Document:

Exhibit 10.1

AGREEMENT

AGREEMENT (this “Agreement”) made and entered
into by and between Cellu Tissue Holdings, Inc., a Delaware corporation
(the “Company”), and Mr. Russell Taylor (the “Executive”),
effective as of the Closing Date as defined in the Agreement and Plan of
Merger, dated May 8, 2006, (the “Merger Agreement”) by and among
Cellu Parent Corporation, a Delaware corporation (“Cellu Parent”), Cellu
Acquisition Corporation, a Delaware corporation and a wholly owned subsidiary
of Cellu Parent Corporation (“Cellu Acquisition”), and Cellu Paper
Holdings, Inc., a Delaware corporation (“Cellu Paper”), and which
is hereafter referred to as the “Effective Date.

WHEREAS, the Company is a wholly owned subsidiary of
Cellu Paper; and Cellu Acquisition is a wholly owned subsidiary of Cellu
Parent;

WHEREAS, the Merger Agreement contemplates that Cellu
Acquisition will merge with and into Cellu Paper, with Cellu Paper as the
surviving entity (the “Merger”);

WHEREAS, the operations of the Company and its
Affiliates are a complex matter requiring direction and leadership in a variety
of areas, including financial, strategic planning, regulatory, community
relations and others;

WHEREAS, the Executive is possessed of certain
experience and expertise that qualify the Executive to provide the direction
and leadership required by the Company and its Affiliates;

WHEREAS, prior to the closing under the Merger
Agreement, the Executive was employed by the Company as its President and Chief
Executive Officer; and

WHEREAS, subject to the terms and conditions
hereinafter set forth, the Company wishes to continue to employ the Executive
as its President and Chief Executive Officer and the Executive wishes to accept
such continued employment, effective as of the Closing;

NOW, THEREFORE, in consideration of the foregoing
premises and the mutual promises, terms, provisions and conditions set forth in
this Agreement, the parties hereby agree:

1              Employment.
Subject to the terms and conditions set forth in this Agreement, the Company
hereby offers and the Executive hereby accepts employment.

2.             Term.
Subject to earlier termination as hereinafter provided, the Executive’s
employment hereunder shall be for a term of four (4) years, commencing on
the Effective Date, and shall be automatically extended thereafter for
successive terms of one year each, unless either party provides notice to the
other at least sixty (60) days prior to the expiration of the original or any
extension term that the Agreement is not to be extended. The term of this Agreement,
as from time to time extended or renewed, is hereafter referred to as “the
term of this Agreement” or “the term hereof.”   Notwithstanding anything in this Agreement
to the contrary, this Agreement shall be null, void and without effect upon
termination of the Merger Agreement prior to consummation of the Merger.

 

3.             Capacity
and Performance.

(a)           Subject
to earlier termination as hereinafter provided, during the term of this
Agreement, the Executive shall serve the Company as its President and Chief
Executive Officer, reporting to the Board of Directors of the Company (the “Board”).
In addition, and without further compensation, the Executive shall serve as a
member of the Board during the term hereof. In addition, during the term
hereof, and without further compensation, the Executive shall serve as a
director and/or officer of one or more of the Company’s Affiliates (as defined
below) if so elected or appointed from time to time.

(b)           During
the term hereof, the Executive shall be employed by the Company on a full-time
basis and shall perform such duties and responsibilities on behalf of the
Company and its Affiliates consistent with the Executive’s position with the
Company as may be designated from time to time by the Board or by its designees.
In addition, all senior executives of the Company shall report to the
Executive, unless the Executive chooses an alternate reporting relationship for
any such senior executive.

(c)           During
the term of the Executive’s employment, the Executive shall devote the Executive’s
full business time and the Executive’s best efforts, business judgment, skill
and knowledge exclusively to the advancement of the business and interests of
the Company and its Affiliates and to the discharge of the Executive’s duties
and responsibilities hereunder. The Executive shall not engage in any other
business activity or serve in any industry, trade, professional, governmental
or academic position during the term of this Agreement, except as may be
expressly approved in advance by the Board in writing.

4.             Compensation
and Benefits. As compensation for all services performed by the Executive
under and during the term hereof and subject to performance of the Executive’s
duties and of the obligations of the Executive to the Company and its Affiliates,
pursuant to this Agreement or otherwise:

(a)           Base
Salary. During the term hereof, the Company shall pay the Executive a base
salary at the rate of Four Hundred Seventy-Five Thousand Dollars ($475,000) per
annum, payable in accordance with the normal payroll practices of the Company
for its executives and subject to increase (but not decrease) from time to time
by the Board, in its discretion. The Board will review the Executive’s base
salary each year. Such base salary, as from time to time increased, is
hereafter referred to as the “Base Salary”.

(b)           Annual
Bonus Compensation.

(i)            During the term hereof and beginning
with the first fiscal year after the Closing Date, Executive shall be eligible
to receive an annual bonus of 100% of Base Salary (the “Target Bonus”),
subject to the achievement of an EBITDA target set by the Chairman of the Board
(after consultation with the Executive), approved by the Board and subject to
the terms and conditions of any applicable annual incentive program in

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effect from time to time (the “Incentive
Plan”). The amount of any bonus awarded (whether more than or less than the
Target Bonus) shall be determined by the Board, based upon the achievement of
the EBITDA target, after the completion of the Company’s annual audit and the
Board’s review thereof, and shall further be subject to the terms of the
Incentive Plan as in effect from time to time. Except as otherwise expressly
provided under this Agreement or under the terms of the Incentive Plan as in
effect from time to time, the Executive shall not be entitled to earn bonus
compensation for any period of service less than a full year, except as set
forth in Sections 5(a), 5(b), 5(d), 5(e), 5(g) and 5(h).

(ii)           Any bonus due hereunder shall be
payable not later than two and one half months following the fiscal year for
which the bonus was earned or as soon as is practicable within the meaning of Section 409A
of the Internal Revenue Code of 1986, as amended, (“Section 409A”).

(c)           Equity
Arrangements. On the Effective Date, the Company will make a grant of
restricted stock to the Executive under the Company’s Stock Option and
Restricted Stock Plan (the “Plan”). The terms and conditions of such
restricted stock grant shall be subject to the terms of the Plan and the
Restricted Stock Award Agreement in the form attached hereto as Exhibit A.

(d)           Vacations.
During the term hereof, the Executive shall be entitled to four (4) weeks
of vacation per annum, to be taken at such times and intervals as shall be
determined by the Executive, subject to the reasonable business needs of the
Company.

(e)           Other
Benefits. During the term hereof and subject to any contribution therefor
generally required of employees of the Company, the Executive shall be entitled
to participate in any and all employee benefit plans from time to time in
effect for employees of the Company generally, except to the extent such plans
are in a category of benefit otherwise provided to the Executive. Such
participation shall be subject to (i) the terms of the applicable plan
documents, (ii) generally applicable Company policies and (iii) the
discretion of the Board or any administrative or other committee provided for
in or contemplated by such plan. The Company may alter, modify, add to or
delete its employee benefit plans at any time as it, in its sole judgment,
determines to be appropriate, without recourse by the Executive.

(f)            Perquisites.
During the term hereof, the Executive shall be entitled to receive any and all
perquisites in effect from time to time for senior executives of the Company
generally, except to the extent such perquisite is otherwise provided to the
Executive. Such receipt shall be subject to (i) generally applicable
Company policies and (ii) the discretion of the Board. The Company may
alter, modify, add to or delete any such perquisite at any time as it, in its
sole judgment, determines to be appropriate without recourse by the Executive.

(g)           [Intentionally
Omitted].

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(h)           Term
Life Insurance. During the term hereof, and, except as otherwise provided
herein, for a period of one (1) year thereafter, the Company shall bear
the cost of a term life insurance policy covering Executive in the amount of
$1,000,000. It is understood that Executive shall establish a trust for the
purpose of purchasing such policy, and that the Company’s contributions shall
be made directly to such trust. All benefits of such term life insurance policy
shall inure to the Executive’s designated beneficiaries. Such term life
insurance policy shall become effective as soon as possible after Executive has
complied with the requirements of the insurance company underwriting such
policy (including but not limited to submission to and satisfactory results of
a physical evaluation).

