subsidiaries are held in
treasury, (c) no preferred stock or other equity securities of any kind of any
of the Company’s Subsidiaries are authorized, issued or outstanding, (d) there
are no other issued or outstanding securities of any of the Company’s
Subsidiaries convertible into or exchangeable or exercisable for at any time
capital stock or other ownership interests of such Subsidiary and (e) there are
no subscriptions, options, “phantom” stock rights, stock appreciation rights,
warrants or other rights of any kind entitling any Person to acquire or
otherwise receive from any of the Company’s Subsidiaries any shares of capital
stock or other ownership interests or securities of the Company’s Subsidiaries
convertible into or exchangeable or exercisable for at any time capital stock
or other ownership interest of the Company’s Subsidiaries (collectively, the “Subsidiary
Securities”). Except as described in Schedule 4.2(d) of the Company
Disclosure Schedules, there are no contracts, commitments, agreements,
understandings or arrangements of any kind relating to the grant, issuance,
repurchase, redemption or other acquisition by the Company’s Subsidiaries of
any Subsidiary Securities. Except as described in Schedule 4.2(d) of the
Company Disclosure Schedules, there are no voting trusts, shareholder
agreements, commitments, undertakings, understandings, proxies or 

 

30

 

other restrictions that directly or indirectly restrict or limit, or
otherwise relate to, the voting, sale or other disposition of any Subsidiary
Securities or the rights of any shareholder of any Subsidiary.

 

Section 4.3.            Authority;
No Conflict; Required Filings and Consents.

 

(a)           The
Company has all requisite corporate power and authority to enter into this
Agreement and all Transaction Documents to which it is or (at or prior to the
Closing) will be a party and to consummate the transactions contemplated by
this Agreement and such Transaction Documents. The execution and delivery of
this Agreement and such Transaction Documents and the consummation of the
transactions contemplated by this Agreement and such Transaction Documents have
been duly authorized by all necessary corporate action on the part of the
Company, subject only to the approval of the Merger by the Company’s
stockholders under the provisions of the DGCL and the Company’s certificate of
incorporation (the “Company Stockholder Approval”). This Agreement has
been, and such other Transaction Documents to which the Company is a party have
been, or to the extent not executed as of the date hereof, will be, duly
executed and delivered by the Company. This Agreement and each of the
Transaction Documents to which the Company is or (at or prior to the Closing)
will be a party constitutes, assuming the due authorization, execution and
delivery by the other parties hereto and thereto, the valid and binding obligation
of the Company, enforceable by Parent against the Company in accordance with
their respective terms, except to the extent that enforceability may be limited
by applicable bankruptcy, reorganization, insolvency, moratorium or other laws
affecting the enforcement of creditors’ rights generally and by general
principles of equity, regardless of whether such enforceability is considered
in a proceeding at law or in equity. For purposes of this Agreement, “Transaction
Documents” means this Agreement, the Escrow Agreement, the Working Capital
Escrow Agreement, the Certificate of Merger, and the Indemnification Matters
Letter. The only vote of holders of any class or series of capital stock of the
Company necessary to approve and adopt this Agreement and the Merger is the
adoption of this Agreement by the holders or a majority of the outstanding
Company Common Stock.

 

(b)           The
execution and delivery by the Company of this Agreement and the Transaction
Documents to which it is a party does not, and the consummation of the
transactions contemplated by this Agreement and the other Transaction Documents
to which it is a party will not, (i) conflict with, or result in any violation
or breach of any provision of the certificate of incorporation, bylaws or other
organizational documents of the Company or any Subsidiary, (ii) violate
any law, rule or regulation applicable to the Company or any Subsidiary,
(iii) except as set forth on Schedule 4.3(b)(iii) of the Company
Disclosure Schedules, conflict with or result in a breach of, or give rise to a
right of termination of, or accelerate the performance (including, without
limitation, payment of severance pay, unemployment compensation or termination
pay, or acceleration of the time or payment or vesting or an increase in the
amount or value of compensation or benefits due to any employee or former
employee solely by reason of the consummation of the transactions contemplated
by this Agreement and the other Transaction Documents) required by the terms of,
or require any consent or approval under, any judgment, court order or consent
decree, or any contract, commitment, agreement, understanding or arrangement or
Permit or constitute a default thereunder, or (iv) result in the creation or
imposition of any Lien on any Property of the Company or any of its
Subsidiaries, except in the 

 

31

 

case of clauses (ii), (iii) and (iv) as has not had, and would not
reasonably be expected to have, a Company Material Adverse Effect.

 

(c)           None
of the execution and delivery by the Company of this Agreement or of any other
Transaction Document to which the Company is or (at or prior to the Closing)
will be a party or the consummation of the transactions contemplated by this
Agreement or such other Transaction Document will require any consent,
approval, order or authorization of, or registration, declaration or filing
with, any court, administrative agency or commission or other governmental
authority or instrumentality (“Governmental Entity”), except for (i) the
filing of the Certificate of Merger with the Delaware Secretary of State, (ii)
such consents, approvals, orders, authorizations, registrations, declarations
and filings as may be required under applicable federal and state securities laws,
(iii) such filings as may be required under the Hart-Scott-Rodino Antitrust
Improvements Act, as amended (the “HSR Act”) and (iv) such other
consents, authorizations, filings, approvals and registrations which are listed
on Schedule 4.3(c) of the Company Disclosure Schedules, and (v) those where the
failure to obtain or make, as applicable, such consent, approval, order or
authorization of, or registration, declaration or filing has not had, and would
not reasonably be expected to have, a Company Material Adverse Effect.

 

Section 4.4.            Financial
Statements; Absence of Undisclosed Liabilities: Sarbanes-Oxley.

 

(a)           The
Company has delivered to Parent copies of (i) the Company’s consolidated
audited balance sheets as of February 28, 2005 and February 28, 2006,
and the related consolidated audited statements of operations, stockholders’
equity and cash flows for the years ended February 28, 2005 (the “2005
Audited Financials”) and February 28, 2006 (the “2006 Audited
Financials”), respectively (the 2005 Audited Financials and the 2006
Audited Financials, collectively, the “Company Audited Financials”), and
(ii) the Company’s consolidated unaudited balance sheet as of the close of
business on March 31, 2006 (the “Most Recent Balance Sheet”) and the
related consolidated unaudited statements of operations and cash flow for the
period that commenced on March 1, 2006 and ended on March 31, 2006 (the “Company
Unaudited Financials”, and together with the Company Audited Financials,
the “Company Financial Statements”).

 

(b)           The
Company Financial Statements are in accordance with the books and records of
the Company and its Subsidiaries and present fairly in all material respects,
subject to, in the case of the Company Unaudited Financials, normal year-end
adjustments (the effect of which would not, individually or in the aggregate,
reasonably be expected to have a Company Material Adverse Effect), the
financial position, results of operations and cash flows of the Company and its
Subsidiaries as of their historical dates and for the periods indicated. The
Company Financial Statements have been prepared in accordance with GAAP applied
on a basis consistent with prior periods, subject to, in the case of the
Company Unaudited Financials, normal year-end adjustments, (the effect of which
would not, individually or in the aggregate, reasonably be expected to have a
Company Material Adverse Effect), and the absence of footnotes. The Company
Financial Statements included in the Company SEC Documents complied, as of
their respective filing dates, in all material respects with then applicable
accounting requirements and the published rules and regulations of the
Securities and Exchange Commission (“SEC”) with 

 

32

 

respect thereto. To the knowledge of the Company, none of the Company SEC
Documents is the subject of ongoing SEC review or outstanding SEC comment.

 

(c)           Except
as set forth in Schedule 4.4(c), neither the Company nor any of its
Subsidiaries has any material debt, liability, or obligation of any nature,
whether accrued, absolute, contingent, or otherwise, and whether due or to
become due, that would, in accordance with GAAP be required to be disclosed on
a balance sheet, except those (i) liabilities reflected in the Most Recent Balance
Sheet or the 2006 Audited Financials, (ii) liabilities disclosed in the Company
Disclosure Schedules, (iii) liabilities incurred in the ordinary course of
business since the date of the Most Recent Balance Sheet that would not,
individually or in the aggregate, reasonably be expected to have a Company
Material Adverse Effect, or (iv) liabilities or performance obligations arising
out of or under agreements, contracts, leases or arrangements to which the
Company or any of its Subsidiaries is a party.

 

(d)           Since
the enactment of the Sarbanes-Oxley Act of 2002 (the “Sarbanes-Oxley Act”),
the Company and its Subsidiaries have been and are in compliance in all
material respects with the applicable provisions of the Sarbanes-Oxley Act. The
Company and its Subsidiaries have disclosure controls and procedures that are
effective to ensure that material information relating to the Company,
including the Company’s Subsidiaries, is made known to the Chief Executive
Officer and the Chief Financial Officer of the Company by others within those
entities. The management of the Company has disclosed, based on its most recent
evaluation, to the Company’s outside auditors and the audit committee of the
Board of Directors of the Company in Schedule 4.4(d) of the Company Disclosure
Schedules (A) all significant deficiencies and material weaknesses in the
design or operation of internal control over financial reporting which are
reasonably likely to adversely affect the Company and its Subsidiaries’ ability
to record, process, summarize and report financial data and (B) any material
fraud that involves management or other employees who have a significant role
in the Company and its Subsidiaries’ internal control over financial reporting.

 

Section 4.5.            Tax
Matters.

 

(a)           For
purposes of this Section 4.5 and other provisions of this Agreement relating to
Taxes, the following definitions shall apply:

 

(i)            The
term “Tax” or “Taxes” shall mean any and all federal, state, local, or foreign
income, gross receipts, license, payroll, employment, excise, severance, stamp,
occupation, premium, windfall profits, environmental, customs duties, capital
stock, franchise, profits, withholding, social security (or similar, including
FICA), unemployment, disability, real property, personal property, sales, use,
transfer, registration, value added, alternative or add-on minimum, estimated,
or other tax of any kind or any charge of any kind in the nature of (or similar
to) taxes whatsoever, including any interest, penalty, or addition thereto, whether
disputed or not and (b) any liability for the payment of any amounts of the
type described in clause (a) of this definition as a result of being a member
of an affiliated, consolidated, combined or unitary group for any period, as a
result of any tax sharing or tax allocation agreement, arrangement or
understanding, or as a result of being liable for another person’s taxes as a
transferee or successor, by contract or otherwise.

 

33

 

(ii)           The
term “Returns” shall mean any return, declaration, claim for refund,
information return, report or statement relating to Taxes (including any
schedule or attachment thereto and any amendment thereof).

 

(b)           Except
as set forth on Schedule 4.5(b) of the Company Disclosure Schedules, (i) all
Returns required to be filed prior to the date hereof by the Company and/or its
Subsidiaries have been duly and timely filed with the appropriate Governmental
Entity in accordance with all applicable laws, rules and regulations and all such
Returns were true, correct and complete in all material respects, (ii) all
material Taxes owed by the Company and each of its Subsidiaries (whether or not
shown on any Returns) have been timely paid in full or have been accrued on the
Most Recent Balance Sheet, (iii) the Company and its Subsidiaries have withheld
and timely paid to the appropriate Governmental Entity all Taxes required to
have been withheld and paid over prior to the date hereof in connection with
amounts paid or owing to any employee, independent contractor, or other third
party and the Company and its Subsidiaries have complied in all material
respects with all associated reporting and record keeping requirements and (iv)
there are no material Liens on any Property of the Company or any of its
Subsidiaries with respect to Taxes, other than material Liens for Taxes not yet
due and payable or for Taxes that the Company or its Subsidiaries are
contesting in good faith through appropriate proceedings and for which an
appropriate reserve has been established on the Most Recent Balance Sheet if
required by GAAP.

 

(c)           Except
as set forth on Schedule 4.5(c) of the Company Disclosure Schedules:  (i) there is no dispute, audit or proceeding,
or to the Company’s knowledge, investigation or claim, concerning any Tax of
the Company or any of its Subsidiaries pending with, or being conducted by, a
Governmental Entity or for which the Company or any of its Subsidiaries
(following the date of the Company’s acquisition of such Subsidiary, if
applicable) has been notified in writing, (ii) neither the Company nor any of
its Subsidiaries has received notice that it has not filed a Return or paid
Taxes required to be filed or paid, (iii) neither the Company nor any of its
Subsidiaries is a party to any action or proceeding for assessment or
collection of Taxes, and, to the Company’s knowledge, no such action or
proceeding is threatened against the Company or any of its Subsidiaries, (iv)
no waiver or extension of any statute of limitations or other extension of time
is in effect or has been requested with respect to Taxes or Returns of the
Company or any of its Subsidiaries, (v) no claim has been made in writing to
the Company or any of its Subsidiaries (following the date of the Company’s
acquisition of such Subsidiary, if applicable) by a Governmental Entity in a
jurisdiction where the Company or any of its Subsidiaries does not file Returns
that the Company or any of its Subsidiaries is or may be subject to material
taxation by that jurisdiction, and (vi) the Company and each of its
Subsidiaries has provided or delivered to Parent true, correct and complete
copies of all Returns, examination reports, and statements of deficiencies
filed, assessed against, or agreed to by such Company or such of the Company’s
Subsidiaries since December 31, 2001.

 

(d)           Except
as set forth on Schedule 4.5(d) of the Company Disclosure Schedules, neither
the Company nor any of its Subsidiaries is a party to any Tax sharing,
allocation or indemnity contract, commitment, agreement, understanding or
arrangement, and neither the Company nor any of its Subsidiaries has executed
any power of attorney with respect to any Tax other than powers of attorney
that are no longer in force.

 

34

 

(e)           Except
as set forth on Schedule 4.5(e) of the Company Disclosure Schedules, the unpaid
Taxes of the Company and its Subsidiaries (a) did not as of the date of the
Most Recent Balance Sheet exceed the liability for Taxes (excluding any reserve
for deferred Taxes established to reflect timing differences between book and
Tax income) set forth on the face of the Most Recent Balance Sheet (rather than
in any notes thereto) and (b) will not exceed that liability as adjusted for
the passage of time through the Closing Date in accordance with the past custom
and practice of the Company and its Subsidiaries in filing their Tax Returns as
modified to take into account any change in applicable Tax laws.

 

(f)            Except
as set forth on Schedule 4.5(f) of the Company Disclosure Schedules, neither
the Company nor any of its Subsidiaries is a party to any agreement, contract,
arrangement or plan that would require it to make any payments that would be
considered “excess parachute payments” within the meaning of Code Section 280G
(or any corresponding provisions of state, local or foreign Tax law) or would
not be deductible by reason of Section 162(m) of the Code.

 

(g)           Except
as set forth on Schedule 4.5(g) of the Company Disclosure Schedules, neither
the Company nor any of its Subsidiaries (following the date of the Company’s
acquisition of such Subsidiary, if applicable) has been a member of an “affiliated
group” within the meaning of Code Section 1504(a) filing a consolidated federal
income Tax Return, other than an “affiliated group” of which the Company or
Cellu Tissue Holdings, Inc. is or was the common parent. Neither the Company
nor any of its Subsidiaries has any liability or obligation for the Taxes of
any Person under Treasury Regulation 1.1502-6 (or any similar provision of
state, local or foreign law), as a transferee or successor, by contract or
otherwise.