(i)            Business
Expenses. The Company shall pay or reimburse the Executive for reasonable,
customary and necessary business expenses incurred or paid by the Executive in
the performance of the Executive’s duties and responsibilities hereunder,
subject to such reasonable substantiation and documentation as may be specified
by the Board or Company policy from time to time.

(j)            Costs
Related to Employment Agreement. The Company will reimburse the Executive
up to Twenty-Five Thousand Dollars ($25,000.00) for fees and expenses incurred
in negotiating this Agreement, subject to receipt of reasonable substantiation
and documentation by the Company.

(5)            Termination
of Employment and Severance Benefits. The Executive’s employment hereunder
shall terminate under the following circumstances:

(a)           Death.
In the event of the Executive’s death during the term hereof, the Executive’s
employment hereunder shall terminate and the Company shall pay or provide to
the Executive’s designated beneficiary or, if no beneficiary has been
designated by the Executive, to the Executive’s estate:  (i) any earned, but unpaid, Base Salary
through the date of termination; (ii) any earned, but unpaid annual bonus
for any fiscal year prior to the fiscal year of the Executive’s termination; (iii) a
pro rata portion (based on the number of days preceding the Executive’s
termination in the fiscal year of termination) of the Target Bonus; (iv) a
lump sum equal to the lesser of (A) twelve (12) months of Base Salary or (B) Base
Salary for the remainder of the term hereof; and (v) any unreimbursed
business expenses. In addition, subject to any employee contribution applicable
to employees and their dependents generally, for the twelve (12) month period
following termination, the Company shall continue to contribute to the premium
cost of coverage for the Executive’s dependents under the Company’s medical and
dental plans provided that a timely COBRA election is made. The payments
referred to in clauses (i), (ii) and (v) above shall be payable in a
lump-sum within thirty (30) days after the date of termination. The Company’s
payments under clauses (iii) and (iv) above, as well as the continued
contribution toward medical and dental premiums, are expressly conditioned upon
the Executive’s designated beneficiary, or if no beneficiary has been
designated, a representative of the Executive’s estate executing and delivering
to the Company a timely and effective separation agreement, including a general
release of claims, in form and substance satisfactory to the Company (“Separation
Agreement”). Payment under clauses (iii) and (iv) will be made

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within thirty (30) days after the Company’s receipt of such release of
claims in form and substance satisfactory to the Company. Other than as set
forth in this clause (a), the Company shall have no further obligation to the Executive’s
beneficiary or the Executive’s estate.

(b)           Disability.

(i)            The Company may terminate the
Executive’s employment hereunder, upon notice to the Executive, in the event
that the Executive becomes disabled during the Executive’s employment hereunder
through any illness, injury, accident or condition of either a physical or
psychological nature and, as a result, is unable to perform substantially all
of the Executive’s material duties and responsibilities hereunder for (x) ninety
(90) consecutive calendar days or (y) one hundred and twenty (120) total
days during any period of three hundred and sixty-five (365) consecutive
calendar days. The Board may designate another employee to act in the Executive’s
place during any period of the Executive’s disability.

(ii)           If any question shall arise as to
whether during any period the Executive is disabled through any illness,
injury, accident or condition of either a physical or psycholog­ical nature so
as to be unable to perform substantially all of the Executive’s duties and
responsibilities hereunder, the Executive may, and at the request of the
Company shall, submit to a medical examination by a physician selected by the
Company to whom the Executive or the Executive’s duly appointed guardian, if
any, has no reasonable objection to determine whether the Executive is so
disabled and such determination shall for the purposes of this Agreement be
conclusive of the issue. If such question shall arise and the Executive shall
fail to submit to such medical examination, the Company’s determination of the
issue shall be binding on the Executive.

(iii)          Upon the giving of notice of
termination of the Executive’s employment due to disability hereunder, the
Company shall have no further obligation or liability to the Executive, other
than for (i) any earned, but unpaid, Base Salary through the date of
termination; (ii) any earned, but unpaid annual bonus for any fiscal year
prior to the fiscal year of the Executive’s termination; (iii) a pro rata
portion (based on the number of days preceding the Executive’s termination in
the fiscal year of termination) of the Target Bonus; (iv) a lump sum
payment equal to the lesser of (A) twelve (12) months of Base Salary or (B) Base
Salary for the remainder of the term hereof; and (v) any unreimbursed
business expenses. In addition, (x) the Company shall continue the
benefits contemplated by Section 4(h) for the period contemplated
therein, and (y) subject to any employee contribution applicable to active
employees and their dependents generally, for the twelve (12) month period
following termination, the Company shall continue to contribute to the premium
cost of coverage for the Executive and the Executive’s dependents under the
Company’s medical and dental plans provided that a timely COBRA election is
made. The payments referred to in clauses (i), (ii) and (v) above
shall be payable in a lump-sum within thirty (30) days after the date of
termination. The Company’s payments under clauses (iii) and (iv) above,
as well as the continued

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contribution toward medical and dental
premiums, are expressly conditioned upon the Executive (or the Executive’s duly
appointed guardian, if any) executing and delivering to the Company a timely
and effective Separation Agreement. Payment under clauses (iii) and (iv) will
be made within thirty (30) days after the Company’s receipt of the Separation
Agreement. Other than as set forth in this clause (b), the Company shall have
no further obligation to the Executive.

(c)           By
the Company for Cause. The Company may terminate the Executive’s employment
hereunder for Cause at any time upon notice to the Executive setting forth in
reasonable detail the nature of such Cause. The following, as determined by the
Board in its reasonable judgment, shall constitute Cause for termination:

(i)            the Executive’s repeated and willful refusal
or failure (other than during periods of illness, disability or vacation) to
perform the Executive’s duties
hereunder or under any lawful directive of the Board (consistent with the terms
of this Agreement;

(ii)           the Executive’s willful misconduct or gross
neglect in the performance of the Executive’s duties hereunder which in either
case is materially injurious to the Company or any of its Subsidiaries,
monetarily or otherwise;

(iii)          the willful material breach of this Agreement by the Executive;

(iv)         except as provided in clause (v) below,
the conviction of the Executive of any felony or any other crime
involving dishonesty or moral turpitude
or the Executive’s pleading guilty to any felony, other than motor vehicle
offenses, or any other crime involving dishonesty or moral turpitude;

(v)          the commission of fraud, embezzlement,
theft or other dishonesty by the Executive with respect to the Company or any
of its Affiliates;

(vi)         any other conduct that involves a
breach of fiduciary obligation on the part of the Executive or otherwise could
reasonably be expected to have a material adverse effect upon the business,
interests or reputation of the Company or any of its Affiliates; or

(vii)        a previous employer of Executive shall commence against
Executive and/or Cellu Tissue an action, suit, proceeding or demand arising
from an alleged violation of a non-competition or other similar agreement
between Executive and such previous employer.

For purposes of this Section 5(c),
no act, or failure to act, on the Executive’s part, will be considered “willful”
unless done or omitted to be done by him not in good faith and without a
reasonable belief that the Executive’s action or omission was in furtherance of
the Company’s business. If the Company desires to terminate the Executive’s
employment pursuant to clause (i),

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(ii), (iii) or (v) above,
it shall first give the Executive written notice of the facts and circumstances
providing Cause and shall allow the Executive no less than twenty (20) days (x) in
the case of a proposed termination pursuant to clause (i), (ii) or (iii) above
to remedy, cure or rectify the situation giving rise to Cause and (y) in
the case of a proposed termination pursuant to clause (v) above to explain
the circumstances of the Executive’s actions or to show that the circumstances
underlying the indictment do not constitute the type of felony described in
clause (v). Termination by the Company for Cause pursuant to clause (iv) above
may be effected by written notice of the Company to the Executive. Upon
the giving of notice of termination of the Executive’s employment hereunder for
Cause, the Company shall have no further obligation to the Executive, other
than for (i) Base Salary earned, but unpaid at the date of termination, (ii) any
earned, but unpaid annual bonus for any fiscal year prior to the fiscal year of
termination of the Executive’s employment; and (iii) any unreimbursed
business expenses.

(d)           By
the Company without Cause. The Company may terminate the Executive’s
employment hereunder without Cause at any time upon notice to the Executive. In
the event of such termination, the Company shall have no further obligation or
liability to the Executive, other than for (i) any earned, but unpaid,
Base Salary through the date of termination; (ii) any earned, but unpaid
annual bonus for any fiscal year prior to the fiscal year of the Executive’s
termination; (iii) a pro rata portion (based on the number of days
preceding the Executive’s termination in the fiscal year of termination) of the
Target Bonus; (iv) a lump sum equal to the greater of (x) twenty-four
(24) months of Base Salary or (y) Base Salary for a period equal to the
remainder of the term of this Agreement; (v) a lump sum equal to the
greater of (x) one times the Target Bonus or (y) payment of the
Target Bonus with respect to a period equal to the remainder of the term of
this Agreement; and (vi) any unreimbursed business expenses. In addition, (x) the
Company shall continue the benefits contemplated by Section 4(h) for
the period contemplated therein, and (y) subject to any employee
contribution applicable to employees and their dependents generally, for the
period following termination specified in clause (iv) above, or if
earlier, until the date that the Executive becomes eligible for coverage with a
subsequent employer, the Company shall continue to contribute to the premium
cost of coverage for the Executive and the Executive’s dependents under the
Company’s medical and dental plans provided that a timely COBRA election is
made. The payments referred to in clauses (i), (ii) and (vi) above
shall be payable in a lump-sum within thirty (30) days after the date of
termination. The Company’s payments under clauses (iii), (iv) and (v) above,
as well as the continued contribution toward medical and dental premiums, are
expressly conditioned upon the Executive executing and delivering to the
Company a timely and effective Separation Agreement. Payment under clauses
(iii), (iv) and (v) will be made within thirty (30) days after the
Company’s receipt of the Separation Agreement. Other than as set forth in this
clause (d), the Company shall have no further obligation to the Executive.

(e)           By
the Executive for Good Reason. The Executive may terminate the Executive’s
employment hereunder for Good Reason, provided that the Executive shall have
given written notice setting forth in reasonable detail the nature of such Good
Reason to the Company upon the Executive’s becoming aware or at such time as
Executive should have been aware of the occurrence of any such event or
condition, and the Company shall not have fully

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corrected the situation within ten (10) days after such notice of
Good Reason. The following shall constitute “Good Reason” for termination
by the Executive:

(i)            failure by the Company to pay any
compensation when due hereunder;

(ii)           any significant reduction by the Company’s of
the Executive’s title, duties or responsibilities (except in connection with
termination of the Executive’s employment for Cause, as a result of Disability,
as a result of the Executive’s death or by the Executive other than for Good
Reason);

(iii)          a reduction by the Company in the Executive’s
Base Salary or any other compensation due hereunder; or

(iv)         any material breach by the Company of any
other provision of this Agreement.

If the
Executive desires to terminate the Executive’s employment with the Company
pursuant to this Section 5(e), the Executive shall first give written
notice of the facts and circumstances providing Good Reason to the Company, and
shall allow the company no less than twenty (20) days to remedy, cure or
rectify the situation giving rise to Good Reason. The Company’s failure to
continue the Executive’s appointment or election as a director or officer of
any of its Affiliates, a change in reporting relationships resulting from the
direct or indirect control of the Company (or a successor corporation) by
another corporation (in the absence of an independent change constituting Good
Reason as defined above) and any diminution of the business of the Company or
any of its Affiliates or any sale or transfer of equity, property or other
assets of the Company or any of its Affiliates (in the absence of an
independent change constituting Good Reason as defined above) shall not
constitute Good Reason. In the event of termination in accordance with this Section 5(e),
then the Executive will be entitled to receive the payments and benefits in
accordance with Section 5(d) hereof provided the Executive complies
with the requirement of executing and delivering the Separation Agreement. Other
than as set forth in this clause (e), the Company shall have no further
obligation to the Executive.

(f)            By
the Executive Without Good Reason. The Executive may terminate the
Executive’s employment hereunder at any time upon sixty (60) days’ written
notice to the Company. In the event of termination of the Executive pursuant to
this Section 5(f), the Board may elect to waive the period of notice, or
any portion thereof, and, if the Board so elects, the Company will pay the
Executive the Executive’s Base Salary for the notice period (or for any
remaining portion of the period). The Company shall also pay the Executive (i) any
earned, but unpaid annual bonus for any fiscal year prior to the fiscal year of
the termination of the Executive’s employment, and (ii) any unreimbursed
business expenses.

(g)           Non-Renewal
by Company. The Company may elect not to renew this Agreement in accordance
with Section 2 above. In the event of such non-renewal for a reason

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other than Cause (as defined in Section 5(c) above), the
Company shall have no further obligation or liability to the Executive other
than for (i) any earned, but unpaid, Base Salary through the date of
termination; (ii) any earned, but unpaid annual bonus for any fiscal year
prior to the fiscal year of the Executive’s termination; (iii) a pro rata
portion (based on the number of days preceding the Executive’s termination in
the fiscal year of termination) of the Target Bonus; (iv) a lump sum equal
to twenty-four (24) months of Base Salary and (v) any unreimbursed
business expenses. In addition, subject to any employee contribution applicable
to employees and their dependents generally, for the twenty-four (24) month
period following termination, or if earlier until the date that the Executive
becomes eligible for coverage with a subsequent employer, the Company shall
continue to contribute to the premium cost of coverage for the Executive and
the Executive’s dependents under the Company’s medical and dental plans
provided that a timely COBRA election is made. The payments referred to in
clauses (i), (ii) and (v) above shall be payable in a lump-sum within
thirty (30) days after the date of termination. The Company’s payments under clauses
(iii) and (iv) above, as well as the continued contribution toward
medical and dental premiums, are expressly conditioned upon the Executive
executing and delivering to the Company a timely and effective Separation
Agreement. Payment under clauses (iii) and (iv) will be made within
thirty (30) days after the Company’s receipt of such Separation Agreement. Other
than as set forth in this clause (g), the Company shall have no further
obligation to the Executive or the Executive’s estate hereunder.

(h)           Change
of Control/Gross Up Payment.

(i)            If a Change of Control occurs and,
within three (3) months before and two (2) years following such
Change of Control, the Company terminates the Executive’s employment other than
for Cause or by reason of death or disability, or the Executive terminates the
Executive’s employment for Good Reason, then, in lieu of any payments to or on
behalf of Executive under Sections 5(d), 5(e) or 5(g) hereof, the
Company shall have no further obligation or liability to the Executive, other
than for (i) any earned, but unpaid, Base Salary through the date of
termination; (ii) any earned, but unpaid annual bonus for any fiscal year
prior to the fiscal year of the Executive’s termination; (iii) a pro rata
portion (based on the number of days preceding the Executive’s termination in
the fiscal year of termination) of the Target Bonus; (iv) a lump sum equal
to the greater of (x) Base Salary for the remainder of the term or (y) thirty-six
(36) months of Base Salary; (v) a lump sum equal to one times the Target
Bonus; and (vi) any unreimbursed business expenses. In addition, subject
to any employee contribution applicable to employees and their dependents generally, for the
thirty-six (36) month period following termination, or if earlier, until the
date that the Executive becomes eligible for coverage with a subsequent
employer, the Company shall continue to contribute to the premium cost of
coverage for the Executive and the Executive’s dependents under the Company’s
medical and dental plans provided that a timely COBRA election is made. The
payments referred to in clauses (i), (ii) and (vi) above shall be
payable in a lump-sum within thirty (30) days after the date of termination. The
Company’s payments under clauses (iii), (iv) and (v) above, as well
as the continued contribution toward medical and dental premiums, are expressly
conditioned upon the

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Executive executing and delivering to the
Company a timely and effective Separation Agreement. Payment under clauses
(iii), (iv) and (v) will be made within thirty (30) days after the
Company’s receipt of the Separation Agreement. Other than as set forth in this
clause (h), the Company shall have no further obligation to the Executive.