 

(h)           Except
as set forth on Schedule 4.5(h) of the Company Disclosure Schedules, neither
the Company nor any of its Subsidiaries has been a “distributing corporation”
or a “controlled corporation” in connection with a distribution that the
parties involved treated as described in Code Section 355 (a) within the past
two years or (b) where the distribution is part of a “plan” or “series of
transactions” (within the meaning of Code Section 355(e)) of which any of the
transactions contemplated by this Agreement is a part. Neither the Company nor
any of its Subsidiaries (following the date of the Company’s acquisition of
such Subsidiary, if applicable) has, within the past five years, been a party
to any other transaction that was reported as a reorganization within the
meaning of Code Section 368.

 

(i)            Except
as set forth on Schedule 4.5(i) of the Company Disclosure Schedules, neither
the Company nor any of its Subsidiaries is required, or has been required (in
the case of any Subsidiary, following the date of the Company’s acquisition of
such Subsidiary, if applicable), to make any adjustment pursuant to Code
Section 481(a) (or any predecessor provision) or any similar provision of
state, local or foreign tax law by reason of any change in any accounting
methods, and there is no application pending with any Governmental Entity
requesting permission for any changes in any of its accounting methods for Tax
purposes. To the knowledge of the Company, no Governmental Entity has proposed
any such adjustment or change in accounting method.

 

(j)            Except
as set forth on Schedule 4.5(j) of the Company Disclosure Schedules, neither
the Company nor any of its Subsidiaries (following the date of the Company’s
acquisition

 

35

 

of such Subsidiary, if applicable) has participated in any reportable
transaction within the meaning of Treasury Regulation Section 1.6011-4 or in
any tax shelter within the meaning of Sections 6111 or 6112 of the Code and the
Treasury Regulations promulgated thereunder.

 

(k)           Neither
the Company nor any of its Subsidiaries will be required to include any amount
in taxable income or exclude any item of deduction or loss from taxable income
for any taxable period (or portion thereof) ending after the Closing Date as a
result of (A) any “closing agreement” as described in Code Section 7121 (or any
corresponding or similar provision of state, local or foreign income Tax law)
executed on or prior to the Closing Date, (B) any deferred intercompany gain or
excess loss account described in Treasury Regulations under Code Section 1502
(or any corresponding or similar provision or administrative rule of federal,
state, local or foreign Income Tax law), (C) an installment sale or open
transaction disposition made on or prior to the Closing Date, or (D) any
prepaid amount received on or prior to the Closing Date.

 

Section 4.6.            Absence
of Certain Changes or Events.

 

Since February 28, 2006, except as set forth on
Schedule 4.6 of the Company Disclosure Schedules, the business of the Company
and its Subsidiaries has been conducted in the ordinary course and neither the
Company nor any of its Subsidiaries has:

 

(a)           suffered
any change that has resulted, or could be reasonably expected to result, in a
Company Material Adverse Effect;

 

(b)           suffered
any damage, destruction or loss, whether covered by insurance or not, that has
resulted, or could be reasonably expected to result, in a Company Material
Adverse Effect;

 

(c)           authorized
or proposed any amendments to its certificate of incorporation or bylaws (or
other similar governing instrument);

 

(d)           declared,
set aside or paid any dividends on or made any other distributions (whether in
cash, stock or property) on or in respect of any of its capital stock (or other
ownership interests), or split, combined or reclassified any of its capital
stock (or other ownership interests) or declared any direct or indirect
redemption, retirement, purchase or other acquisition by the Company or any of
its Subsidiaries of such capital stock (or other ownership interests);

 

(e)           issued,
sold, granted pledged, disposed of, encumbered or otherwise subjected to any
Liens, or authorized such issuance, sale, grant, pledge, disposal of,
encumbrance or subjection to Liens, any shares of its capital stock (or other
ownership interests) or securities convertible into shares of its capital stock
(or other ownership interests), or subscriptions, rights, warrants or options
to acquire, or other agreements or commitments of any character obligating it
to issue any such shares (or other ownership interests) or other convertible
securities, other than the issuance of shares of Company Common Stock issuable
upon exercise of Company Options or Company Warrants;

 

36

 

(f)            acquired
or agreed to acquire by merging or consolidating with, or by purchasing an
equity interest in or portion of the assets of, or by any other manner, any
business or any corporation, partnership or other business organization or
division;

 

(g)           other
than Indebtedness set forth on Schedule 4.23, (i) incurred or assumed any
Indebtedness in excess of $500,000, other than in the ordinary course of
business; or (ii) assumed, Guaranteed or otherwise became liable or responsible
for the obligations (directly, contingently or otherwise) of any other Person
in amounts in excess of $250,000, other than in the ordinary course of business;

 

(h)           except
in the ordinary course of business consistent with past practices with respect
to employees who are not officers or directors, or as may be required by
applicable law, (i) entered into, adopted, amended or terminated any
employment agreement or any bonus payments with any employee, officer or
director of the Company, or (ii) entered into, adopted, amended or terminated
any pension, retirement, health, life, or disability insurance, severance,
profit sharing, bonus, compensation, termination, stock option, stock
appreciation right, restricted stock, employee benefit plan, agreement, trust,
fund or other arrangement for the benefit or welfare of any director, officer
or employee in any manner;

 

(i)            granted
or agreed to make any severance, termination pay or deferred compensation (or
amendment to any existing arrangement) to or increase in the compensation,
bonus or other benefit payable or to become payable by the Company or any of
its Subsidiaries to their directors, officers or employees, except, increases granted
or agreed to be made in the ordinary course of business consistent with past
practice to employees who are not officers or directors or increases required
by any pre-existing agreement;

 

(j)            (i) entered
into any contract or agreement material to the Company and its Subsidiaries,
taken as a whole, other than contracts or agreements in the ordinary course of business
consistent with past practice; (ii) amended, modified or waived any
material right under any Material Contract; or (iii) paid or authorized
any capital expenditure in excess of $500,000 per expenditure or $5,000,000 in
the aggregate, other than in accordance with the Company’s fiscal year 2007
capital expenditures budget as approved by the Company’s board, which has been
provided to the Parent;

 

(k)           (i)
made any material change in the accounting methods or practices it follows,
(ii) revalued in any material respect any Property, including writing down the
value of inventory or writing off notes or accounts receivable other than in
the ordinary course of business consistent with past practice or (iii) made any
change in any Tax election or method of Tax accounting;

 

(l)            made
any loan, advance or capital contribution to or investment in any Person in
excess of $250,000, other than (i) loans, advances or capital contributions to
or investments in its wholly owned Subsidiaries in the ordinary course of business
consistent with past practice and (ii) reimbursement of employee business
expenses in the ordinary course of business consistent with past practice;

 

37

 

(m)          (i) purchased,
acquired or leased any material assets other than in the ordinary course of
business consistent with past practice and in accordance with the Company’s
fiscal year 2007 capital expenditures budget as approved by the Company’s
board, which has been provided to the Parent, (ii) sold, leased, licensed,
transferred to any Person, or otherwise disposed of, any of the Properties of
the Company or any of its Subsidiaries except for the sale of inventory or
obsolete equipment in the ordinary course of business consistent with past
practice, (iii) canceled or compromised any Indebtedness or claim (other
than compromises of accounts receivable in the ordinary course of business
consistent with past practice) in excess of $500,000, (iii) waived or
released any right of substantial value, or (iv) instituted, settled or
agreed to settle any action, suit, proceeding, claim, arbitration or
investigation other than such actions that are not material to the Company or
any Subsidiary and that will not result in any obligation of the Company or any
Subsidiary on or after the Closing Date;

 

(n)           suffered
any material loss, destruction, damage or eminent domain taking (in each case,
whether or not insured) affecting the business of the Company or any of its
Subsidiaries; or

 

(o)           entered
into any contract, commitment, agreement, understanding or arrangement to do
any of things referred to in clauses (a) through (n) above.

 

Section 4.7.            Property.

 

(a)           Schedule
4.7(a) of the Company Disclosure Schedules sets forth a list of all real
property owned by the Company or its Subsidiaries (the “Owned Premises”).
Except as set forth on Schedule 4.7(a) of the Company Disclosure Schedules
there are no written or oral subleases, licenses, concessions, occupancy
agreements or other Contractual Obligations granting to any other Person the
right of use or occupancy of the Owned Premises and there is no Person (other
than the Company or any of its Subsidiaries) in possession of the Owned
Premises.

 

(b)           Schedule
4.7(b) of the Company Disclosure Schedules sets forth a list of all leases, or
similar agreements relating to the Company’s or its Subsidiaries’ use or
occupancy of real estate owned by a third party (“Leases”), true and
correct copies of which have previously been furnished to Parent (the “Leased
Premises”).

 

(c)           Except
as set forth in Schedule 4.7(c) of the Company Disclosure Schedules, each
current use of any Owned Premise is in compliance with all applicable laws,
including applicable zoning restrictions and ordinances, variances thereto or
conditional use permits of the jurisdictions in which the Owned Property in
question is located, health and fire codes and ordinances, and subdivision
regulations except for any such non-compliance as has not had, and would not
reasonably be expected to have, a Company Material Adverse Effect.

 

(d)           Except
as set forth in Schedule 4.7(d) of the Company Disclosure Schedules, the
buildings and other improvements on or at the Owned Premises do not encroach on
any easements or on any land not included within the boundary lines of such Owned
Premises, except for such of the foregoing as would not reasonably be expected
to (a) interfere with the current use of the Owned Premises or (b) have a
Company Material Adverse Effect. The current use of the Owned Premises does not
violate or conflict with any covenants, conditions or restrictions applicable
thereto, except for such of the foregoing as would not reasonably be 

 

38

 

expected to (a) interfere with the current use of the Owned Premises or
(b) have a Company Material Adverse Effect.

 

(e)           Neither
the Company nor any of its Subsidiaries has received any notice of any pending
or threatened eminent domain, condemnation or similar proceeding affecting any
of the Owned Premises, or any decree or order relating thereto.

 

(f)            The
Company and each of its Subsidiaries has good and valid title to, or in the
case of Property held by lease or any other contract, commitment, agreement, understanding
or arrangement, a valid and enforceable right to use, all of their Properties
free and clear of all mortgages, liens, security interests, pledges, charges,
claims, restrictions or encumbrances of any kind or character (“Liens”),
except (i) as set forth on Schedule 4.7(f) of the Company Disclosure Schedules,
(ii) statutory liens for current taxes not yet due and payable, (iii) statutory
liens for amounts not yet delinquent or which are being contested in good
faith; (iv) such liens and title imperfections that have not had, and are not
reasonably expected to have, a Company Material Adverse Effect; (v) statutory
liens securing the claims or demands of materialmen, mechanics, carriers,
warehousemen, landlords, and other like persons for labor, materials, supplies,
or rentals, if any, to the extent that payment thereof is not in arrears or
otherwise due; (vi) liens resulting from deposits made in connection with
workers’ compensation, unemployment insurance, social security and like laws;
and (vii) liens of banks and financial institutions with respect to funds on
deposit therewith or other property in possession thereof. The Properties
owned, leased or licensed by the Company and its Subsidiaries constitute all of
the material Properties used in or necessary to conduct the business of the
Company and its Subsidiaries as it is presently conducted.

 

Section 4.8.            Intellectual
Property.

 

Schedule 4.8 of the Company Disclosure Schedules
contains a true and complete list of the registered trademarks, trade names,
servicemarks, logos, copyrights, patents, web sites and domain names owned or
used by the Company or any of its Subsidiaries in its business and any
registrations or applications for registration thereof. Except as set forth on
Schedule 4.8 of the Company Disclosure Schedules, the Company and/or its
Subsidiaries owns or possesses adequate licenses or other valid rights to use
all of the Intellectual Property used in, or necessary for, the conduct of its
business free and clear of all Liens. Except as set forth on Schedule 4.8 of
the Company Disclosure Schedules: (a) to the knowledge of the Company, there is
no infringement or misappropriation by others of any right of the Company or
any of its Subsidiaries with respect to its Intellectual Property, (b) neither
the Company nor any of its Subsidiaries has or is infringing upon or
misappropriating in any material respect upon any Intellectual Property rights
of any third party; (c) no proceedings are pending or, to the knowledge of the
Company, threatened, and no claim has been received by the Company or any of
its Subsidiaries alleging any such infringement or misappropriation;  (d) neither the Company nor any of its
Subsidiaries has granted any Person any interest, as licensee or otherwise, in
or to any one or more items of the Intellectual Property of the Company or its
Subsidiaries; and (e) no third party has notified the Company or any of its
Subsidiaries in writing that it is claiming any ownership of, or right to use,
any such Intellectual Property.

 

39

 

Section 4.9.            Employee
Benefit Plans.

 

(a)           Schedule
4.9(a) of the Company Disclosure Schedules lists, with respect to the Company,
its Subsidiaries and any trade or business (whether or not incorporated and
whether or not maintained for the benefit of employees located within or
without the United States) which is treated as a single employer with the
Company or any of its Subsidiaries (an “ERISA Affiliate”) within the
meaning of Section 414(b), (c), (m) or (o) of the Code, (i) each employee
benefit plan (as defined in Section 3(3) of the Employee Retirement Income
Security Act of 1974, as amended (“ERISA”)) (ii) each stock option,
stock purchase, phantom stock, stock appreciation right, supplemental
retirement, medical, dental, disability or life insurance plans, programs or
arrangements, and (iii) each bonus, pension, profit sharing, savings, deferred
compensation or incentive plans, severance, change-in-control or fringe benefit
plan, programs or arrangements (whether written or unwritten, insured or
self-insured), other than schemes mandated by a government or Foreign Employee
Plan, for the benefit of or relating to any employee or former employee,
director or consultant of the Company, any Subsidiary or with respect to which
the Company or any Subsidiary has or would reasonably be expected to have any
material obligation or liability (contingent or otherwise) (“Company
Employee Plans”).

 

(b)           The
Company has delivered to Parent a copy of each of the Company Employee Plans
(including the plan document together with all amendments and, where
applicable, any trust agreements and insurance policies, summary plan
descriptions and employee handbooks) and has, with respect to each Company
Employee Plan which is subject to ERISA reporting requirements, provided copies
of the most recent Form 5500 reports filed, with schedules attached. Except as
set forth on Schedule 4.9(b) of the Company Disclosure Schedule, any Company
Employee Plan intended to be qualified under Section 401(a) of the Code has
obtained from the Internal Revenue Service a favorable determination letter as
to its qualified status under the Code. There is no fact or circumstance that
exists that would reasonably be expected to cause the Internal Revenue Service
to revoke such letter, except such defects as may be corrected under Rev. Proc.
2003-44 (or any successor ruling or guidance) without material liability to the
Company or to the Company and its Subsidiaries, taken as a whole.