(ii)           The Company and the Executive agree
that in the event that any of the severance payments or severance benefits
under Sections 5(d), 5(e), 5(g) or 5(h) of this Agreement might be
characterized as parachute payments under Section 280G of the Internal
Revenue Code of 1986, as amended (“Section 280G”), the parties shall
timely take reasonable steps to avoid the tax liability under Section 280G
and Section 4999 of the Internal Revenue Code of 1986, as amended (the “Code”)
to the extent permitted by law. Accordingly, the Executive agrees to cooperate
fully in procuring a shareholder vote (including, but not limited to, providing
any required consents or waivers) to approve the severance payments or
severance benefits under this Agreement received, to be received by, or payable
on behalf of, the Executive in satisfaction of the shareholder approval
requirements described in Treas. Reg. Section 1.280G-1, Q&A-7,
to the extent applicable. If the shareholder approval requirements described in
Treas. Reg. Section 1.280G-1, Q&A-7 cannot be satisfied
and if the Company determines that any of the severance payments or severance
benefits under this Agreement received, to be received by, or payable on behalf
of, the Executive would be subject to the excise tax imposed by Section 4999
of the Code, (the “Excise Tax”), then the Company will, on or prior to
the date on which the Excise Tax must be paid or withheld, make an additional
lump sum payment (the “gross up payment”) to the Executive. The gross up
payment will be sufficient, after giving effect to federal, state, and local
income taxes (excluding any taxes imposed under or as a result of Section 409A,
but otherwise including interest and penalties, if any) with respect to the
gross up payment, to make the Executive whole for such taxes and associated
interest and penalties imposed under or as a result of Section 4999. Determinations
under this Section 5(h) will be made by the Company’ s independent
auditors unless the Executive has reasonable objections to the use of that
firm, in which case the determinations will be made by a comparable firm chosen
by the Executive after consultation with the Company (the firm making the
determinations to be referred to as the “Firm”). The determinations of
the Firm will be binding upon the Company and the Executive except as the
determinations are established in resolution (including by settlement) of a
controversy with the Internal Revenue Service to have been incorrect. All fees
and expenses of the Firm will be paid by the Company. If the Internal Revenue
Service asserts a claim that, if successful, would require the Company to make
a gross up payment or an additional gross up payment, the Company and the
Executive will cooperate fully in resolving the controversy with the Internal
Revenue Service. The Company will make or advance such gross up payments as are
necessary to prevent the Executive from having to bear the cost of the payments
to the Internal Revenue Service in the course of, or as a result of, the
controversy. The Firm will determine the amount of such gross up payments or
advances and will determine after resolution of the

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controversy whether any advances must be
returned by the Executive to the Company. The Company will bear all expenses of
the controversy.

(i)            Timing
of Payments. If at the time of the Executive’s separation from service, the
Executive is a “specified employee,” as hereinafter defined, any and all
amounts payable under this Section 5 in connection with such separation
from service that constitute deferred compensation subject to Section 409A,
as determined by the Company in its sole discretion, and that would (but for
this sentence) be payable within six months following such separation from
service, shall instead be paid on the date that follows the date of such
separation from service by six (6) months. For purposes of the preceding
sentence, “separation from service” shall be determined in a manner consistent
with subsection (a)(2)(A)(i) of Section 409A and the term “specified
employee” shall mean an individual determined by the Company to be a specified
employee as defined in subsection (a)(2)(B)(i) of Section 409A.

6.             Effect
of Termination. The provisions of this Section 6 shall apply to a
termination pursuant to Section 5 or otherwise.

(a)           A
condition precedent to the Company’s obligations to provide any severance
payments or severance benefits hereunder, including lump-sum payments, vesting
of restricted stock and contributions toward health insurance premiums, shall
be the Executive’s executing and delivering (and not revoking) a timely and
effective Separation Agreement, or in the case of a termination due to the
death of the Executive, the Executive’s beneficiary or representative of the
Executive’s estate executing and delivering a general release of claims in form
and substance satisfactory to the Company.

(b)           Upon
termination of the Executive’s employment with the Company, unless otherwise
specifically provided herein, the Executive’s rights to benefits and payments
under any benefits or welfare plan or under any stock option, restricted stock,
stock appreciation right, bonus unit, management or bonus incentive or other
plan of the Company shall be determined in accordance with the terms and
provisions of such plans and any agreements under which such stock options,
restricted stock or other awards were granted.

(c)           Provisions
of this Agreement shall survive any termination if so provided herein or if
necessary or desirable fully to accomplish the purposes of such provision,
including without limitation the obligations of the Executive under Sections 7,
8 and 9 hereof. The obligation of the Company to provide any severance payment
or benefit is expressly conditioned upon the Executive’s continued full
performance of obligations under Sections 7, 8 and 9 hereof. The Executive
recognizes that, except as expressly provided in Sections 5(d), 5(e), 5(g) or
5(h), no compen­sation is earned after termination of employment.

(d)           Except
as expressly provided herein, Executive is entitled to no payments or benefits
in connection with a termination of the Executive’s employment.

 11

 

 

7.             Confidential
Information.

(a)           The Executive acknowledges that the
Company and its Affiliates continually develop “Trade Secrets” and “Confidential
Information” that the Executive may develop Trade Secrets and Confidential
Information for the Company or its Affiliates and that the Executive may learn
of Trade Secrets and Confidential Information during the course of employment. The
Executive will comply with the policies and procedures of the Company and its
Affiliates for protecting Trade Secrets and Confidential Information and shall
never disclose to any Person (except as required by applicable law or for the
proper performance of the Executive’s duties and responsibilities to the
Company and its Affiliates), or use for the Executive’s own benefit or gain,
any Trade Secrets or Confidential Information obtained by the Executive
incident to the Executive’s employment or other association with the Company or
any of its Affiliates.

(b)           For purposes of this Agreement, “Trade
Secrets means all information that constitutes a trade secret within the
meaning of the Georgia Trade Secrets Act, as amended (the “Georgia Act”). Under
the Georgia Act, a trade secret is defined as: 
“Information without regard to form, including, but not limited to,
technical or non-technical data, a formula, a pattern, a compilation, a
program, a device, a method, a technique, a drawing, a process, financial data,
financial plans, product plans, or a list of actual or potential customers or
suppliers which is not commonly known by or available to the public and which
information:  (i) derives economic
value, actual or potential, from not being generally known to, and not being
readily ascertainable by proper means by, other persons who can obtain economic
value from its disclosure or use; and (ii) is the subject of efforts that
are reasonable under the circumstances to maintain its secrecy.”

(c)           For purposes of this Agreement, “Confidential
Information” means any and all information of the Company and its
Affiliates other than Trade Secrets that is not generally known by others with
whom they compete or do business, or with whom they plan to compete or do
business and any and all information, not publicly known, which, if disclosed
by the Company or its Affiliates would assist in competition against them. Confidential
Information includes without limitation such information relating to (i) the
development, research, testing, manufacturing, marketing and financial
activities of the Company and its Affiliates, (ii) the Products, (iii) the
costs, sources of supply, financial performance and strategic plans of the
Company and its Affiliates, (iv) the identity and special needs of the
customers of the Company and its Affiliates and (v) the people and
organizations with whom the Company and its Affiliates have business
relationships and those relationships. Confidential Information also includes
comparable information that the Company or any of its Affiliates have received
belonging to others or which was received by the Company or any of its Affiliates
with any understanding that it would not be disclosed.

(d)           The foregoing obligations do not
apply to the extent that the Confidential Information is or becomes generally
available to the public through no fault of the Executive. The Executive
understands and agrees that the Executive’s obligations under this Agreement

 12
 

 

with regard to
Trade Secrets shall remain in effect for as long as such information shall
remain a trade secret under applicable law. The Executive acknowledge that the
Executive’s obligations with regard to the Confidential Information shall
remain in effect while employed or retained by the Company and for three (3) years
after the termination of employment, regardless of the reason for such
termination.

(e)           All documents, records, tapes and
other media of every kind and description relating to the business, present or
otherwise, of the Company or its Affiliates and any copies, in whole or in
part, thereof (the “Documents”), whether or not prepared by the
Executive, shall be the sole and exclusive property of the Company and its
Affiliates. The Executive shall safeguard all Documents and shall surrender to
the Company at the time the Executive’s employment terminates, or at such
earlier time or times as the Board or its designee may specify, all Documents
then in the Executive’s possession or control.