 

(c)           Except
as set forth on Schedule 4.9(c) of the Company Disclosure Schedules:

 

(i)            there
has been no “prohibited transaction,” as such term is defined in Section 406 of
ERISA and Section 4975 of the Code, with respect to any Company Employee Plan;

 

(ii)           each
Company Employee Plan has been administered in material compliance with its
terms and the requirements prescribed by any and all statutes, rules and
regulations (including ERISA and the Code) applicable to such Company Employee
Plan and nothing has occurred with respect to any Company Employee Plan that
has subjected or would reasonably be expected to subject the Company or any of
its Subsidiaries to a material liability under Section 409 or Section 502 of
ERISA or Chapter 43 of Subtitle D or Section 6652 of the Code;

 

(iii)          all
contributions and premium payments required to be made by the Company or any of
its Subsidiaries or any ERISA Affiliate to any Company Employee Plan have 

 

40

 

been made on or before their due dates, and to the extent that
contributions, premium payments (including retrospective or retroactive
premiums) or benefits payments are not yet due, all liabilities relating to
each Company Employee Plan have been appropriately accrued in accordance with
GAAP;

 

(iv)          with
respect to each Company Employee Plan, no “reportable event” within the meaning
of Section 4043 of ERISA (excluding any such event for which the thirty (30)
day notice requirement has been waived under the regulations to Section 4043 of
ERISA) nor any event described in Section 4062, 4063, 4064, 4069 or 4041 of ERISA
has occurred;

 

(v)           there
are no existing (or to the knowledge of the Company, threatened) lawsuits,
claims or other controversies relating to a Company Employee Plan, other than
routine claims for information or benefits in the normal course and no Company
Employee Plan is or within the last three years has been the subject of an
examination by a governmental authority or a participant who submitted a
written filing in a government sponsored amnesty, voluntary compliance or
similar program;

 

(vi)          neither
the Company nor any of its Subsidiaries nor any ERISA Affiliate is a party to,
or has made any contribution to or otherwise incurred any obligation or has any
liability (including by reason of an under funding) with respect to (a) any “multi-employer
plan” as defined in Section 3(37) of ERISA, or (b) any employee pension benefit
plan (within the meaning of Section 3(2) of ERISA) that is subject to Title IV
of ERISA; and

 

(vii)         other
than as required under Section 601 et seq. of ERISA, no Company employee Plan
provides benefits or coverage following retirement or other termination of
employment to any current or future retiree or terminated employee.

 

(d)           Each
Company Employee Plan that is a “nonqualified deferred compensation plan” (as
defined under Section 409A(d)(1) of the Code) has been operated and
administered in good faith compliance with Section 409A from the period
beginning January 1, 2005 through the date hereof and has not been materially
modified since October 2, 2004.

 

(e)           With
respect to each scheme or arrangement mandated by a government other than the
United States and with respect to each Company Employee Plan that is subject to
the laws of a jurisdiction outside of the United States (a “Foreign Employee
Plan”) the fair market value of the assets of each funded Foreign Employee
Plan, the liability of each insurer for any Foreign Employee Plan funded
through insurance or the book reserve established for any Foreign Employee
Plan, together with any accrued contributions, is sufficient to procure or
provide for the accrued benefit obligations, as of the date of this Agreement,
with respect to all current and former participants in such Foreign Employee
Plan according to the actuarial assumptions and valuations most recently used
to determine employer contributions to such Foreign Employee Plan and no
transactions contemplated by this Agreement shall cause such assets or
insurance obligations to be less than such benefit obligations. Each Foreign
Employee Plan has been maintained in all material respects in accordance with
all applicable requirements, and if intended to qualify for special tax
treatment, meets all requirements for such treatment.

 

41

 

Section 4.10.          Contracts.

 

(a)           Except
as set forth on Schedule 4.10(a) of the Company Disclosure Schedules:

 

(i)            Neither
the Company nor any of its Subsidiaries has employment agreements with its
officers or employees (other than setting forth an employment-at will relationship).
Neither the Company nor any of its Subsidiaries has any independent contractor
or similar agreement, contract or commitment that is not terminable on sixty
(60) days’ notice or less without penalty, liability or premium. Neither the
Company nor any of its Subsidiaries is a party to any contract, commitment,
agreement, understanding or arrangement that provides for any severance pay or
other compensation obligations which become payable by reason of, this
Agreement or the consummation of the transactions contemplated hereby.

 

(ii)           Neither
the Company nor any of its Subsidiaries has any collective bargaining or union
agreements, with respect to its employees.

 

(iii)          Neither
the Company nor any of its Subsidiaries is party to any agreement relating to
non-competition (whether the Company or any Subsidiary is subject to or the
beneficiary of any such obligation).

 

(iv)          Neither
the Company nor any of its Subsidiaries has Guaranteed any obligations of other
Persons or made any agreements to acquire or Guarantee any obligations of other
Persons.

 

(v)           Neither
the Company nor any of its Subsidiaries has any outstanding loan or advance in
excess of $100,000 to any Person; nor is it party to any contract or agreement
relating to Indebtedness which would permit the borrowing by the Company or any
of its Subsidiaries of any sum in excess of $1,000,000.

 

(vi)          Neither
the Company nor any of its Subsidiaries is a party to any partnership, joint
venture or other similar contract, commitment, agreement, understanding or
arrangement.

 

(vii)         Neither
the Company nor any of its Subsidiaries is a party to any contract, commitment,
agreement, understanding or arrangement for the purchase of materials,
supplies, goods, services, equipment or assets (A) providing for annual
payments by the Company and its Subsidiaries of greater than $500,000, (B)
providing for aggregate payments by the Company and its Subsidiaries of greater
than $2,500,000, or (C) having a term of greater than one year that is not
terminable on 60 days’ notice or less without penalty, liability or premium in
excess of $250,000.

 

(viii)        Neither
the Company nor any of its Subsidiaries is a party to any sales, distribution
or other similar contract, commitment, agreement, understanding or arrangement
for the sale by the Company or any of its Subsidiaries of materials, supplies,
goods, services, equipment or other assets (A) providing for annual payments to
the Company and its Subsidiaries of greater than $500,000, (B) providing for
aggregate payments to the Company and its Subsidiaries of greater than $2,500,000,
or (C) having a term of greater than one year that is 

 

42

 

not terminable on 60 days’ notice or less without penalty, liability or
premium in excess of $250,000.

 

(ix)           Neither
the Company nor any of its Subsidiaries is a party to any lease or license for
any asset (A) providing for annual payments of greater than $500,000 or (B)
having a term of greater than one year that is not terminable on 60 days’
notice or less without penalty, liability or premium in excess of $250,000.

 

(x)            Neither
the Company nor any of its Subsidiaries is a party to any contract, commitment,
agreement, understanding or arrangement relating to the acquisition or
disposition of any business (whether by merger, sale of stock, sale of assets
or otherwise).

 

(xi)           Neither
the Company nor any of its Subsidiaries is a party to any license for the use
of Intellectual Property or similar contract, commitment, agreement,
understanding or arrangement.

 

(xii)          Neither
the Company nor any of its Subsidiaries is a party to any agency, dealer, sales
representative, marketing or similar contract, commitment, agreement,
understanding or arrangement having a term of greater than one year that is not
terminable on 60 days’ notice or less without penalty, liability or premium in
excess of $250,000.

 

(xiii)         Neither
the Company nor any of its Subsidiaries is a party to any contract, commitment,
agreement, understanding or arrangement with any of its Affiliates or any
current or former stockholder, officer or director of the Company or any of its
Subsidiaries, or any “affiliate” or “associate” of such persons (as such terms
are defined in the rules and regulations promulgated under the 1933 Act) (any
of the foregoing, a “Related Party”).

 

(xiv)        Neither
the Company nor any of its Subsidiaries is party to any lease in respect of
real property.

 

(xv)         Neither
the Company nor any of its Subsidiaries has any other material contracts or
agreements.

 

The agreements, documents and instruments set forth on
Schedule 4.10(a) of the Company Disclosure Schedules are referred to herein as “Material
Contracts”. True and correct copies of each document or instrument listed on
Schedule 4.10(a) of the Company Disclosure Schedules have been provided to
Parent.

 

(b)           Except
as set forth on Schedule 4.10(b) of the Company Disclosure Schedules, all of
the Material Contracts are valid, binding, in full force and effect, and
enforceable by the Company and/or its Subsidiaries in accordance with their
respective terms, except (i) to the extent that enforceability may be limited
by applicable bankruptcy, reorganization, insolvency, moratorium or other laws
affecting the enforcement of creditors’ rights generally and by general
principles of equity, regardless of whether such enforceability is considered
in a proceeding at law or in equity and (ii) for such matters that would not
reasonably be expected to have, a Company Material Adverse Effect.

 

43

 

(c)           Neither
the Company nor any of its Subsidiaries is in default under or in breach or
violation of, and, to the Company’s knowledge, no event has occurred which with
notice or lapse of time or both would constitute such a default, breach or
violation of, any provision of any Material Contract that would reasonably be
expected to have a Company Material Adverse Effect. To the Company’s knowledge,
no other party is in default under or in breach or violation of, and, to the
Company’s knowledge, no event has occurred which with notice or lapse of time
or both would constitute such a default, breach or violation of, any provision
of any Material Contract that would reasonably be expected to have a Company
Material Adverse Effect.

 

Section 4.11.          Compliance
With Law.

 

Except as set forth in Schedule 4.11 of the Company
Disclosure Schedules, the Company and each of its Subsidiaries is, and has been
since February 28, 2004, in compliance with all applicable laws, rules and
regulations, except where such failure to comply has not had, and would not reasonably
be expected to have, a Company Material Adverse Effect.

 

Section 4.12.          Labor
Matters.

 

Except as set forth on Schedule 4.12 of the Company
Disclosure Schedules, the Company and each of its Subsidiaries is in compliance
with all currently applicable laws respecting employment and employment
practices, terms and conditions of employment, and wages and hours, except
where such failure to comply will not result in a Company Material Adverse
Effect. There is no unfair labor practice complaint against the Company or any
of its Subsidiaries pending or, to the knowledge of the Company, threatened
before the National Labor Relations Board. There is no strike, labor dispute,
lockout, slowdown, or stoppage pending or, to the knowledge of the Company,
threatened against the Company or any of its Subsidiaries. Except as set forth
on Schedule 4.12 of the Company Disclosure Schedules, none of the employees of
the Company or any of its Subsidiaries is represented by a labor union. To the
knowledge of the Company, no union organizing activities are taking place with
respect to the business of the Company or any of its Subsidiaries.

 

Section 4.13.          Insurance.

 

Schedule 4.13 of the Company Disclosure Schedules
contains a list of the policies of fire, liability and other forms of insurance
currently held by the Company and/or its Subsidiaries. To the knowledge of the
Company, except as set forth in Schedule 4.13 of the Company Disclosure
Schedules, there is no claim pending under any of such policies, other than
health insurance policies, as to which coverage has been questioned, denied or
disputed by the underwriters of such policies. All premiums payable under all
such policies have been timely paid and the Company and the Subsidiaries are in
compliance in all material respects with the terms and conditions of such
policies. Except as set forth on Schedule 4.13 of the Company Disclosure
Schedules, the Company has no knowledge of any threatened termination of any of
such policies.

 

Section 4.14.          Litigation.

 

Except as set forth on Schedule 4.14 of the Company
Disclosure Schedules, there is no action, suit, proceeding, claim, arbitration
or, to the Company’s knowledge, investigation pending before any governmental
body, agency, arbitrator, court or tribunal, foreign or domestic,

 

44

 

or, to the
knowledge of the Company, threatened against the Company or any of its
Subsidiaries or any Properties or any of their respective officers or directors
(in their capacities as such) that (A) if adversely determined, would
reasonably be expected to have, a Company Material Adverse Effect, (B) if
adversely determined, could reasonably be expected to adversely affect the
Company’s ability to perform hereunder, or (C) which seeks to enjoin or obtain
damages in respect of the transactions contemplated hereby. There is no
judgment, decree or order against the Company or any of its Subsidiaries, or,
to the knowledge of the Company, any of the directors or officers of the
Company or any of its Subsidiaries (in their capacities as such) that would
reasonably be expected to have, a Company Material Adverse Effect.

 

Section 4.15.          Governmental
Authorizations and Regulations.

 

Except as set forth on Schedule 4.15 of the Company
Disclosure Schedules, the Company and each of its Subsidiaries has obtained
each federal, state, county, local or foreign governmental consent, license,
permit, grant, or other authorization of a Governmental Entity (a “Permit”)
that is required for the operation of its business or the holding of any
interest in any of its Properties, and all of such Permits are in full force
and effect except where the failure to have such Permit would reasonably be
expected to have, a Company Material Adverse Effect.

 

Section 4.16.          Compliance
with Environmental Requirements.

 

Except as set forth on Schedule 4.16 of the Company
Disclosure Schedules, (i) the Company and each of its Subsidiaries has obtained
all material Permits applicable to the Company and each of its Subsidiaries and
relating to pollution or protection of the environment, including all
Environmental Laws, (ii) the Company and each of its Subsidiaries is in
compliance with all terms and conditions of all such Permits, except where
failure to comply would not reasonably be expected to have, a Company Material
Adverse Effect, and (iii) there are no conditions, circumstances, activities,
practices, incidents, or actions known to the Company which could reasonably be
expected to form the basis of any claim, action, suit, proceeding, hearing, or
investigation of, by, against or relating to the Company or any of its
Subsidiaries, based on or related to the manufacture, processing, distribution,
use, treatment, storage, disposal, transport, or handling, or the Release or
threatened Release into the environment, of any Hazardous Substance, which, if
adversely determined, would reasonably be expected to have a Company Material
Adverse Effect. There has been no Release or threatened Release of a Hazardous
Substance on, upon, into or from any site currently owned, leased or otherwise
used by the Company or any Subsidiary or, to Company’s knowledge, any site
previously owned, leased or otherwise used by the Company or any Subsidiary,
except as would not have a Company Material Adverse Effect.

 

Section 4.17.          No
Brokers.

 

Except as set forth on Schedule 4.17 of the Company
Disclosure Schedules, neither the Company nor any of its Subsidiaries is or
will become as a result of the transactions contemplated hereby, obligated for
the payment of fees or expenses of any broker or finder in connection with the
origin, negotiation or execution of this Agreement or the other Transaction
Documents or in connection with any transaction contemplated hereby or thereby.

 

45

 

Section 4.18.          Inventories.

 

Except as set forth on Schedule 4.18 of the Company
Disclosure Schedules, all of the inventories recorded on the Most Recent
Balance Sheet consisted of, and all inventories of the Company and its
Subsidiaries immediately prior to the Closing will consist of, items usable and
saleable for the purposes acquired or created in the ordinary course of
business consistent with past practice, net of applicable allowances for
obsolete, excessive or damaged inventories. Since the date of the Most Recent
Balance Sheet, the inventories of the Company and its Subsidiaries have been
maintained in the ordinary course of business consistent with past practices
and no inventory has been sold or disposed of except through sales in the
ordinary course consistent with past practices.

 

Section 4.19.          Related
Party Transactions.

 

Except as set forth on Schedule 4.19 of the Company
Disclosure Schedules, no Related Party has served as a consultant, competitor,
customer, licensee, distributor, supplier or vendor of the Company or any of
its Subsidiaries. Since February 28, 2006, except as set forth on Schedule 4.19
of the Company Disclosure Schedules, there have been no transactions or
contracts in effect (other than employment arrangements (i.e. stock options,
bonuses and employments agreements) between the Company or any of its
Subsidiaries, on the one hand, and any Related Party, on the other hand.

 

Section 4.20.          Customers
and Vendors.

 

Except as set forth on Schedule 4.20 of the Company
Disclosure Schedules, since February 28, 2005, (a) no customer with purchases
from the Company and its Subsidiaries of more than $2,500,000 in either of the
last two fiscal years has given a senior executive officer of the Company or
any of its Subsidiaries notice that such customer (or group of customers) will
significantly reduce or terminate the amount of products purchased from the
Company and its Subsidiaries and (b) no significant vendor (or group of vendors
which in the aggregate is significant) of the Company and its Subsidiaries has
given a senior executive officer of the Company or any of its Subsidiaries
notice that such vendor (or group of vendors) will cease to supply or
significantly adversely change its price or terms to the Company and its
Subsidiaries of any products or services.

 

Section 4.21.          Company
SEC Documents.

 

The Company and its Subsidiaries have filed with the
Securities and Exchange Commission all Company SEC Documents. As of its filing
date, (a) each Company SEC Document complied as to form in all material
respects with the applicable requirements of the 1933 Act, and the Securities
Exchange Act of 1934, as amended (the “1934 Act”), as the case may be,
and (b) each Company SEC Document filed pursuant to the 1934 Act did not as of
the filing date thereof, and each such Company SEC Document filed subsequent to
the date hereof will not as of the filing date thereof, contain any untrue
statement of a material fact or omit to state any material fact necessary in
order to make the statements made therein, in light of the circumstances under
which they were made, not misleading. Each Company SEC Document that is a
registration statement, as amended or supplemented, if applicable, filed
pursuant to the 

 

46

 

1933 Act, as of
the date such registration statement or amendment became effective, did not
contain any untrue statement of a material fact or omit to state any material
fact necessary in order to make the statements made therein, in light of the
circumstances under which they were made, not misleading.

 

Section 4.22.          Information
Supplied to the Company’s Stockholders.

 

The information and materials to be supplied by the
Company to its stockholders in connection with the Company Stockholder Approval
will comply with the requirements of the DGCL, the Company’s certificate of
incorporation and bylaws and all other applicable legal requirements.

 

Section 4.23.          Indebtedness.

 

As of the date hereof, except as set forth on Schedule
4.23 of the Company Disclosure Schedules, there is no Indebtedness.

 

ARTICLE V

 

REPRESENTATIONS AND WARRANTIES OF PARENT

 

Parent
and Merger Sub jointly and severally represent and warrant to the Company as
follows:

 

Section 5.1.            Organization
of Parent.

 

Parent and Merger Sub are Delaware corporations, and
each is duly organized, validly existing and in good standing under the laws of
its respective jurisdiction of formation and is in good standing in each
jurisdiction in which the failure to be so qualified or licensed would
reasonably be expected to have a Parent Material Adverse Effect. For purposes
of this Agreement, “Parent Material Adverse Effect” shall mean any change,
effect, event, occurrence, state of facts or development that is or could
reasonably be expected to have a material adverse effect on the ability of
Parent and Merger Sub to consummate the transaction contemplated by this
Agreement or perform its obligations hereunder or under the Transaction
Documents.

 

Section 5.2.            Authority;
No Conflict; Required Filings and Consents.

 

(a)           Each
of Parent and Merger Sub has all requisite corporate power and authority to
enter into this Agreement and the other Transaction Documents to which it is or
will become a party and to consummate the transactions contemplated by this
Agreement and such Transaction Documents. The execution and delivery of this
Agreement and such Transaction Documents and the consummation of the
transactions contemplated by this Agreement and such Transaction Documents have
been duly authorized by all necessary corporate action on the part of Parent
and Merger Sub. This Agreement has been and such Transaction Documents have
been or, to the extent not executed as of the date hereof, will be duly
executed and delivered by Parent and Merger Sub. This Agreement and each of the
Transaction Documents to which Parent and/or Merger Sub is a party constitutes,
and each of the Transaction Documents to which Parent and/or Merger Sub will
become a party when executed and delivered by Parent and/or Merger Sub will 

 

47

 

constitute, assuming the due authorization, execution and delivery by
the other parties hereto and thereto, a valid and binding obligation of Parent
and/or Merger Sub, enforceable by the Company against Parent or Merger Sub, as
the case may be, in accordance with their respective terms, except to the
extent that enforceability may be limited by applicable bankruptcy,
reorganization, insolvency, moratorium or other laws affecting the enforcement
of creditors’ rights generally and by general principles of equity, regardless
of whether such enforceability is considered in a proceeding at law or equity.

 

(b)           The
execution and delivery by Parent or Merger Sub of this Agreement and the
Transaction Documents to which it is or will become a party does not, and
consummation of the transactions contemplated by this Agreement or the
Transaction Documents to which it is or will become a party will not, (i)
conflict with, or result in any material violation or breach of any provision of
the governing documents of Parent and/or Merger Sub, (ii) violate any law, rule
or regulation applicable to Parent and/or Merger Sub, except as has not had,
and would not reasonably be expected to have, a Parent Material Adverse Effect,
or (iii) conflict with or result in a breach of, or give rise to a right of
termination of, or accelerate the performance required by the terms of any
judgment, court order or consent decree, or any material agreement to which
Parent or Merger Sub is party or constitute a default thereunder, except in
each case has not had, and would not reasonably be expected to have, a Parent
Material Adverse Effect.

 

(c)           None
of the execution and delivery of this Agreement by Parent or Merger Sub or the
other Transaction Documents to which Parent and/or Merger Sub is a party or the
consummation of the transactions contemplated hereby or thereby will require
any consent, approval, order or authorization of, or registration, declaration
or filing with, any Governmental Entity, except for (i) the filing of the
Certificate of Merger with the Delaware Secretary of State, (ii) such consents,
approvals, orders, authorizations, registrations, declarations and filings as
may be required under applicable federal and state securities laws and the laws
of any foreign country, (iii) such filings as may be required under the HSR
Act, and (iv) those where the failure to obtain or make, as applicable, such
consent, approval, order or authorization of, or registration, declaration or
filing has not had, and would not reasonably be expected to have, a Parent
Material Adverse Effect.

 

Section 5.3.            Capital
Resources.

 

Subject to the satisfaction of the closing condition
set forth in Section 9.2(f), Parent and Merger Sub will have prior to the
Effective Time sufficient cash available, lines of credit or other resources to
pay the Merger Consideration payable at the Closing as well as all associated
fees, costs and expenses payable by the Parent or the Merger Sub.

 

Section 5.4.            Litigation.

 

There is no suit, claim, action, proceeding or
arbitration pending or, to Parent’s knowledge, threatened against Parent and
Merger Sub (a) which, if adversely determined, could reasonably be expected to
have a Parent Material Adverse Effect.

 

48

 

Section 5.5.            No
Brokers.

 

Neither Parent nor Merger Sub is obligated for the
payment of fees or expenses of any broker or finder in connection with the
origin, negotiation or execution of this Agreement or the other Transaction
Documents or in connection with any transaction contemplated hereby or thereby,
in each case, for which the Company is liable.

 

Section 5.6.            Ownership
of Merger Sub.

 

Parent is the record owner of all of the capital stock
of Merger Sub free and clear of any Lien and free and clear of any other
limitation or restriction (including any restriction on the right to vote, sell
or otherwise dispose of such capital stock).

 

ARTICLE VI

 

PRE-CLOSING COVENANTS OF THE COMPANY

 

Section 6.1.            Approval
of Company Stockholders.

 

Immediately following the execution of this Agreement,
the Company shall deliver to Parent the following materials (collectively, the “Consent
Materials”):  (i) with respect to
each of the stockholders of the Company identified on Schedule 6.1 of the
Disclosure Schedules (the “Consenting Stockholders”), a written consent
(the “Stockholder Approval”) solely in his, her or its capacity as the
holder of all of such Consenting Stockholder’s outstanding shares of Company
Common Stock, in favor of approving the Merger under the provisions of the DGCL
and the Company’s certificate of incorporation and bylaws, and (ii) a
certificate executed on behalf of the Company by its Secretary and certifying
that the Stockholder Approval has been obtained in accordance with the DGCL and
the Company’s certificate of incorporation and bylaws.

 

Section 6.2.            Conduct
of Business Prior to the Effective Time.

 

Except (i) as expressly contemplated by this
Agreement, (ii) as described in Schedule 6.2 of the Company
Disclosure Schedules, or (iii) to the extent that Parent shall otherwise
consent in writing (such consent or declination to consent not to be
unreasonably delayed or withheld), during the period from the date hereof to
the earlier of the Effective Time and the termination of this Agreement in
accordance with its terms, the Company shall and shall cause each of its
Subsidiaries to conduct its operations in the ordinary course of business
consistent with past practices and use commercially reasonable efforts to
preserve intact its current business organizations, keep available the service
of its current officers and employees and preserve its relationships with
customers, suppliers, distributors, lessors, creditors, employees, contractors
and others having business dealings with it.  Without limiting the
generality of the foregoing, except as otherwise expressly provided in this
Agreement and except as described in Schedule 6.2 of the Company
Disclosure Schedules, between the date hereof and the Effective Time, the
Company shall not and shall cause its Subsidiaries not to, without the prior
written consent (such consent or declination to consent not to be unreasonably
delayed or withheld) of Parent:

 

49

 

(a)           authorize
or propose any amendments to its certificate of incorporation or bylaws (or
other similar governing instrument);

 

(b)           declare,
set aside or pay any dividends on or make any other distributions (whether in
cash, stock or property) in respect of any of its capital stock (or other
ownership interests), or split, combine or reclassify any of its capital stock
(or other ownership interests) or declare any direct or indirect redemption,
retirement, purchase or other acquisition by the Company or any of its
Subsidiaries of such capital (or other ownership interests);

 

(c)           issue,
sell, grant, pledge, dispose of, encumber or otherwise subject to any Liens, or
authorize such issuance, sale, grant, pledge, disposition, encumbrance or
subject to such Lien, any shares of its capital stock (or other ownership
interests) or securities convertible into shares of its capital stock (or other
interests), or subscriptions, rights, warrants or options to acquire, or other
agreements or commitments of any character obligating it to issue any such shares
(or other ownership interests) or other convertible securities, other than the
issuance of shares of Company Common Stock issuable upon exercise of Company
Options or Company Warrants;

 

(d)           acquire
or agree to acquire by merging or consolidating with, or by purchasing an
equity interest in or portion of the assets of, or by any other manner, any
business or any corporation, partnership or other business organization or
division;

 

(e)           other
than Indebtedness existing on the date hereof, (1) incur or assume any
Indebtedness in excess of $500,000, other than in the ordinary course of
business consistent with past practices; or (2) assume, Guarantee or otherwise
become liable or responsible for (directly, contingently or otherwise) the
obligations of any other Person in amounts in excess of $250,000, other than in
the ordinary course of business consistent with past practices;

 

(f)            (1)
except in the ordinary course of business consistent with past practice with
respect to any employee (other than any officer or director), or as may be
required by applicable law enter into, adopt, amend or terminate any employment
agreement or any bonus payments with any employee, officer or director of the
Company, or (2) except as required by applicable law, enter into, adopt, amend
or terminate any pension, retirement, health, life, or disability insurance,
severance, profit sharing, bonus compensation, termination, stock option, stock
appreciation right, restricted stock, employee benefit plan, agreement, trust,
fund or other arrangement for the benefit or welfare of any director, officer
or employee in any manner;

 

(g)           (i)
except as permitted by clause (i)(iii) below, purchase, acquire or lease any
material assets other than in the ordinary course of business consistent with past
practice; or (ii) sell, lease, license, transfer or otherwise dispose of any material
Properties other than the sale of inventory or obsolete equipment in the ordinary
course of business consistent with past practice.

 

(h)           (i) make
any change in the accounting methods or practices it follows, (ii) revalue
in any Property, including writing down the value of inventory or writing off
notes or accounts receivable other than in the ordinary course of business
consistent with past practice or (iii) make or change any Tax election or
change any of the accounting or Tax principles, practices or methods used by it;

 

50

 

(i)            (i) enter
into any contract or agreement that would be material to the Company and its
Subsidiaries, taken as a whole, other than contracts or agreements in the ordinary
course of business consistent with past practice; (ii) amend, modify or
waive any material right under any Material Contract other than in the ordinary
course; or (iii) make or authorize any capital expenditure in excess of $500,000
per expenditure or $5,000,000 in the aggregate, other than in accordance with
the Company’s fiscal year 2007 capital expenditures budget as approved by the
Company’s board, which has been provided to the Parent; or

 

(j)            grant
or agree to make any severance, termination pay or deferred compensation (or
amendment to any existing arrangement) to or increase in the compensation,
bonus or other benefit payable or to become payable by the Company or any of its
Subsidiaries to their directors, officers or employees, except increases
required by any agreement existing on the date hereof;

 

(k)           make
any loan, advance or capital contribution to or investment in any Person other
than (i) loans, advances or capital contributions to or investments in its
wholly owned Subsidiaries in the ordinary course of business consistent with
past practice and (ii) reimbursement of employee business expenses in the
ordinary course of business consistent with past practice;

 

(l)            (i)
cancel or compromise any Indebtedness or claim (other than compromises of
accounts receivable in the ordinary course of business consistent with past
practice) in excess of $500,000, (ii) waive or release any right of
substantial value, or (iii) institute, settle or agreed to settle any
action, suit, proceeding, claim, arbitration or investigation other than such
actions that are not material to the Company or any Subsidiary and that will
not result in any obligation of the Company or any Subsidiary on or after the
Closing Date;

 

(m)          agree,
commit to do, or otherwise take any of the actions described in Sections 6.2(a)
through 6.2(l).

 

Other
than the right to consent or withhold consent with respect to the foregoing
matters, nothing contained herein shall give Parent any right to manage,
control, direct or be involved in the management of the business of the Company
and its Subsidiaries prior to the Closing.

 

Section 6.3.            Access
to Information.

 

Until the Closing, the Company shall and shall cause
its Subsidiaries to allow Parent and its agents, advisors, lenders and its and
their respective representatives reasonable access during normal business hours
upon reasonable notice to the books, records, representatives, officers,
employees, agents, Properties and offices of the Company and its Subsidiaries. All
such access shall be subject to the terms of the Confidentiality Agreement.

 

Section 6.4.            Satisfaction
of Conditions Precedent.

 

The Company will and will cause each of its
Subsidiaries to use its commercially reasonable efforts to satisfy or cause to
be satisfied all the conditions precedent which are set forth in Sections 9.1
and 9.2, and the Company will and will cause each of its Subsidiaries to use
its commercially reasonable efforts to cause the transactions contemplated by
this Agreement to 

 

51

 

be consummated,
and, without limiting the generality of the foregoing, to obtain all consents
and authorizations of third parties and to make all filings with, and give all
notices to, third parties which may be necessary or reasonably required on its
part in order to effect the transactions contemplated by this Agreement.

 

Section 6.5.            No
Solicitation.

 

(a)           From
the date hereof until the termination of this Agreement pursuant to Section
10.1 (the “Pre-Closing Period”), except to the extent required to be
disclosed in Company SEC Documents, the Company will not, and will not permit
or cause any of its Affiliates, officers, directors, employees, investment
bankers, consultants and other agents to, directly or indirectly, take any
action to solicit, initiate, encourage or facilitate the making of any
Acquisition Proposal (as defined below) or any inquiry with respect thereto or
engage in discussions or negotiations with any Person with respect thereto, or
disclose any nonpublic information relating to the Company or any of its
Subsidiaries (including this Agreement) or afford access to the Properties,
books or records of the Company or any of its Subsidiaries to, or otherwise
assist or participate in or facilitate in any other manner any effort or
attempt by any Person that has made or, to the knowledge of the Company, is
contemplating making any Acquisition Proposal. The Company will, and will cause
the other Persons listed in the first sentence of this Section 6.5 to,
immediately cease and cause to be terminated all existing activities
discussions and negotiations, if any, that have taken place prior to the date
hereof with any parties with respect to any Acquisition Proposal.

 

(b)           Notwithstanding
the foregoing, nothing contained in this Section 6.5 shall prevent the Company
from entering into discussions or negotiations with any Person in connection
with a bona fide Acquisition Proposal received from such Person that the board
of directors of the Company determines in good faith could lead to a Superior
Proposal (as defined below). The Company will notify (which notice shall be
provided orally and in writing) Parent of the receipt of any Acquisition
Proposal, but in no event within forty-eight (48) hours after receipt of an
Acquisition Proposal. If the board of directors of the Company shall determine
that an Acquisition Proposal is a Superior Proposal, the Company shall notify
Parent in writing of such determination. In the event that the Company receives
an Acquisition Proposal and the board of directors of the Company determines in
good faith that it has a fiduciary duty to withdraw its recommendation that the
stockholders of the Company approve the Merger and the transactions
contemplated hereby, nothing herein shall restrict or prevent the board of
directors from withdrawing such recommendation. The provisions of this Section
6.5(b) shall terminate upon the receipt of the requisite stockholder approval
of this Agreement and the Merger.