8.             Assignment
of Rights to Intellectual Property. The Executive shall promptly and fully
disclose all Intellectual Property to the Company. The Executive hereby assigns
and agrees to assign to the Company (or as otherwise directed by the Company)
the Executive’s full right, title and interest in and to all Intellectual
Property. The Executive agrees to execute any and all applications for domestic
and foreign patents, copyrights or other proprietary rights and to do such
other acts (including without limitation the execution and delivery of
instruments of further assurance or confirmation) requested by the Company to
assign the Intellectual Property to the Company and to permit the Company to enforce
any patents, copyrights or other proprietary rights to the Intellectual
Property. The Executive will not charge the Company for time spent in complying
with these obligations. All copyrightable works that the Executive creates
shall be considered “work made for hire.”

9.             Restricted
Activities. In exchange for good and valuable consideration including,
without limitation, the grant of restricted stock hereunder, the Executive
agrees that some restrictions on the Executive’s activities during and after
the Executive’s employment are necessary to protect the goodwill, Confidential
Information and other legitimate interests of the Company and its Affiliates:

(a)           While the Executive is employed by
the Company and for a period of twenty-four (24) months after the Executive’s
employment terminates (the “Non-Competition Period”), the Executive shall not,
directly or indirectly, provide services in a Restricted Capacity to any Person
with respect to any product or service of that Person which directly competes
with, or may be used in substitution for, one or more of the Products of the
Company and/or its Subsidiaries with respect to which the Executive has had
access to Confidential Information or customer goodwill as a result of the
Executive’s employment or other association with the Company and/or its
Subsidiaries, but this restriction shall apply only with respect to the
following states:  Alabama, Alaska,
Arizona, Arkansas, California, Colorado, Connecticut, Florida, Georgia, Hawaii,
Illinois, Indiana, Iowa, Kansas, Kentucky, Louisiana, Maine, Maryland,
Massachusetts, Michigan, Minnesota, Mississippi, Missouri, Nebraska, Nevada,
New Jersey, New Mexico, New York, North Carolina, North Dakota, Ohio, Oklahoma,
Oregon,

 13
 

 

Pennsylvania,
Rhode Island, South Carolina, Tennessee, Texas, Utah, Virginia, Washington and
Wisconsin.  For the purposes of this Section 9,
the business of the Company and its Subsidiaries shall include the research,
development, testing, manufacture, sale, license, lease or distribution of all
Products and the Executive’s undertaking shall encompass all items, products
and services that may be used in substitution for Products.

(b)           The Executive further agrees that
while the Executive is employed by the Company and during the Non-Competition
Period, the Executive will not, and will not assist anyone else to solicit for
hiring any employee of the Company or any of its Affiliates, or seek to
persuade any employee of the Company or any of its Affiliates to discontinue
employment. For purposes of this Agreement, an “employee” of the Company or any
of its Affiliates is any person who was such at any time within the preceding
one year.

(c)           The Executive further agrees that
while the Executive is employed by the Company and during the Non-Competition
Period, the Executive will not directly or indirectly (1) solicit or
encourage any customer of the Company or any of its Affiliates to terminate or
diminish its relationship with them, or, (2) seek to persuade any customer
or prospective customer of the Company or any of its Affiliates to conduct with
any Person any business or activity which such customer or prospective customer
conducts or could conduct with the Company; provided that these restrictions
shall apply (a) only with respect to those Persons who are or have been a
customer of the Company of any of its Affiliates at any time within the
immediately preceding one year period or whose business has been solicited on
behalf of the Company or any of its Affiliates by any of their officers,
employees or agents within said one year period, other than by form letter,
blanket mailing or published advertisement, and (b) only if the Executive
had a business relationship with such Person as a result of the Executive’s
employment or other associations with the Company or one of its Affiliates. Notwithstanding
anything to the contrary contained in this Section 9, after termination of
Executive’s employment, this restriction shall apply only to customers or
prospective customers located in those states within the United States in which
the Company was doing business during the year preceding Executive’s
termination.

(d)           The Executive further agrees that
while the Executive is employed by the Company and during the Non-Competition
Period the Executive shall not willfully make false, misleading or disparaging
statements about the Company including, without limitation, its products,
services, management, direct or indirect equity holders, employees and
customers.

10.           Enforcement
of Covenants. The Executive acknowledges that the Executive has carefully
read and considered all the terms and conditions of this Agreement, including
the restraints imposed upon the Executive’s pursuant to Sections 7, 8 and 9
hereof. The Executive agrees without reservation that each of the restraints
contained herein is necessary for the reasonable and proper protection of the
goodwill, Confidential Information and other legitimate interests of the
Company and its Affiliates; that each and every one of those restraints is
reasonable in respect to subject matter, length of time and geographic area;
and that these restraints, individually or in the aggregate, will not prevent
the Executive from obtaining other

 14
 

 

suitable
employment during the period in which the Executive is bound by these restraints.
The Executive further agrees that the Executive will never assert, or permit to
be asserted on the Executive’s behalf, in any forum, any position contrary to
the foregoing.  The Executive further
acknowledges that, were the Executive to breach any of the covenants contained
in Sections 7, 8 or 9 hereof, the damage to the Company would be irreparable. The
Executive therefore agrees that the Company, in addition to any other remedies
available to it, shall be entitled to preliminary and permanent injunctive
relief against any breach or threatened breach by the Executive of any of said
covenants, without having to post bond. The parties further agree that, in the
event that any provision of Section 7, 8 or 9 hereof shall be determined
by any court of competent jurisdiction to be unenforceable by reason of its
being extended over too great a time, too large a geographic area or too great
a range of activities, such provision shall be deemed to be modified to permit
its enforcement to the maximum extent permitted by law.

11.           Conflicting
Agreements. The Executive hereby represents and warrants that the execution
of this Agreement and the performance of the Executive’s obligations hereunder
will not breach or be in conflict with any other agreement to which the Executive
is a party or is bound and that the Executive is not now subject to any
covenants against competition or similar covenants that would affect the
performance of the Executive’s obligations hereunder. The Executive will not
disclose to or use on behalf of the Company any proprietary information of a
third party without such party’s consent.

12.           Indemnification.
The Executive shall be entitled, at all times (including after the termination
of this Agreement for any reason), to the benefit of the maximum
indemnification and advancement of expenses available from time to time under
the Company’s certificate of incorporation and Bylaws, and if not set forth
therein, to the maximum extent available under the laws of the State of
Delaware. In addition, the Company shall maintain in full force and effect the
directors’ and officers’ liability insurance policy currently in effect or such
other insurance with reputable insurance carriers which may provide for a
reduced level of coverage for the Executive, provided that such coverage is
identical to that provided by the Company for the benefit of the other
directors of the Company and its other executive officers. The Executive agrees
to promptly notify the Company of any actual or threatened claim arising out of
or as a result of the Executive’s employment with the Company. The Executive
hereby represents and warrants to the Company that, as of the date hereof, the
Executive has no and is aware of no such claim.

13.           Definitions.
Words or phrases which are initially capitalized or are within quotation marks
shall have the meanings provided in this Section 13 and as provided
elsewhere herein. For purposes of this Agreement, the following definitions
apply:

(a)           “Affiliates” means all persons
and entities directly or indirectly controlling, controlled by or under common
control with the Company, where control may be by either management authority
or equity interest.

 15
 

 

(b)           “Change
of Control” means (i) a sale of all or substantially all of the assets
of the Company, Cellu Paper or Cellu Parent to a Person in which the
shareholders of Cellu Parent immediately prior to such transaction do not,
directly or indirectly, own securities representing more than 50% of the voting
power of the Person acquiring such assets immediately following the
transaction, (ii) a sale of shares of capital stock of Cellu Parent by
Cellu Parent or its shareholders resulting in more than 50% of the voting power
of Cellu Parent being held, directly or indirectly, by a Person other than the
shareholders of Cellu Parent immediately prior to such sale, (iii) a sale
by Cellu Parent of the equity securities of Cellu Paper or the Company
resulting in more than 50% of the voting power of Cellu Paper or Cellu Tissue
(as the case may be) being held directly or indirectly by a Person other than
Cellu Parent or the shareholders of Cellu Parent immediately prior to such
sale, or (iv) a merger or consolidation of the Company, Cellu Paper or
Cellu Parent with or into another Person, if and only if, after such merger or
consolidation, more than 50% of the voting power of the Company, Cellu Paper or
Cellu Parent (as the case may be) is directly or indirectly owned by a Person
other than Cellu Parent or the shareholders of Cellu Parent immediately prior
to such merger or consolidation. For the avoidance of doubt, the transaction
contemplated by the Merger Agreement shall not constitute a Change of Control.