 

(c)           For
purposes of this Agreement, “Acquisition Proposal” means any bona fide
offer or proposal for, or any indication of interest in, a merger or other
business combination involving the Company, the acquisition of a majority of
the equity in, or all or substantially all of the assets of, the Company, in
one transaction or series of related transactions, in each case other than the
transactions contemplated by this Agreement. For purposes of this Agreement, “Superior
Proposal” means any bona fide Acquisition Proposal on terms that the board
of directors of the Company determines in its good faith judgment are more
favorable to the Company’s stockholders than this Agreement and the Merger
taken as a whole.

 

52

 

Section 6.6.            Cooperation.

 

(a)           The
Company shall provide, and shall cause its Subsidiaries and their respective
officers, employees, counsel, accountants and other representatives to provide,
on a timely basis, all cooperation reasonably requested by Parent in connection
with the refinancing of the existing senior secured credit facility of Cellu
Tissue Holdings, Inc. (“Cellu Tissue Holdings”), including
(i) participation in meetings, including meetings with lenders, due
diligence sessions and any rating agency presentations, (ii) furnishing
Parent and its financing sources with financial and other pertinent information
regarding the Company and its Subsidiaries as may be reasonably requested by
Parent, (iii) assisting Parent and its financing sources in the
preparation of (A) offering documents for the new senior secured credit
facility of Cellu Tissue Holdings and (B) materials needed for any rating
agency presentations, (iv) providing and executing such other documents, and
taking such other actions, as may be necessary to consummate such refinancing;
provided, that, with respect to such cooperation by counsel, accountants and
other representatives of the Company (other than its officers and employees), (x)
Parent shall reimburse the Company for the reasonable out-of-pocket expenses
(if any) incurred by the Company to provide the cooperation so requested by
Parent and (y) all such expenses paid prior to Closing and required to be so
reimbursed shall increase Net Cash on a dollar for dollar basis (but without
double counting). The Company agrees that Parent will have sole discretion over
the terms, conditions and structure of the debt financing referred to above.

 

(b)           The
Company shall cause Cellu Tissue Holdings to commence, in accordance with the
terms of the Indenture dated as of March 12, 2004 (the “Indenture”)
between Cellu Tissue Holdings and The Bank of New York, as trustee (the “Trustee”),
and all applicable rules and regulations of the SEC and other applicable law, a
solicitation (the “Consent Solicitation”) of consents from the holders
of the Bonds to certain amendments to the Indenture and a waiver of each
consenting holder of the requirement that Cellu Tissue Holdings make a Change
of Control Offer (as defined in the Indenture) as a result of the transactions
contemplated by this Agreement, and shall take, and shall cause Cellu Tissue
Holdings and their respective officers, employees, counsel, accountants and
other representatives to take, all actions reasonably necessary to consummate
the Consent Solicitation, including preparing and executing all documents
reasonably required in connection therewith. Without limiting the foregoing,
the Company shall, or shall cause Cellu Tissue Holdings to, (i) enter into a
solicitation agent agreement with a solicitation agent recommended by Parent
(and reasonably acceptable to the Company), and (ii) enter into an information
agent agreement with an information agent recommended by Parent (and reasonably
acceptable to the Company). The terms and conditions of the Consent
Solicitation shall be reasonably satisfactory to Parent and the Company, and
all documentation relating to the Consent Solicitation will be subject to the
prior review, comment and approval of Parent and the Company, which approval
shall not be unreasonably withheld or delayed. In the event that a sufficient number of holders of Bonds provide
consents in the Consent Solicitation, then the Company shall cause Cellu Tissue
Holdings, at or prior to the Closing, to enter into a supplemental indenture
(the “Supplemental Indenture”) with the Trustee reflecting the
amendments approved in the Consent Solicitation (which Supplemental Indenture
shall be prepared jointly by Parent and the Company).

 

(c)           All
costs and expenses incurred by any of the Company, its Subsidiaries and their
representatives in performing any of their respective obligations under this
Section 6.6 shall be 

 

53

 

included in Company Transaction Expenses to the extent set forth in
that certain Letter Agreement relating to transaction expenses, dated as of
March 10, 2006, by and between the Company and Weston Presidio V, L.P. (“Weston
Presidio V”), as modified by that certain Letter Agreement, dated as of May 8, 2006, by and between the Company and
Weston Presidio V (the “Expense Letter”).  If this Agreement is
terminated pursuant to Article X, Parent shall reimburse the Company upon
such termination in accordance with the Expense Letter, and all such expenses
paid by the Company and required to be so reimbursed shall increase Net Cash on
a dollar for dollar basis (but without double counting), if and to the extent
the Company provides to the Parent at the Closing a certificate signed by an
executive officer of the Company as to the amount and source of each such
expense.

 

Section 6.7.            Information.

 

Between the date hereof and the Effective Time, the
Company shall, and shall cause its Subsidiaries to, promptly provide to Parent
all material written communications, known to the Company, relating to
unionizing efforts or elections at any of its facilities, including, without
limitation, any notices of unfair labor practices and any and all
communications to employees of the Company with respect to such unionizing
efforts or elections.

 

Section 6.8.            Tax
Sharing.

 

All Tax sharing agreements or similar agreements with
respect to or involving the Company and its Subsidiaries shall be terminated
prior to the Closing Date and, after the Closing Date, neither the Company nor
any of its Subsidiaries shall be bound thereby or have any liability thereunder.

 

Section 6.9.            Certain
Collective Bargaining Agreements.

 

(a)           Prior
to the Closing, promptly (and in any event no later than two (2) Business Days)
after each negotiating session with the union related to the negotiation of a
collective bargaining agreement for workers of the Company’s Wiggins,
Mississippi facility, the Company will provide the Parent an update on the
status of negotiations. If, prior to the Closing, the Company or any of its Subsidiaries,
or any of their respective bargaining representatives, enters into or agrees to
enter into any agreement with the union representing workers at the Company’s
Wiggins, Mississippi facility, then the Company shall provide a reasonably
detailed written notice describing such agreement or commitment to the Parent
prior to Closing (which such writing is sent to all parties listed in Section
12.2 and provides that it is a notice pursuant to this Section 6.9). In the
event that the Parent has a reasonable objection to such agreement or
commitment, the Parent shall have ten (10) Business Days from the date of its
receipt of such notice to determine whether to terminate this Agreement by
written notice to the Company (which notice shall describe such objection in
reasonable detail).

 

(b)           No
bargaining unit employee of the Company’s Menominee, Michigan or Natural Dam
Mill facilities shall experience an employment loss as of the Closing Date due
to the Merger.  This provision shall not limit in any way the Company’s
right to terminate the employment of any bargaining unit employee of the
Company’s Menominee, Michigan or Natural Dam Mill facilities after the Closing
Date.

 

54

 

ARTICLE VII

 

PRE-CLOSING AND OTHER COVENANTS OF PARENT

 

Section 7.1.            Satisfaction
of Conditions Precedent.

 

Parent and Merger Sub will use their commercially
reasonable efforts to satisfy or cause to be satisfied all the conditions
precedent that are set forth in Sections 9.1 and 9.3, and Parent and Merger Sub
will use their commercially reasonable efforts to cause the transactions
contemplated by this Agreement to be consummated, and, without limiting the
generality of the foregoing, to obtain the financing referred to in
Section 9.2(f)(ii), all consents and authorizations of third parties and
to make all filings with, and give all notices to, third parties which may be
necessary or reasonably required on its part in order to effect the
transactions contemplated by this Agreement.

 

Section 7.2.            Certain
Employee Benefit Matters.

 

Each employee of the Company
and its Subsidiaries that becomes a participant in any employee benefit plan,
program, policy or arrangement of the Surviving Corporation, shall be given
credit for all service prior to the Effective Time with the Company (for
purposes of eligibility to participate and vesting, except to the extent such
service results in duplication of benefits) and any waiting period for
participation shall be waived.

 

ARTICLE VIII

 

OTHER AGREEMENTS

 

Section 8.1.            Confidentiality.

 

Each party acknowledges that the WP Entities and the
Company have previously executed a Non-Disclosure Agreement (the “Confidentiality
Agreement”), which agreement shall continue in full force and effect in
accordance with its terms.

 

Section 8.2.            No
Public Announcement.

 

Except to the extent required to be disclosed in
Company SEC Filings, until the Closing, the parties hereto shall make no public
announcement concerning this Agreement, their discussions or any other
memoranda, letters or agreements between the parties relating to the Merger; provided,
however, that (A) any of the parties, but only after reasonable
consultation with the other (unless prohibited by law), may make disclosure if
required under applicable law, regulation or legal process and (B) this
Section 8.2 shall not prohibit any disclosure by Parent to its officers,
directors, members, partners, affiliates, representatives, lenders or investors
and their respective representatives.  The Company shall use commercially
reasonable efforts to consult with Parent prior to making disclosures relating
to the Merger in Company SEC filings.

 

55

 

Section 8.3.            Regulatory
Filings; Consents; Reasonable Efforts.

 

(a)           Subject
to the terms and conditions of this Agreement, the Company and Parent shall use
their respective commercially reasonable efforts to (i) make as soon as
practicable after the date hereof all necessary filings with respect to the
Merger and this Agreement and obtain required approvals and clearances with
respect thereto and supply all additional information requested in connection
therewith; (ii) make as soon as practicable after the date hereof merger
notification or other appropriate filings with federal, state or local
governmental bodies or applicable foreign governmental agencies and obtain
required approvals and clearances with respect thereto, including without
limitation notices required under the Antitrust Laws (as defined below) and
supply all additional information requested in connection therewith; (iii)
obtain as soon as practicable after the date hereof all consents, waivers,
approvals, authorizations and orders required in connection with the
authorization, execution and delivery of this Agreement and the consummation of
the Merger, including those required under the HSR Act; and (iv) take, or cause
to be taken, all appropriate action, and do, or cause to be done, all things
necessary, proper or advisable to consummate and make effective the transactions
contemplated by this Agreement as promptly as practicable.

 

(b)           Each
of Parent and the Company shall use all commercially reasonable efforts to
resolve such objections, if any, as may be asserted by any Governmental Entity
with respect to the transactions contemplated by this Agreement under the HSR
Act, the Sherman Antitrust Act, as amended, the Clayton Antitrust Act, as
amended, the Federal Trade Commission Act, as amended, and any other federal,
state or foreign statutes, rules, regulations, orders or decrees that are
designed to prohibit, restrict or regulate actions having the purpose or effect
of monopolization or restraint of trade (collectively, “Antitrust Laws”).
In connection therewith, if any administrative or judicial action or proceeding
is instituted (or, to Parent’s or the Company’s knowledge, threatened to be
instituted) challenging any transaction contemplated by this Agreement as
violative of any Antitrust Law, each of Parent and the Company shall cooperate
and use all commercially reasonable efforts to contest and resist any such
action or proceeding and to have vacated, lifted, reversed, or overturned any
decree, judgment, injunction or other order, whether temporary, preliminary or
permanent (each an “Order”), that is in effect and that prohibits,
prevents, or restricts consummation of the Merger or any such other
transactions, unless by mutual agreement Parent and the Company decide that
litigation is not in their respective best interests. The parties hereto will
consult and cooperate with one another, and consider in good faith the views of
one another, in connection with any analyses, appearances, presentations,
memoranda, briefs, arguments, opinions and proposals made or submitted by or on
behalf of any party hereto in connection with proceedings under or relating to
any Antitrust Laws. Each of Parent and the Company shall use all commercially
reasonable efforts to take such action as may be required to cause the
expiration of the waiting periods under the HSR Act or other Antitrust Laws
with respect to such transactions as promptly as possible after the execution
of this Agreement. Nothing contained herein shall be deemed to require Parent
or any of its Affiliates to take or agree to take any Action of Divestiture (as
defined below). For purposes of this Agreement, an “Action of Divestiture”
means (i) the sale, license or other disposition or holding separate (through
the establishment of a trust or otherwise) of any assets or categories of
assets of Parent or any of its Affiliates or, following the Effective Time, any
assets or categories of assets of the Surviving Corporation or any of its
Subsidiaries, (ii) the imposition of any limitation or regulation on the
ability of Parent or any of its Affiliates to 

 

56

 

operate, directly or indirectly, their business, the business of their
Subsidiaries or, following the Effective Time, the business of the Surviving
Corporation or any of its Subsidiaries or (iii) the imposition of any
limitation or regulation on Parent’s or any of its Affiliates’ ownership or
control, direct or indirect, of their Subsidiaries or, following the Effective
Time, the Surviving Corporation or any of its Subsidiaries.

 

(c)           From
the date of this Agreement until the earlier of the Effective Time or the
termination of this Agreement, each party shall promptly notify the other party
of any pending or, to the knowledge of such party, threatened action,
proceeding or investigation by any Governmental Entity or any other Person (i)
challenging or seeking material damages in connection with this Agreement or
the transactions contemplated hereunder or (ii) seeking to restrain or prohibit
the consummation of the Merger or the transactions contemplated hereunder or
otherwise require an Action of Divestiture.

 

Section 8.4.            Further
Assurances.

 

At and following the Closing, each party hereto agrees
to cooperate fully with the other parties and to execute such further
instruments, documents and agreements and to give such further written
assurances, as may be reasonably requested by any other party to better
evidence and reflect the transactions described herein and contemplated hereby
and to carry into effect the intents and purposes of this Agreement.

 

Section 8.5.            Director
and Officer Liability.

 

The Surviving Corporation shall indemnify and hold
harmless the present and former officers, directors, employees and agents of
the Company (collectively, “Company Indemnitees”) in respect of acts and
omissions occurring on or prior to the Effective Time to the extent required by
the Company’s certificate of incorporation and bylaws in effect on the date
hereof or under any indemnification agreement between such Person and the
Company in effect on the date hereof; provided, however,
that none of the Surviving Corporation or its Affiliates shall be required to
indemnify and hold harmless any Company Indemnitee in respect of any claim
brought by a Parent Indemnified Party against the Former Company Stockholders
pursuant to the terms of this Agreement.

 

Section 8.6.            East
Hartford Facility.

 

The Former Company Stockholders shall pay, on a
several basis (but not joint), all reasonable third-party costs, fees and
expenses incurred in connection with obtaining the Environmental Land Use
Restriction at the Company’s East Hartford facility to the extent not already
paid or accrued immediately prior to the Effective Time. Notwithstanding
anything to the contrary in this Section 8.6, payments under this Section 8.6
to be made in respect of any Rollover Shareholder may be satisfied in shares of
capital stock of the Parent, as and to the extent provided in the Rollover
Agreement with such Rollover Shareholder, as the case may be.

 

Section 8.7.            Cooperation
on Tax Matters.

 

Parent, the Company and Former Company Stockholders
will cooperate fully, as and to the extent reasonably requested by the other
party, in connection with any Tax matters relating to 

 

57

 

Company and its Subsidiaries (including by the provision of reasonably
relevant records or information). The party requesting such cooperation will
pay the reasonable out-of-pocket expenses of the other party.

 

ARTICLE IX

 

CONDITIONS TO MERGER

 

Section 9.1.            Conditions
to Each Party’s Obligation to Effect the Merger.

 

The respective obligations of each party to this
Agreement to effect the Merger shall be subject to the satisfaction on or prior
to the Closing Date of the following conditions:

 

(a)           Stockholder
Approval. The Stockholder Approval shall have been obtained in accordance
with DGCL and the Company’s certificate of incorporation and bylaws and shall
be in effect (and shall not have been modified, withdrawn or revoked in any
respect).

 

(b)           Approvals.
All authorizations, consents, orders or approvals of, or declarations or
filings with, or expirations of waiting periods (and any extensions thereof)
imposed by, any Governmental Entity, shall have been filed, occurred or been
obtained (and shall not have been revoked).

 

(c)           No
Injunctions or Restraints; Illegality. No temporary restraining order,
preliminary or permanent injunction or other order or judgment issued by any
court of competent jurisdiction preventing or restricting the consummation of
the Merger shall have been issued; nor shall any suit, action, or other
proceeding by any Governmental Entity have been instituted that seeks an Action
of Divestiture; nor shall there be any action taken, or any statute, law, rule,
regulation or order enacted, entered, enforced or deemed applicable to the
Merger which makes the consummation of the Merger illegal.

 

Section 9.2.            Additional
Conditions to Obligations of Parent.

 

The obligations of Parent and Merger Sub to effect the
Merger are subject to the satisfaction on or prior to the Closing Date of each
of the following conditions, any of which may be waived in writing exclusively
by Parent:

 

(a)           Performance
of Obligations of the Company. The Company shall have performed in all
material respects all obligations required to be performed by it under this
Agreement at or prior to the Closing Date; and Parent shall have received a
certificate signed on behalf of the Company by the chief executive officer of
the Company to such effect.

 

(b)           Representations
and Warranties. The Company’s representations and warranties in this Agreement
must be true and correct in all material respects (except representations
which, as written, are already qualified by materiality, in which case such
representations and warranties shall be true and correct in all respects) as of
the date of this Agreement, and, except to the extent such representations and
warranties speak as of an earlier date (in which case such 

 

58

 

representatives and warranties shall be true and correct as of such
earlier date), as of the Effective Time as if made at the Effective Time and
Parent shall have received a certificate signed on behalf of the Company by the
chief executive officer of the Company to that effect.

 

(c)           Opinion
of Company’s Counsel. Parent shall have received an opinion dated the
Closing Date of Proskauer Rose LLP, counsel to the Company, as to the matters
set forth in the form attached hereto as Exhibit 9.2(c). Such opinion shall, at
the request of Parent, be confirmed to any Person providing financing in
connection with the transactions contemplated hereby.

 

(d)           Escrow
Agreements. Former Company Stockholders’ Agent, the Escrow Agent and the
Company shall have executed and delivered the Escrow Agreement and the Working
Capital Escrow Agreement.

 

(e)           Certificate
of Merger. The Company shall have executed and delivered the Certificate of
Merger.

 

(f)            Financing;
Bond Consent. Parent and Merger Sub shall have obtained, on terms and
conditions reasonably satisfactory to them, replacement financing for the
existing senior secured credit facility of Cellu Tissue Holdings providing for
a revolving line of credit in an amount not less than $35.0 million. Cellu
Tissue Holdings shall have obtained the consent and waiver of at least 95% in
aggregate principal amount of the outstanding Bonds in the Consent Solicitation
and shall have entered into the Supplemental Indenture.

 

(g)           Termination
of Certain Agreements. The agreements listed on Schedule 9.2(g) of the
Disclosure Schedules shall have been terminated in all respects pursuant to
instruments reasonably satisfactory to Parent and without any obligations or
liabilities thereunder on the part of the Company and its Subsidiaries.

 

(h)           Repayment
of Pre-Closing Indebtedness. All Indebtedness listed on Schedule 9.2(h) of
the Disclosure Schedules shall be repayable (without penalty, fee or premium or
other similar cost) in full at the Effective Time and the Company shall have
obtained and delivered, or caused to be obtained and delivered to Parent upon
such repayment, documentation reasonably satisfactory to Parent evidencing such
repayment and the termination of all Liens on any Properties securing such
Indebtedness.

 

(i)            Resignations.
Parent shall have received the written resignations, effective as of the
Effective Time, of each director of the Company and its Subsidiaries, other
than those whom Parent shall have specified in writing at least two Business
Days prior to the Closing Date.

 

(j)            Dissenting
Shares. Holders of no more than 5% of the Company Common Stock shall have exercised
any appraisal or dissenters’ rights pursuant to the DGCL.

 

(k)           FIRPTA
Certificate. The Company shall have delivered to Parent a certification
conforming to the requirements of Treasury Regulations 1.1445-2(c)(3) and
1.897-2(h).

 

(l)            Indemnification
Agreements. Each Former Company Stockholder shall have executed the
indemnification agreement, in the form attached hereto as Exhibit 9.2(l)
(the 

 

59

 

“Former Company Stockholders Indemnification Agreement”), and
each such agreement shall be in full force and effect.

 

(m)          Tax
Matters. The Company and/or its shareholders shall have taken all actions
necessary to provide that no amount paid to any Persons or any other amounts
that will be received from the Company or any of its Subsidiaries (whether in
cash or property or the vesting of property) as a result of the transactions
contemplated by this Agreement or the consummation of the Merger by any
employee, officer, director or independent contractor of the Company will constitute
an “excess parachute payment” (as defined in Section 280G(b)(1) of the Code).

 

(n)           Management
Rollover. Prior to the Effective Time, (i) the shareholders designated on
Schedule 9.2(n) of the Disclosure Schedules as Rollover Shareholders (the “Rollover
Shareholders”) shall have contributed the Rollover Shares to Parent, pursuant
to a Rollover Agreement (which such agreement shall be in full force and
effect), in exchange for Series A Preferred Stock of Parent and (ii) the
Rollover Shareholders, WP Entities and Parent shall have entered into a
stockholders agreement regarding the ownership of the capital stock of Parent
and a registration rights agreement regarding the registration of capital stock
of the Parent, and each such agreement shall be in full force and effect.

 

(o)           Confidentiality
and Non-Solicit. Charter Agent LLC shall have entered into a
confidentiality, non-solicitation and release agreement in substantially the
form attached hereto as Exhibit 9.2(o) (the “Charter Non-Solicit”), and
such agreement shall be in full force and effect.

 

(p)           Other
Agreements. The execution and delivery by all parties other than Parent of
ancillary agreements related to the transactions contemplated hereby listed on
Schedule 9.2(p) of the Disclosure Schedules, each on terms reasonably
satisfactory to Parent.

 

(q)           No
Material Adverse Change. Since February 28, 2006, there will have occurred
no events nor will there exist circumstances which singly or in the aggregate
have resulted in any change, effect, event, occurrence, state of facts or
development that is or could reasonably be expected to (i) be materially
adverse to the business, assets, prospects, liabilities, condition (financial
or otherwise), property or results of operations of the Company and its
Subsidiaries (taken as a whole) or (ii) materially and adversely affect the
ability of the Company to consummate the Merger or prevent or delay
consummation of the Merger. 

 

(r)            Third
Party Approvals. All authorizations, consents, orders or approvals of, or
declarations, or expirations of waiting periods (and any extensions thereof)
imposed by, any third party, set forth on Schedule 9.2(r) of the Disclosure
Schedules, shall have occurred or been obtained (and shall not have been
revoked).

 

(s)           Warrant
Holders. The Company shall have delivered to Parent (i) a written consent
duly executed by each holder of a Company Warrant consenting to the treatment
in the transaction contemplated by this Agreement of the Company Warrants held
by such holder in the manner set forth in Section 3.3(e), and each such consent
shall be in full force and effect, and (ii) a Former Company Stockholders
Indemnification Agreement duly executed by each holder of a Company Warrant,
and each such agreement shall be in full force and effect.

 

60

 

(t)            General.
All corporate and other proceedings of the Company in connection with the
Merger and the other transactions contemplated hereby and all documents
incident thereto shall be reasonably satisfactory in form and substance to
Parent and its counsel, and they shall have received all such counterpart
original and certified or other copies of such documents as they may reasonably
request.

 

Section 9.3.            Additional
Conditions to Obligations of the Company.

 

The obligation of the Company to effect the Merger is
subject to the satisfaction of each of the following conditions, any of which
may be waived, in writing, exclusively by the Company:

 

(a)           Performance
of Obligations of Parent and Merger Sub. Parent and Merger Sub shall have
performed in all material respects all obligations required to be performed by them
under this Agreement at or prior to the Closing Date; and the Company shall
have received a certificate signed on behalf of Parent by the chief executive
officer of Parent to such effect.

 

(b)           Representations
and Warranties. Parent and Merger Sub’s representations and warranties in
this Agreement must be true and correct in all material respects (except
representations which, as written, are already qualified by materiality, in
which case such representations and warranties shall be true and correct in all
respects) as of the date of this Agreement, and, except to the extent such
representations and warranties speak as of an earlier date (in which case such
representatives and warranties shall be true and correct as of such earlier
date), as of the Effective Time as if made at the Effective Time.

 

(c)           Merger
Consideration. Parent shall have wired the Merger Consideration payable at
the Closing (less the Escrow Amount and the Working Capital Escrow Amount and
the portion of the Merger Consideration allocable to the Rollover Shares) to
the Paying Agent, and the Escrow Amount and the Working Capital Escrow Amount
to the Escrow Agent.

 

(d)           Opinion
of Parent’s Counsel. The Company shall have received an opinion dated the
Closing Date of Ropes & Gray LLP, counsel to Parent and Merger Sub, as to
the matters set forth in the form attached hereto as Exhibit 9.3(d).

 

(e)           Certificate
of Merger. Parent and Merger Sub shall have executed and delivered the
Certificate of Merger.

 

(f)            Escrow
Agreements. Parent and the Escrow Agent shall have executed and delivered
the Escrow Agreement and the Working Capital Escrow Agreement.

 

(g)           Certain
Deliverable. The Former Company Stockholders’ Agent shall have received, on
behalf of the Former Company Stockholders, the agreement attached as Exhibit
A to the Letter Agreement, dated as of the date hereof, by and between the
Former Company Stockholders’ Agent and Weston Presidio V (the “Closing
Deliverable Letter Agreement”), and such agreement shall be in full force
and effect in accordance with its terms.

 

(h)           General.
All corporate and other proceedings of Parent and Merger Sub in connection with
the Merger and the other transactions contemplated hereby and all documents 

 

61

 

incident thereto shall be reasonably satisfactory in form and substance
to the Company and its counsel, and they shall have received all such counterpart
original and certified or other copies of such documents as they may reasonably
request.

 

ARTICLE X

 

 TERMINATION AND AMENDMENT

 

Section 10.1.          Termination.

 

This Agreement may be terminated at any time prior to
the Effective Time:

 

(a)           by
mutual written consent of Parent and the Company;

 

(b)           by
either Parent or the Company, by giving written notice to the other party, if
(i) a court of competent jurisdiction or other Governmental Entity shall have
issued a nonappealable final order, decree or ruling having the effect of
permanently restraining, enjoining or otherwise prohibiting the Merger or (ii)
there be any statute, law, rule, regulation or order enacted, enforced or
deemed applicable to the Merger which makes the consummation of the Merger illegal;

 

(c)           by
Parent, by giving written notice to the Company, if the Closing shall not have
occurred on or before August 8, 2006 (or such later date as the parties may
mutually agree) by reason of the failure of any condition precedent under
Section 9.1 or 9.2 (unless the failure results primarily from a breach by
Parent or Merger Sub of any representation, warranty, or covenant of Parent or
Merger Sub contained in this Agreement or Parent’s or Merger Sub’s failure to
fulfill a condition precedent to closing set forth in Section 9.1 or 9.3 or
other default or acts or omissions to act by Parent or Merger Sub that has the
effect of delaying the Closing Date);

 

(d)           by
the Company, by giving written notice to Parent, if the Closing shall not have
occurred on or before August 8, 2006 (or such later date as the parties may
mutually agree) by reason of the failure of any condition precedent under
Section 9.1 or 9.3 (unless the failure results primarily from a breach by the
Company of any representation, warranty, or covenant of the Company contained
in this Agreement or the Company’s failure to fulfill a condition precedent to
closing set forth in Section 9.1 or 9.2 or other default or acts or omissions
to act by the Company that has the effect of delaying the Closing Date);

 

(e)           by
the Company if its Board of Directors has authorized the Company to enter into
a definitive agreement with respect to a Superior Proposal and the Company has
notified Parent in writing that it intends to enter into such an agreement; or

 

(f)            by
the Parent, as contemplated by Section 6.9(a).

 

Section 10.2.          Effect
of Termination. In the event of termination of this Agreement as provided
in Section 10.1, this Agreement shall immediately become void and there
shall be no liability or obligation on the part of Parent, the Company, Merger
Sub or their respective officers, directors, stockholders or Affiliates, except
(i) as set forth in this Section 10.2 and 

 

62

 

Sections 8.2 and 10.3 or (ii) to arising
out of or relating to a willful breach by any such party of any of its
representations, warranties or covenants set forth in this Agreement.

 

Section 10.3.          Fees
and Expenses. Except as set forth in this Section 10.3 and subject to
(i) the provision regarding the Company Transaction Expenses in
Section 3.1 and (ii) as set forth in the Expense Letter, all fees and
expenses incurred in connection with this Agreement and the transactions
contemplated hereby shall be paid by the party incurring such fees and
expenses, whether or not the Merger is consummated (it being understood that if
the transaction is consummated, Company Transaction Expenses not actually paid
prior to the Effective Time will adjust the Merger Consideration in accordance
with Section 3.1).  In addition, Parent and the Company shall share
equally the cost of any filing fees payable under the HSR Act (it being
understood the portion to be so borne by the Company shall be treated as a
Company Transaction Expense).

 

ARTICLE XI

 

INDEMNIFICATION

 

Section 11.1.          Indemnification
of Parent.