(c)           “Intellectual Property” means
inventions, discoveries, developments, methods, processes, compositions, works,
concepts and ideas (whether or not patentable or copyrightable or constituting
trade secrets) conceived, made, created, developed or reduced to practice by
the Executive (whether alone or with others, whether or not during normal
business hours or on or off Company premises) during the Executive’s employment
and during the period of six (6) months immediately following termination
of the Executive’s employment that relate to either the Products or any
prospective activity of the Company or any of its Affiliates.

(d)           “Person” means an individual,
a corporation, an association, a partnership, an estate, a trust and any other
entity or organization, other than the Company or any of its Affiliates.

(e)           “Products” mean all specialty
paper products, tissue hard rolls, tissue converted products and/or deep
colored napkin products planned, researched, developed, tested, manufactured,
sold, licensed, leased or otherwise distributed or put into use by the Company
or any of its Affiliates, together with all services provided or planned by the
Company or any of its Affiliates, during the Executive’s employment.

(f)            “Restricted Capacity” means a
position which is the same or comparable to the position the Executive held
with the Company or in which the Confidential Information or customer goodwill
which the Executive created or to which the Executive had access during the
Executive’s employment with the Company would give that competitor an unfair
competitive advantage. For the avoidance of doubt, this definition as used
herein shall in no way diminish the Executive’s obligations under Section 7.

14.           Withholding.
All payments made by the Company under this Agreement shall be

 16
 

 

reduced by any tax
or other amounts required to be withheld by the Company under applicable law.

15.           Assignment.
Neither the Company nor the Executive may make any assignment of this Agreement
or any interest herein, by operation of law or otherwise, without the prior
written consent of the other; provided, however, that the Company
may assign its rights and obligations under this Agreement without the consent
of the Executive in the event that the Company shall hereafter affect a
reorganization, consolidate with, or merge into, any other Person or transfer
all or substantially all of its properties or assets to any other Person. This
Agreement shall inure to the benefit of and be binding upon the Company and the
Executive, their respective successors, executors, administrators, heirs and
permitted assigns.

16.           Severability.
If any portion or provision of this Agreement shall to any extent be declared
illegal or unenforceable by a court of competent jurisdiction, then the
remainder of this Agreement, or the application of such portion or provision in
circumstances other than those as to which it is so declared illegal or
unenforceable, shall not be affected thereby, and each portion and provision of
this Agreement shall be valid and enforceable to the fullest extent permitted
by law.

17.           Waiver.
No waiver of any provision hereof shall be effective unless made in writing and
signed by the waiving party. The failure of either party to require the
performance of any term or obligation of this Agreement, or the waiver by
either party of any breach of this Agreement, shall not prevent any subsequent
enforcement of such term or obligation or be deemed a waiver of any subsequent
breach.

18.           Notices.
Any and all notices, requests, demands and other communications provided for by
this Agreement shall be in writing and shall be effective when delivered in
person or deposited in the United States mail, postage prepaid, registered or
certified, and addressed to the Executive at the Executive’s last known address
on the books of the Company or, in the case of the Company, at its principal
place of business, attention of the Chairman of the Board, or to such other
address as either party may specify by notice to the other actually received.

19.           Entire
Agreement. This Agreement constitutes the entire agreement between the
parties and supersedes and terminates all prior communications, agreements and
understandings, written or oral, with respect to the terms and conditions of
the Executive’s employment with the Company. For the avoidance of doubt, in
consideration of the benefits to which the Executive is entitled under this
Agreement and other good and valuable consideration, the Executive hereby
waives any and all rights to any severance payment, change of control payment
or any other payment or benefit that the Executive may have under any agreement
with, or policy of, the Company.

20.           Amendment;
Section 409A. This Agreement may be amended or modified only by a
written instrument signed by the Executive and by an expressly authorized
representative

 17
 

 

of the Company. The
parties acknowledge that certain provisions of this Agreement may
be required to be amended, following the issuance of additional guidance by the
Internal Revenue Service with respect to Section 409A, to avoid the possible
imposition of additional tax under Section 409A with respect to certain
payments and benefits under this Agreement. The Company agrees that it will not
unreasonably withhold its consent to any such amendments which in its
determination are (i) feasible and necessary to avoid adverse tax
treatment under Section 409A for the Executive, and (ii) not adverse
to the interests of the Company.

21.           Dispute
Resolution. In the event of any dispute relating to
Executive’s employment, the termination thereof, or this Agreement, other than
a dispute in which the primary relief sought is an equitable remedy such as an
injunction, the parties shall be required to have the dispute, controversy or
claim settled by alternative dispute resolution conducted by JAMS (or, if JAMS
is not available, another mutually agreeable alternative dispute resolution
organization), in the city of Executive’s principal place of employment. Any
award entered by JAMS (or such other organization) shall be final, binding and
nonappealable, and judgment may be entered thereon by either party in
accordance with applicable law in any court of competent jurisdiction. This Section 21
shall be specifically enforceable. JAMS (or such other organization) shall have
no authority to modify any provision of this Agreement. The Company shall
reimburse the Executive the Executive’s reasonable attorney’s fees and costs in
the event that the Executive prevails in an action brought by the Executive’s
against the Company to enforce the terms of this Agreement. THE PARTIES
IRREVOCABLY WAIVE ANY RIGHT TO TRIAL BY JURY AS TO ALL CLAIMS HEREUNDER.

22.           Headings.
The headings and captions in this Agreement are for convenience only and in no
way define or describe the scope or content of any provision of this Agreement.

23.           Counterparts.
This Agreement may be executed in two or more counterparts, each of which shall
be an original and all of which together shall constitute one and the same
instrument.

24.           Governing
Law, Choice of Forum. This is a New York contract and shall be construed
and enforced under and be governed in all respects by the laws of the State of
New York, without regard to the conflict of laws principles thereto. The
parties consent to the jurisdiction of any state or federal court sitting in
the State of New York and waive any objection either party may have to the
laying of venue of any such suit, action or proceeding in any such court. The
Company and the Executive each also irrevocably and unconditionally consent to
service of any process, pleadings, notices or other papers in a manner
permitted by the notice provisions of Section 18 of this Agreement.

 18

 

IN WITNESS WHEREOF, this Agreement has been executed
as a sealed instrument by the Company, by its duly authorized representative,
and by the Executive, as of the date first above written.

	
  THE EXECUTIVE:

  	
  THE COMPANY:

  
	
   

  	
   

  
	
   

  	
  CELLU TISSUE HOLDINGS, INC.

  
	
   

  	
   

  
	
   

  	
   

  
	
  /s/ Russell C. Taylor

  	
   

  	
  By:

  	
  /s/ Dianne M. Scheu

  	
   

  
	
  Russell C. Taylor

  	
   

  
	
   

  	
  Title: 

  	
  Chief Financial Officer

  	
   

  
							

 

EXHIBIT A

[Form of
Restricted Stock Award Agreement]

 

THE SHARES
RECEIVED PURSUANT TO THIS AWARD SHALL BE SUBJECT TO THE RIGHTS, RESTRICTIONS,
AND OBLIGATIONS APPLICABLE TO SUCH SECURITIES, ALL AS PROVIDED IN THE
SHAREHOLDERS AGREEMENT DATED AS OF JUNE 12, 2006 BETWEEN THE COMPANY AND IT
SHAREHOLDERS, AS AMENDED AND IN EFFECT FROM TIME TO TIME (THE “SHAREHOLDERS
AGREEMENT”).

Mr. Russell Taylor

CELLU PARENT CORPORATION

2006 STOCK OPTION AND RESTRICTED STOCK PLAN

Restricted Stock Award Agreement

Cellu
Parent Corporation

c/o Weston Presidio

Pier 1, Bay 2

San Francisco, CA 94111

Attn:       Chief Executive
Officer

Ladies
and Gentlemen:

The undersigned (i) acknowledges that he has received an award
(the “Award”) of restricted stock from Cellu Parent Corporation (the “Company”)
under the Cellu Parent Corporation 2006 Stock Option and Restricted Stock Plan
(the “Plan”), subject to the terms set forth below and in the Plan; (ii) further
acknowledges receipt of a copy of the Plan as in effect on the date hereof; and
(iii) agrees with the Company as follows:

1.               Effective Date. This Agreement shall take effect as of June 12,
2006, which is the date of grant of the Award.

2.               Shares Subject to Award. The Award consists of 3,778shares (the “Shares”)
of common stock of the Company (“Stock”). The undersigned’s rights to the
Shares are subject to the restrictions described in this Agreement and the Plan
(which is incorporated herein by reference with the same effect as if set forth
herein in full) in addition to such other restrictions, if any, as may be
imposed by law.

3.               Meaning of Certain Terms. Except as otherwise expressly provided, all
terms used herein shall have the same meaning as in the Plan. The term “vest”
as used herein with respect to any Share means the lapsing of the restrictions
described herein with respect to such Share.

4.               Nontransferability of Shares. The Shares acquired by the undersigned
pursuant to this Agreement shall not be sold, transferred, pledged, assigned or
otherwise encumbered or disposed of except as provided below and in the Plan.

5.               Forfeiture Risk. If the undersigned ceases to be employed by
the Company and its subsidiaries any then outstanding and unvested Shares
acquired by the undersigned hereunder shall be automatically and immediately
forfeited; provided, however, that if the
undersigned ceases to be employed by the Company due to the undersigned’s death
or disability, fifty  percent (50%) of
the Shares granted under this Award that are not then already vested shall 

 

vest; and further
provided that if the undersigned ceases to be employed by the Company
by reason of the Company’s election not to renew the undersigned’s employment
agreement with the Company dated June 12, 2006 (the “Employment Agreement”)
and at the time the Company elects not to renew such Employment Agreement there
exists no Cause for the termination of the undersigned, one hundred percent
(100%) of the Shares granted under this Award that are not then already vested
shall vest. For purposes of the preceding sentence, Cause shall be as defined
in the Employment Agreement. The undersigned hereby (i) appoints the
Company as the attorney-in-fact of the undersigned to take such actions as may
be necessary or appropriate to effectuate a transfer of the record ownership of
any such shares that are unvested and forfeited hereunder, (ii) agrees to
deliver to the Company, as a precondition to the issuance of any certificate or
certificates with respect to unvested Shares hereunder, one or more stock
powers, endorsed in blank, with respect to such Shares, and (iii) agrees
to sign such other powers and take such other actions as the Company may
reasonably request to accomplish the transfer or forfeiture of any unvested
Shares that are forfeited hereunder.

6.               Retention of Certificates. Any certificates representing unvested
Shares shall be held by the Company. If unvested Shares are held in book entry
form, the undersigned agrees that the Company may give stop transfer
instructions to the depository to ensure compliance with the provisions hereof.

7.               Vesting of Shares. The shares acquired hereunder shall vest in
accordance with the provisions of this Paragraph 7 and applicable provisions of
the Plan, as follows:

25% of the Shares on and
after June 12, 2007;

an additional 25% of the
Shares on and after June 12, 2008;

an additional 25% of the
Shares on and after June 12, 2009; and

an additional 25% of the
Shares on and after June 12, 2010.

Notwithstanding the foregoing, no shares
shall vest on any vesting date specified above unless the undersigned is then,
and since the date of grant has continuously been, employed by the Company or
its subsidiaries.

8.               Shareholders Agreement. The granting of this Award and the issuance
of Shares received under this Award shall be subject to the Plan and the
Shareholders Agreement, and the issuance of this Award shall be conditional
upon the execution and delivery by the undersigned of the Shareholders
Agreement. Any Shares received under this Award shall be subject to the rights,
restrictions and obligations applicable to options and shares of Stock of the
Company as provided from time to time in such Shareholders Agreement.

9.               Legend. Any certificates representing unvested
Shares shall be held by the Company, and any such certificate shall contain a
legend substantially in the following form:

THE TRANSFERABILITY OF THIS CERTIFICATE AND
THE SHARES OF STOCK REPRESENTED HEREBY ARE SUBJECT TO THE TERMS AND CONDITIONS
(INCLUDING FORFEITURE) OF THE CELLU PARENT CORPORATION 2006 STOCK OPTION AND
RESTRICTED STOCK PLAN AND A RESTRICTED STOCK AWARD AGREEMENT ENTERED INTO
BETWEEN THE REGISTERED OWNER 

 2
 

 

AND CELLU PARENT CORPORATION. COPIES OF SUCH
PLAN AND AGREEMENT ARE ON FILE IN THE OFFICES OF CELLU PARENT CORPORATION.

THE SECURITIES
REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO THE TERMS AND CONDITIONS,
INCLUDING CERTAIN RESTRICTIONS ON TRANSFER, OF A SHAREHOLDERS AGREEMENT DATED
AS OF JUNE 12, 2006 BETWEEN CELLU TISSUE CORPORATION AND ITS SHAREHOLDERS, AS
AMENDED FROM TIME TO TIME, AND NONE OF SUCH SECURITIES, OR ANY INTEREST
THEREIN, SHALL BE TRANSFERRED, PLEDGED, ENCUMBERED OR OTHERWISE DISPOSED OF
EXCEPT AS PROVIDED IN THAT AGREEMENT. A COPY OF THE SHAREHOLDERS AGREEMENT IS
ON FILE IN THE OFFICES OF CELLU PARENT CORPORATION.

As soon as practicable
following the vesting of any such Shares the Company shall cause a certificate
or certificates covering such Shares, without the aforesaid legend, to be
issued and delivered to the undersigned. If any Shares are held in book-entry
form, the Company may take such steps as it deems necessary or appropriate to
record and manifest the restrictions applicable to such Shares.

10.         Dividends, etc..
The undersigned shall be entitled to (i) receive any and all dividends or
other distributions paid with respect to those Shares of which he is the record
owner on the record date for such dividend or other distribution, and (ii) vote
any Shares of which he is the record owner on the record date for such vote; provided, however, that any property (other than cash)
distributed with respect to a share of Stock (the “associated share”) acquired
hereunder, including without limitation a distribution of Stock by reason of a
stock dividend, stock split or otherwise, or a distribution of other securities
with respect to an associated share, shall be subject to the restrictions of
this Agreement in the same manner and for so long as the associated share
remains subject to such restrictions, and shall be promptly forfeited if and
when the associated share is so forfeited; and further provided,
that the Administrator may require that any cash distribution with respect to
the Shares other than a normal cash dividend be placed in escrow or otherwise
made subject to such restrictions as the Administrator deems appropriate to
carry out the intent of the Plan, consistent with Section 409A of the Code
to the extent applicable. References in this Agreement to the Shares shall  refer, mutatis mutandis,
to any such restricted amounts.

11.         Sale of Vested Shares.
The undersigned understands
that he will be free to sell any Share once it has vested, subject to (i) satisfaction
of any applicable tax withholding requirements with respect to the vesting or
transfer of such Share; (ii) the completion of any administrative steps
(for example, but without limitation, the transfer of certificates) that the
Company may reasonably impose; (iii) applicable requirements of federal
and state securities laws; and (iv) the terms and conditions of the
Shareholders Agreement.