 

From and after the Effective Time and subject to the
limitations contained in this Article XI, the Former Company Stockholders
will indemnify, on a several (and not joint) basis, Parent, Merger Sub, the
Surviving Corporation and their respective officers, directors, employees and
Affiliates (collectively, the “Parent Indemnified Parties”) and hold the
Parent Indemnified Parties harmless against any loss, expense, liability or
other damage, including court costs and attorneys’ fees, to the extent of the
actual amount of such loss, expense, liability or other damage (without regard
to the use of any multiplier) (collectively “Damages”) that the Parent
Indemnified Parties have incurred by reason of (i) the inaccuracy or
breach by the Company of any representation or warranty of the Company
contained in this Agreement or in the certificate delivered pursuant to
Section 9.2(a) or 9.2(b) of this Agreement (in each case, as such
representation or warranty would read if all qualifications as to materiality,
including each reference to the defined term “Company Material Adverse Effect,”
were deleted therefrom), and (ii) any of the matters set forth on
Schedule 4.16 of the Company Disclosure Schedules. All such calculations of
Damages shall take into account any offset benefits or insurance proceeds
received in connection with the matter out of which such Damages shall arise
net of any premium increases directly resulting therefrom and shall take into
account any refund, credit or actual reduction in Taxes realized by the Parent
Indemnified Parties as a result of such Damages (including any such Tax benefit
realized in the taxable period in which such Damages were incurred or a taxable
period beginning after the tax period in which such Damages were incurred);
provided, that any benefit referred to above that occurs after the Parent
Indemnified Parties have recovered Damages in accordance with this
Article XI shall be promptly paid to the Former Company Stockholders’
Agent. Each of Parent and Merger Sub shall be deemed to have waived, on behalf
of all Parent Indemnified Parties, any claim for Damages to the extent set
forth in Section 2 of the letter dated as of the date hereof, between the
Company and Parent (Re: Indemnification Matters) (the “Indemnification
Matters Letter”). Notwithstanding anything herein to the contrary,
(a) the Parent Indemnified Parties shall not be entitled to seek
indemnification with respect to any Damages arising under clause (i) above
unless and until the 

 

63

 

aggregate amount
of all Damages suffered by the Parent Indemnified Parties as a result of such
breach(es) exceeds in the aggregate the amount set forth as the Deductible in
Section 11.4 and then the Parent Indemnified Parties shall be entitled to
indemnification only for such aggregate amount that exceeds the Deductible; provided, that the Deductible shall not apply to Damages
incurred by reason of the matters set forth in Section 1 of the Indemnification
Matters Letter; (b) a breach of a representation or warranty shall not be
deemed to have occurred and the Parent Indemnified Parties shall not be deemed
to have incurred any Damages under clauses (i) or (ii) above unless any Damages
arising from such breach or matter set forth on Schedule 4.16 of the Company
Disclosure Schedules, as the case may be, exceeds (together with all other
claims so substantially related as to effectively constitute one claim)
$100,000; provided, that such $100,000 threshold shall not apply to Damages
incurred by reason of the matters set forth in Section 1 of the Indemnification
Matters Letter; (c) the aggregate amount of all payments to which the Parent
Indemnified Parties shall be entitled to receive in satisfaction of claims for
indemnification pursuant to this Section 11.1 or Section 8.6 shall in no event
exceed the amount set forth in Section 11.4 as the Cap; (d) the Parent
Indemnified Parties shall not be entitled to seek indemnification for Damages
to the extent that the items giving rise to such Damages had been accounted for
in any of the adjustments to the Merger Consideration pursuant to Sections
3.3(f), (g) and (h); (e) the Parent Indemnified Parties shall not be entitled
to seek indemnification with respect to any Damages arising under clause (ii)
above unless and until (A) the aggregate amount of all Damages suffered by the
Parent Indemnified Parties under clause (ii) above exceeds in the aggregate the
amount set forth as the Schedule 4.16 Matters Deductible in Section 11.4 and
(B) the aggregate amount of all Damages suffered by Parent Indemnified Parties
under clauses (i) and (ii) above exceeds in the aggregate the sum of the amount
set forth as the Schedule 4.16 Matters Deductible and the amount set forth as
the Deductible in Section 11.4, and, then the Parent Indemnified Parties shall
be entitled to indemnification only for such aggregate amount that exceeds the
sum of the Schedule 4.16 Matters Deductible and the Deductible; and (f) the
Parent Indemnified Parties shall not be deemed to have incurred any Damages
under clauses (i) or (ii) above with respect to any of the matters set forth on
Schedule 11.1 attached hereto.  In no event shall the Former
Company Stockholders be liable for any punitive, special or exemplary damages
except to the extent actually payable by a Parent Indemnified Party to a third
party.

 

Section 11.2.          Indemnification
of Former Company Stockholders.

 

From and after the Effective Time and subject to the
limitations contained in this Article XI, Parent will indemnify the Former
Company Stockholders and their respective officers, directors, employees and
Affiliates (collectively, the “Stockholders Indemnified Parties”) and
hold the Stockholders Indemnified Parties harmless against any Damages that the
Stockholders Indemnified Parties have incurred by reason of the inaccuracy or
breach by Parent or Merger Sub of any representation or warranty of Parent or
Merger Sub contained in this Agreement, (all such calculations of Damages shall
take into account any offset benefits or insurance proceeds received in
connection with the matter out of which such Damages shall arise and shall take
into account any tax benefits that the Stockholders Indemnified Parties may
receive in connection therewith).   Each Former Company Stockholder
shall be deemed to have waived, on behalf of all Stockholders Indemnified
Parties, any claim for Damages to the extent set forth in Section 3 of the
Indemnification Matters Letter. Notwithstanding anything herein to the
contrary, (i) the Stockholders Indemnified Parties shall not be entitled
to seek 

 

64

 

indemnification
with respect to any Damages unless and until the aggregate amount of all
Damages suffered by the Stockholders Indemnified Parties as a result of such
breach(es) exceeds in the aggregate the amount set forth as the Deductible in
Section 11.4, and then the Stockholders Indemnified Parties shall be
entitled to indemnification only for such aggregate amount that exceeds the
Deductible; and (ii) the aggregate amount of all payments to which the
Stockholders Indemnified Parties shall be entitled to receive in satisfaction
of claims for indemnification pursuant to this Section 11.2 shall in no
event exceed the amount set forth in Section 11.4 as the Cap.  In no
event shall Parent, Merger Sub or the Surviving Corporation be liable for any
punitive, special, consequential, exemplary or incidental damages except to the
extent actually payable by a Stockholders Indemnified Party to a third party.

 

Section 11.3.          Exclusive
Remedies.

 

Subject to the final sentence of this Section 11.3,
the parties agree that notwithstanding anything to the contrary set forth in
this Agreement or otherwise, from and after the Effective Time, the indemnification
provisions of this Article XI are the sole and exclusive remedies of the
parties pursuant to this Agreement or in connection with the transactions
contemplated hereby. From and after the Effective Time, to the maximum extent
permitted by law, but subject to the final sentence of this Section 11.3, the
parties hereby waive all other rights, claims, remedies or actions with respect
to any matter in any way relating to this Agreement or arising in connection
herewith, whether under any foreign, federal, state, provincial or local laws,
statutes, ordinances, rules, regulations, requirements or orders at common law
or otherwise. Except as provided in this Article XI, subject to the final
sentence of this Section 11.3, from and after the Effective Time, no right,
claim, remedy or action shall be brought or maintained by any party, and no
recourse shall be brought or granted against any of them, by virtue of or based
upon any alleged misstatement or omission respecting an inaccuracy in or breach
of any of the representations, warranties or covenants of any of the parties
thereto set forth or contained in this Agreement. All obligations of the Former
Company Stockholders pursuant to the terms of this Article XI shall be
satisfied first by payment from the Escrow Amount. Notwithstanding anything to
the contrary in this Section 11.3 or otherwise in this Agreement, (i) from and
after the Effective Time, a claim may be brought based upon a breach of the
covenants set forth in Sections 3.3(f), 3.3(g), 3.3(h), 3.3(i), 8.5, 8.6 or
8.7, or in any Transaction Document (other than this Agreement), the Former
Company Stockholders Indemnification Agreement or the Charter Non-Solicit, and
(ii) a claim based upon fraud or intentional misrepresentation may be brought,
without regard to any of the limitations set forth in this Agreement (including
without regard to any time or monetary limitations or any limitation on
remedies), against any Person or Persons (or, in the case of the Company, the
Former Company Stockholders) accused of committing such fraud or intentional
misrepresentation.

 

Section 11.4.          Deductible
and Cap.

 

Notwithstanding anything contained herein or in the
Merger Agreement to the contrary, neither the Parent nor the Former Company
Stockholders shall have any liability under this Article XI unless and
until the aggregate Damages for which indemnity by such party would otherwise
be due under Article XI exceeds $1,890,000 (the “Deductible”), in
which case such indemnifying party shall only be responsible for the excess Damages;
provided, that: (a) the Deductible shall not apply to Damages incurred
by reason of the matters set forth in Section 1 of 

 

65

 

the
Indemnification Matters Letter; (b) that a breach shall not be deemed to have
occurred and the Parent Indemnified Parties shall not be deemed to have
incurred any Damages under clauses (i) or (ii) of Section 11.1 unless any
Damages arising from such breach or matter set forth on Schedule 4.16 of the
Company Disclosure Schedules, as the case may be, exceeds (together with all
other claims for Damages so substantially related as to effectively constitute
one claim) $100,000; provided, that such $100,000 threshold shall not apply to
Damages incurred by reason of the matters set forth in Section 1 of the
Indemnification Matters Letter; (c) that the Former Company Stockholders shall
not have any liability with respect to any Damages arising under clause (ii) of
Section 11.1 unless and until (A) the aggregate amount of all Damages suffered
by the Parent Indemnified Parties under clause (ii) of Section 11.1 exceeds in
the aggregate $1,250,000 (the “Schedule 4.16 Matters Deductible”), and
(B) the aggregate amount of all Damages suffered by Parent Indemnified Parties
under clauses (i) and (ii) of Section 11.1 exceeds in the aggregate the sum of
the amount set forth as the Schedule 4.16 Matters Deductible and the amount set
forth as the Deductible in this Section 11.4, then the Parent Indemnified
Parties shall be entitled to indemnification only for such aggregate amount
that exceeds the sum of the Schedule 4.16 Matters Deductible and the Deductible.
Notwithstanding anything contained herein to the contrary, the maximum
aggregate liability of Parent, Merger Sub, the Surviving Corporation or the
Former Company Stockholders, as the case may be, under this Article XI or
Section 8.6 shall not exceed $17,120,000 (the “Cap”).

 

Section 11.5.          Survival
of Indemnification Obligations.

 

The indemnification obligations set forth in this
Article XI shall terminate upon the 547th day following the Closing
Date. Notwithstanding the preceding sentence, (i) indemnification obligations
with respect to Damages incurred by reason of the matters set forth in Section
1 of the Indemnification Matters Letter shall terminate as set forth in the
Indemnification Matters Letter; and (ii) indemnification obligations set forth
in this Article XI shall survive the time at which they would otherwise
terminate pursuant to this Section 11.5, if notice of (x) the inaccuracy or
breach thereof giving rise to such obligations, (y) the aggregate amount of
such Damages or an estimate thereof, in each case to the extent known or
determinable at such time, and (z) reasonable detail of the individual items of
such Damages included in the amount so stated and the date, if known, each such
item arose shall have been given to the party against whom such indemnity may
be sought prior to such time; and (iii) indemnification obligations with
respect to Damages arising from fraud or intentional misrepresentation will
survive indefinitely.

 

Section 11.6.          Terms
and Conditions of Indemnification; Resolution of Conflicts.

 

(a)           Any
party seeking indemnification for any third-party claim must give the other
party prompt notice of the claim for Damages (i) stating the aggregate amount
of the Damages or an estimate thereof, in each case to the extent known or
determinable at such time, and (ii) specifying in reasonable detail the
individual items of such Damages included in the amount so stated, the date
each such item was paid or properly accrued or arose, and the nature of the
misrepresentation, breach or claim to which such item is related; provided, however, that the failure to give such notice
shall not relieve the indemnifying party from any obligation hereunder except
where, and then solely to the extent that, such failure actually and materially
prejudices the rights of the indemnifying party.

 

66

 

(b)           The
respective obligations and liabilities of the parties to indemnify pursuant to
this Article XI in respect of any Damages arising from a claim by a third party
shall be subject to the following additional terms and conditions:

 

(i)            The
indemnifying party shall have the right to undertake, by counsel or other
representatives of its own choosing reasonably satisfactory to the indemnified
party, the defense, compromise, and settlement of such claim.

 

(ii)           In
the event that the indemnifying party shall elect not to undertake such
defense, or within thirty (30) days after notice of any such claim from the
indemnified party shall fail to defend, the indemnified party (upon further
written notice to the indemnifying party) shall have the right to undertake the
defense, compromise or settlement of such claim, by counsel or other
representatives of its own choosing, on behalf of and for the account and risk
of the indemnifying party.

 

(iii)          Notwithstanding
anything in this Section 11.6 to the contrary, if there is a reasonable
probability that a claim may materially and adversely affect the indemnified
party other than as a result of money damages or other money payments, the
indemnified party shall have the right, at its own cost and expense, to
participate in the defense, compromise or settlement of the claim. The
indemnifying party shall not, without the indemnified party’s written consent,
settle or compromise any claim or consent to entry of any judgment which does
not include as an unconditional term thereof the giving by the claiming party
or the plaintiff to the indemnified party of a release from all liability in
respect of such claim. In the event that the indemnifying party undertakes
defense of any claim, the indemnified party by counsel or other representative
of its own choosing and at its sole cost and expense, shall have the right to
consult with the indemnifying party and its counsel or other representatives
concerning such claim and the indemnifying party and the indemnified party and
their respective counsel or other representatives shall cooperate with respect
to such claim, subject to the execution and delivery of a mutually satisfactory
joint defense agreement; provided, however,
that if representation of both the indemnifying party and the indemnified party
by the same counsel would create a conflict of interest, the reasonable costs
and expenses of any separate counsel retained by the indemnified party shall be
paid by the indemnifying party.

 

(c)           If
the Former Company Stockholders’ Agent or the Parent shall object in writing to
any claim or claims by a Parent Indemnified Party or Stockholders Indemnified
Party, as the case may be, the Parent or Former Company Stockholders’ Agent, as
the case may be, shall have thirty (30) days from the receipt of such objection
to respond in a written statement to the objection. If after such thirty (30)
day period there remains a dispute as to any claims, the Former Company
Stockholders’ Agent and the Parent shall attempt in good faith for thirty (30)
days to agree upon the rights of the respective parties with respect to each of
such claims.

 

(d)           If
no such agreement can be reached after good faith negotiation, either the Parent
or the Former Company Stockholders’ Agent may, by written notice to the other,
demand arbitration of the matter unless the amount of the damage or loss at
issue is in pending litigation with a third party, in which event arbitration
shall not be commenced until such amount is ascertained or both parties agree
to arbitration; and in either such event the matter shall be settled by
arbitration conducted by three arbitrators. Within fifteen (15) days after such
written notice is 

 

67

 

sent, the Parent (on the one hand) and the Former Company Stockholders’
Agent (on the other hand) shall each select one arbitrator, and the two
arbitrators so selected shall select a third arbitrator. The decision of the
arbitrators as to the validity and amount of any made claim shall be solely
decided in accordance with the provisions of this Article XI and shall be
binding and conclusive upon the parties to this Agreement.

 

(e)           Judgment
upon any award rendered by the arbitrators may be entered in any court having
jurisdiction. Any such arbitration shall be held in New York, New York under
the commercial rules then in effect of the American Arbitration Association. The
non-prevailing party to an arbitration shall pay its own expenses, the fees of
each arbitrator, the administrative fee of the American Arbitration
Association, and the expenses, including, without limitation, the reasonable
attorneys’ fees and costs, incurred by the prevailing party to the arbitration.

 

Section 11.7.          Former
Company Stockholders’ Agent.

 

(a)           In
the event that the Merger is approved by the stockholders of the Company,
effective upon such vote, and without further act of any stockholder of the
Company, Charter Agent LLC shall be appointed as agent and attorney-in-fact
(the “Former Company Stockholders’ Agent”) for each Optionholder,
Warrantholder and stockholder of the Company (except such stockholders of the
Company, if any, as shall have perfected their appraisal or dissenters’ rights
under the DGCL). The Former Company Stockholders’ Agent shall have the
authority to act for and on behalf of the Former Company Stockholders, including,
without limitation, to give and receive notices and communications, to act on
behalf of the Former Company Stockholders with respect to any matters arising
under this Agreement or the other Transaction Documents, to authorize delivery
to the Parent of any funds and property in its possession or in the Escrow
Amount or the Working Capital Escrow Amount in satisfaction of claims by Parent
Indemnified Parties, to object to such deliveries, to agree to, negotiate,
enter into settlements and compromises of, and commence, prosecute, participate
in, settle, dismiss or otherwise terminate, as applicable, lawsuits and claims,
mediation and arbitration proceedings, and to comply with orders of courts and
awards of courts, mediators and arbitrators with respect to such suits, claims
or proceedings, and to take all actions necessary or appropriate in the
judgment of the Former Company Stockholders’ Agent for the accomplishment of
the foregoing. The Former Company Stockholders’ Agent shall for all purposes be
deemed the sole authorized agent of the Former Company Stockholders until such
time as the agency is terminated. Such agency may be changed by the Former
Company Stockholders from time to time upon not less than 30 days prior written
notice to the Parent; provided, however,
that the Former Company Stockholders’ Agent may not be removed unless holders
of a two-thirds interest in the Merger Consideration agree to such removal and
to the identity of the substituted Former Company Stockholders’ Agent. Any
vacancy in the position of Former Company Stockholders’ Agent may be filled by
approval of the holders of a majority in interest of the Merger Consideration. No
bond shall be required of the Former Company Stockholders’ Agent, and the
Former Company Stockholders’ Agent shall not receive compensation for its
services. Notices or communications to or from the Former Company Stockholders’
Agent shall constitute notice to or from each of the Former Company
Stockholders during the term of the agency.

 

(b)           The
Former Company Stockholders’ Agent shall not incur any liability with respect
to any action taken or suffered by it or omitted hereunder as Former Company 

 

68

 

Stockholders’ Agent while acting in its capacity as Former Company
Stockholders’ Agent. The Former Company Stockholders’ Agent may, in all
questions arising hereunder, rely on the advice of counsel and other
professionals and for anything done, omitted or suffered by the Former Company
Stockholders’ Agent shall not be liable to anyone while acting as Former
Company Stockholders’ Agent. The Former Company Stockholders’ Agent undertakes
to perform such duties and only such duties as are specifically set forth in
this Agreement and no other covenants or obligations shall be implied under
this Agreement against the Former Company Stockholders’ Agent; provided, however, that the foregoing shall not act as a
limitation on the powers of the Former Company Stockholders’ Agent determined
by it to be reasonably necessary to carry out the purposes of its obligations. The
Former Company Stockholders shall indemnify the Former Company Stockholders’
Agent and hold it harmless against any loss, liability or expense incurred on
the part of the Former Company Stockholders’ Agent and arising out of or in
connection with the acceptance or administration of their duties hereunder
under this Agreement. The Former Company Stockholders’ Agent shall be entitled
to satisfy any such loss, liability and expense from the proceeds of the
Working Capital Escrow Amount and/or the Escrow Amount to the extent received
by the Former Company Stockholders’ Agent for distribution to the Former
Company Stockholders on a pro rata basis.

 

(c)           The
Former Company Stockholders’ Agent shall have reasonable access to information
about the Company and Parent and the reasonable assistance of the Surviving
Corporation’s and Parent’s officers and employees for purposes of performing
its duties and exercising its rights hereunder, provided that the Former
Company Stockholders’ Agent shall treat confidentially and not disclose any
nonpublic information from or about the Surviving Corporation or Parent to
anyone (except on a need to know basis to individuals who agree to treat such
information confidentially) and will execute a confidentiality agreement to
that effect upon request.

 

(d)           A
decision, act, consent or instruction of the Former Company Stockholders’ Agent
shall constitute a decision, act, consent or instruction of all of the Former
Company Stockholders and shall be final, binding and conclusive upon each such
Former Company Stockholder. Parent and the Surviving Corporation may rely upon
any such decision, act, consent or instruction of the Former Company
Stockholders’ Agent as being the decision, act, consent or instruction of every
such Former Company Stockholder.

 

ARTICLE XII

 

MISCELLANEOUS

 

Section 12.1.          Survival
of Representations and Covenants.

 

Subject to Section 11.5 hereof, all representations
and warranties of the Company contained in this Agreement, the Company
Disclosure Schedules or in the certificate delivered pursuant to Section 9.2(a)
or 9.2(b) of this Agreement shall survive Closing until the 547th day following
the Closing Date. All representations and warranties of Parent contained in
this Agreement shall survive Closing until the 547th day following the Closing
Date. All covenants and agreements set forth in this Agreement that are to be
performed following the Closing Date 

 

69

 

shall survive the
Closing and continue in full force and effect until such covenants and
agreements are performed in accordance with the terms of this Agreement.

 

Section 12.2.          Notices.

 

All notices and other communications hereunder shall
be in writing and shall be deemed given if delivered personally, telecopied
(which is confirmed) or two Business Days after being mailed by registered or
certified mail (return receipt requested) to the parties at the following
addresses (or at such other address for a party as shall be specified by like
notice):

 

(a)if to Parent, Merger Sub or the Surviving Corporation:

 

c/o Weston Presidio V, L.P.

Pier 1, Bay 2

San Francisco, CA 94111

Attention: R. Sean Honey and Therese Mrozek

Fax No: 
(415) 398-0990

Tel. No: 
(415) 398-0770

 

with a copy to:

 

Ropes & Gray L.L.P.

One International Place

Boston, Massachusetts 02110

Attention: David C. Chapin, Esq. and Shari
Wolkon, Esq.

Fax No: 
(617) 951-7050

Tel. No: 
(617) 951-7371

Tel. No.: 
(617) 951-7861

 

(b)if to the Company, prior to the Closing, to:

 

Cellu Paper Holdings, Inc.

3440 Francis Road

Suite C

Alpharetta, Georgia 30004

Attention: 
Russell C. Taylor

Fax No: 
(678) 393-2657

Tel. No: 
(678) 393-2148

 

with a copy to:

 

Proskauer Rose LLP

1585 Broadway

New York, New York 10036

Attention:  Stephen W. Rubin, Esq.

Fax No: 
212-969-2900

Tel. No: 
212-969-3000

 

70

 

(c) if to the Former Company Stockholders’ Agent, to:

 

Charter Agent LLC

c/o Charterhouse Group, Inc.

535 Madison Avenue

New York, New York 10022

Attention: 
William Landuyt

Fax No: 
212-750-9704

Tel. No: 
212-584-3216

 

with a copy to:

 

Proskauer Rose LLP

1585 Broadway

New York, New York 10036

Attention:  Stephen W. Rubin, Esq.

Fax No: 
212-969-2900

Tel. No: 
212-969-3000

 

Section 12.3.          Interpretation.

 

When a reference is made in this Agreement to
sections, such reference shall be to a section of this Agreement unless
otherwise indicated. The table of contents and headings contained in this
Agreement are for reference purposes only and shall not affect in any way the
meaning or interpretation of this Agreement. Whenever the words “include,” “includes”
or “including” are used in this Agreement they shall be deemed to be followed
by the words “without limitation.” 
Whenever the words “to the knowledge of the Company” or “known to the
Company” or similar phrases are used in this Agreement, they mean the actual
knowledge, assuming the knowledge that would be obtained after reasonable
inquiry of Russell Taylor, Diane Scheu, Hugo Vivero, Thomas Moore, Kevin French,
Steve Ziessler and Steve Simeone.

 

Section 12.4.          Counterparts.

 

This Agreement may be executed in two or more
counterparts, all of which shall be considered one and the same agreement and
shall become effective when two or more counterparts have been signed by each
of the parties and delivered to the other parties, it being understood that all
parties need not sign the same counterpart.

 

Section 12.5.          Entire
Agreement; No Third-Party Beneficiaries.

 

This Agreement (including the documents and the
instruments referred to herein), the Confidentiality Agreement, the other
Transaction Documents, the Former Company Stockholders Indemnification
Agreement, the Rollover Agreements, the Charter Non-Solicit, the Closing
Deliverable Letter Agreement and the Expense Letter (a) constitute the
entire agreement and supersedes all prior agreements and understandings, both
written and oral, among the parties with respect to the subject matter hereof,
and (b) are not intended to confer upon any Person 

 

71

 

other than the
parties hereto any rights or remedies hereunder.  Notwithstanding the
foregoing, (i) the Former Company Stockholders shall be deemed to be
third-party beneficiaries of this Agreement with respect to Articles III and
XI; and (ii) from and after the Effective Time, the former directors and
officers of the Company shall be deemed to be third-party beneficiaries of this
Agreement with respect to Section 8.5.

 

Section 12.6.          Governing
Law.

 

With respect to matters of corporate law, this
Agreement shall be governed and construed in accordance with the DGCL. With
respect to all other matters this Agreement shall be governed and construed in
accordance with the laws of the State of New York without regard to any
applicable conflicts of law.

 

Section 12.7.          Assignment.

 

Neither this Agreement nor any of the rights,
interests or obligations hereunder shall be assigned by any of the parties
hereto (whether by operation of law or otherwise) without the prior written consent
of the other parties, except that Parent or Merger Sub may assign its rights
hereunder (a) to one or more of its affiliates or lenders or (b) following the
Effective Time, to a purchaser of the Surviving Corporation or the business of
the Surviving Corporation. Subject to the preceding sentence, this Agreement
will be binding upon, inure to the benefit of and be enforceable by the parties
and their respective successors and assigns.

 

Section 12.8.          Amendment.

 

This Agreement may be amended by the parties hereto,
at any time before or after approval of matters presented in connection with
the Merger by the stockholders of the Company, but after any such stockholder
approval, no amendment shall be made which by law requires the further approval
of stockholders without obtaining such further approval. This Agreement may not
be amended except by an instrument in writing signed on behalf of each of the
parties hereto.

 

Section 12.9.          Extension;
Waiver.

 

At any time prior to the Effective Time, the parties
hereto may, to the extent legally allowed, (a) extend the time for the
performance of any of the obligations or the other acts of the other parties
hereto, (b) waive any inaccuracies in the representations or warranties
contained herein or in any document delivered pursuant hereto and (c) waive
compliance with any of the agreements or conditions contained herein. Any
agreement on the part of a party hereto to any such extension or waiver shall
be valid only if set forth in a written instrument signed on behalf of such
party. Any such waiver by a party of a condition to closing of this Agreement
shall also operate as a waiver and release of any corresponding covenant or
agreement relating to the same subject matter set forth in Articles VI through
VIII of this Agreement. No waiver of any provision of this Agreement (a) shall,
except as set forth in the immediately preceding sentence, be deemed to or
shall constitute a waiver of any other provision hereof (whether or not
similar) or (b) shall constitute a continuing waiver unless otherwise expressly
provided therein. No delay or omission on the part of any party in exercising
any right, power or remedy under this Agreement will operate as a waiver
thereof.

 

72

 

Section 12.10.        Severability.

 

If any provision of this Agreement is held to be
illegal, invalid or unenforceable under any present or future law or
regulation, and if the rights or obligations of any party hereto under this
Agreement will not be materially and adversely affected thereby, (a) such
provision will be fully severable, (b) this Agreement will be construed and
enforced as if such illegal, invalid or unenforceable provision had never
comprised a part hereof, (c) the remaining provisions of this Agreement will
remain in full force and effect and will not be affected by the illegal,
invalid or unenforceable provision or by its severance from this Agreement and
(d) in lieu of such illegal, invalid or unenforceable provision, there will be
added automatically as a part of this Agreement a legal, valid and enforceable
provision as similar in terms to such illegal, invalid or unenforceable
provision as may be possible.

 

Section 12.11.        Jurisdiction;
Venue; Service of Process.

 

(a)           Jurisdiction.
Each party, by its execution hereby, (a) hereby irrevocably submits to the
exclusive jurisdiction of the state courts of the State of New York or the
United States District Court located in the Southern District of the State of
New York for the purpose of any action, suit, claim or litigation (each an “Action”)
between the parties arising in whole or in part under or in connection with
this Agreement, (b) hereby waives to the extent not prohibited by applicable
Law, and agrees not to assert, by way of motion, as a defense or otherwise, in
any such Action, any claim that it is not subject personally to the
jurisdiction of the above-named courts, that its property is exempt or immune
from attachment or execution, that any such Action brought in one of the
above-named courts should be dismissed on grounds of forum non
conveniens, should be transferred or removed to any court other than
one of the above-named courts, or should be stayed by reason of the pendency of
some other proceeding in any other court other than one of the above-named
courts, or that this Agreement or the subject matter hereof may not be enforced
in or by such court and (c) hereby agrees not to commence any such Action other
than before one of the above-named courts. Notwithstanding the previous
sentence a party may commence any Action in a court other than the above-named
courts solely for the purpose of enforcing an order or judgment issued by one
of the above-named courts.

 

(b)           Venue.
Each party agrees that for any Action between the parties arising in whole or
in part under or in connection with this Agreement, such party bring Actions
only in the Borough of Manhattan. Each party further waives any claim and will
not assert that venue should properly lie in any other location within the
selected jurisdiction.

 

(c)           Service
of Process. Each party hereby (a) consents to service of process in any
Action between the parties arising in whole or in part under or in connection
with this Agreement in any manner permitted by New York law, (b) agrees that
service of process made in accordance with clause (a) or made by registered or
certified mail, return receipt requested, at its address specified pursuant to
Section 12.2, will constitute good and valid service of process in any such
Action and (c) waives and agrees not to assert (by way of motion, as a defense,
or otherwise) in any such Action any claim that service of process made in
accordance with clause (a) or (b) does not constitute good and valid service of
process.

 

73

 

Section 12.12.        Waiver
of Jury Trial.

 

TO THE EXTENT NOT PROHIBITED BY APPLICABLE LAW WHICH
CANNOT BE WAIVED, EACH OF THE PARTIES HERETO HEREBY WAIVES, AND COVENANTS THAT
IT SHALL NOT ASSERT (WHETHER AS PLAINTIFF, DEFENDANT OR OTHERWISE) ANY RIGHT TO
TRIAL BY JURY IN ANY FORUM IN RESPECT OF ANY ISSUE OR ACTION, CLAIM, CAUSE OF
ACTION OR SUIT (IN CONTRACT, TORT OR OTHERWISE), INQUIRY, PROCEEDING OR
INVESTIGATION ARISING OUT OF OR BASED UPON THIS AGREEMENT OR THE SUBJECT MATTER
HEREOF OR IN ANY WAY CONNECTED WITH OR RELATED OR INCIDENTAL TO THE
TRANSACTIONS CONTEMPLATED HEREBY, IN EACH CASE WHETHER NOW EXISTING OR
HEREAFTER ARISING. ANY PARTY HERETO MAY FILE AN ORIGINAL COUNTERPART OR A COPY
OF THIS SECTION 12.12 WITH ANY COURT AS WRITTEN EVIDENCE OF THE CONSENT OF EACH
SUCH PARTY TO THE WAIVER OF ITS RIGHT TO TRIAL BY JURY.

 

[Signature Page Follows]

 

74

 

IN
WITNESS WHEREOF, the parties shall have caused this Agreement and Plan of
Merger to be signed by their respective officers thereunto duly authorized as
of the date first written above.

 

	
   

  	
  CELLU PARENT CORPORATION

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ R. Sean Honey

  	
   

  
	
   

  	
  Name:

  	
  R. Sean Honey

  	
   

  
	
   

  	
  Title:

  	
  President

  	
   

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  CELLU ACQUISITION CORPORATION

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ R. Sean Honey

  	
   

  
	
   

  	
  Name:

  	
  R. Sean Honey

  	
   

  
	
   

  	
  Title:

  	
  President

  	
   

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  CELLU PAPER HOLDINGS, INC.

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ Russell C. Taylor

  	
   

  
	
   

  	
  Name: 

  	
  Russell C. Taylor

  
	
   

  	
  Title: 

  	
  CEO/President

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  Former Company Stockholders Agent

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  /s/ William Landuyt

  	
   

  
	
   

  	
  Charter Agent LLC, solely to accept the role

  of Former Company Stockholders’ Agent

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