12.         Certain Tax Matters.
The undersigned expressly acknowledges the following:

a.               The undersigned has been advised to confer
promptly with a professional tax advisor to consider whether the undersigned
should make a so-called “83(b) election” with respect to the Shares. Any
such election, to be effective, must be made in accordance with applicable
regulations and within thirty (30) days following the date of this Award. The
Company has made no recommendation to the undersigned with respect to the
advisability of making such an election. In the event that the undersigned 

 3
 

 

makes an 83(b) election
and incurs a tax liability as a result, the Company will, on a date prior to
the date on which the taxes must be paid or withheld, make a lump sum payment
(a “Gross Up Payment”) to the undersigned that will be sufficient, after giving
effect to federal, state, and local income taxes with respect to the Gross Up
Payment, to pay any marginal increase in tax liability of the undersigned as a
result of such 83(b) election. For this purpose, a tax liability will be
treated as incurred only to the extent that the inclusion of the income by reason
of the grant will increase the undersigned’s tax liability for the year of
inclusion, after giving effect to all losses, credits, carry-forwards,
carry-backs, etc. that the undersigned may be able to utilize in such year and
without regard to any decrease in losses, credits, carry-forwards, carry-backs,
etc. and the effect of any such decrease on other tax years.

b.              The award or vesting of the Shares acquired
hereunder, and the payment of dividends with respect to such Shares, may give
rise to “wages” subject to withholding. The undersigned expressly acknowledges
and agrees that his rights hereunder are subject to his promptly paying to the
Company in cash (or by such other means as may be acceptable to the Company in
its discretion, including, if the Administrator so determines, by the delivery
of previously acquired Stock or shares of Stock acquired hereunder or by the
withholding of amounts from any payment hereunder) all taxes required to be
withheld in connection with such award, vesting or payment.

	
   

  	
   

  	
  Very truly yours,

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  (Signature of
  Employee)

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
  Dated:
  June 12, 2006

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
  The foregoing
  Restricted Stock

  	
   

  	
   

  
	
  Award Agreement
  is hereby accepted:

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
  CELLU PARENT
  CORPORATION

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
  By

  	
   

  	
   

  	
   

  
				

 

 4Exhibit 10.2

AGREEMENT

AGREEMENT (this “Agreement”) made and entered
into by and between Cellu Tissue Holdings, Inc., a Delaware corporation
(the “Company”), and Ms. Dianne Scheu (the “Executive”),
effective as of the Closing Date as defined in the Agreement and Plan of
Merger, dated May 8, 2006, (the “Merger Agreement”) by and among
Cellu Parent Corporation, a Delaware corporation (“Cellu Parent”), Cellu
Acquisition Corporation, a Delaware corporation and a wholly owned subsidiary
of Cellu Parent Corporation (“Cellu Acquisition”), and Cellu Paper Holdings, Inc.,
a Delaware corporation (“Cellu Paper”), and which is hereafter referred
to as the “Effective Date.

WHEREAS, the Company is a wholly owned subsidiary of
Cellu Paper; and Cellu Acquisition is a wholly owned subsidiary of Cellu
Parent;

WHEREAS, the Merger Agreement contemplates that Cellu
Acquisition will merge with and into Cellu Paper, with Cellu Paper as the
surviving entity (the “Merger”);

WHEREAS, the operations of the Company and its
Affiliates are a complex matter requiring direction and leadership in a variety
of areas, including financial, strategic planning, regulatory, community
relations and others;

WHEREAS, the Executive is possessed of certain
experience and expertise that qualify the Executive to provide the direction
and leadership required by the Company and its Affiliates;

WHEREAS, prior to the closing under the Merger
Agreement, the Executive was employed by the Company as its Chief Financial
Officer; and

WHEREAS, subject to the terms and conditions
hereinafter set forth, the Company wishes to employ the Executive as its
President of Finance and Chief Financial Officer and the Executive wishes to
accept such continued employment, effective as of the Closing;

NOW, THEREFORE, in consideration of the foregoing
premises and the mutual promises, terms, provisions and conditions set forth in
this Agreement, the parties hereby agree:

1.             Employment.
Subject to the terms and conditions set forth in this Agreement, the Company
hereby offers and the Executive hereby accepts employment.

2.             Term.      Subject to earlier termination as
hereinafter provided, the Executive’s employment hereunder shall be for a term
of four (4) years, commencing on the Effective Date, and shall be
automatically extended thereafter for successive terms of one year each, unless
either party provides notice to the other at least sixty (60) days prior to the
expiration of the original or any extension term that the Agreement is not to
be extended. The term of this Agreement, as from time to time extended or
renewed, is hereafter referred to as “the term of this Agreement” or “the
term hereof.”   Notwithstanding
anything in this Agreement to the contrary, this Agreement shall be null, void
and without effect upon termination of the Merger Agreement prior to
consummation of the Merger.

 

3.             Capacity
and Performance.

(a)         Subject to earlier
termination as hereinafter provided, during the term of this Agreement, the
Executive shall serve the Company as its President of Finance and Chief Financial
Officer, reporting to the Company’s Chief Executive Officer. In addition,
during the term hereof, and without further compensation, the Executive shall
serve as a director and/or officer of one or more of the Company’s Affiliates
(as defined below) if so elected or appointed from time to time.

(b)         During the term
hereof, the Executive shall be employed by the Company on a full-time basis and
shall perform such duties and responsibilities on behalf of the Company and its
Affiliates consistent with the Executive’s position with the Company as may be
designated from time to time by the Board or by its designees.

(c)         During the term of the
Executive’s employment, the Executive shall devote the Executive’s full
business time and the Executive’s best efforts, business judgment, skill and
knowledge exclusively to the advancement of the business and interests of the
Company and its Affiliates and to the discharge of the Executive’s duties and
responsibilities hereunder. The Executive shall not engage in any other
business activity or serve in any industry, trade, professional, governmental
or academic position during the term of this Agreement, except as may be
expressly approved in advance by the Board in writing.

4.             Compensation
and Benefits. As compensation for all services performed by the Executive
under and during the term hereof and subject to performance of the Executive’s
duties and of the obligations of the Executive to the Company and its
Affiliates, pursuant to this Agreement or otherwise:

(a)         Base Salary. During
the term hereof, the Company shall pay the Executive a base salary at the rate
of Two Hundred Thirty Thousand Dollars ($230,000) per annum, payable in
accordance with the normal payroll practices of the Company for its executives
and subject to increase (but not decrease) from time to time by the Board, in
its discretion. The Board will review the Executive’s base salary each year. Such
base salary, as from time to time increased, is hereafter referred to as the “Base
Salary”.

(b)         Annual Bonus
Compensation.

(i)            During the term hereof and beginning
with the first fiscal year after the Closing Date, Executive shall be eligible
to receive an annual bonus of 100% of Base Salary (the “Target Bonus”),
subject to the achievement of an EBITDA target set by the Chairman of the Board
(after consultation with the Executive), approved by the Board and subject to
the terms and conditions of any applicable annual incentive program in effect
from time to time (the “Incentive Plan”). The amount of any bonus awarded
(whether more than or less than the Target Bonus) shall be determined by the
Board, based upon the achievement of the EBITDA target, after the completion of
the 

 2
 

Company’s
annual audit and the Board’s review thereof, and shall further be subject to the
terms of the Incentive Plan as in effect from time to time. Except as otherwise
expressly provided under this Agreement or under the terms of the Incentive
Plan as in effect from time to time, the Executive shall not be entitled to
earn bonus compensation for any period of service less than a full year, except
as set forth in Sections 5(a), 5(b), 5(d), 5(e), 5(g) and 5(h).

(ii)           Any bonus due
hereunder shall be payable not later than two and one half months following the
fiscal year for which the bonus was earned or as soon as is practicable within
the meaning of Section 409A of the Internal Revenue Code of 1986, as
amended, (“Section 409A”).

(c)         Equity Arrangements.
On the Effective Date, the Company will make a grant of restricted stock to the
Executive under the Company’s Stock Option and Restricted Stock Plan (the “Plan”).
The terms and conditions of such restricted stock grant shall be subject to the
terms of the Plan and the Restricted Stock Award Agreement in the form attached
hereto as Exhibit A.

(d)         Vacations. During
the term hereof, the Executive shall be entitled to four (4) weeks of
vacation per annum, to be taken at such times and intervals as shall be
determined by the Executive, subject to the reasonable business needs of the
Company.

(e)         Other Benefits.
During the term hereof and subject to any contribution therefor generally
required of employees of the Company, the Executive shall be entitled to
participate in any and all employee benefit plans from time to time in effect
for employees of the Company generally, except to the extent such plans are in
a category of benefit otherwise provided to the Executive. Such participation
shall be subject to (i) the terms of the applicable plan documents, (ii) generally
applicable Company policies and (iii) the discretion of the Board or any
administrative or other committee provided for in or contemplated by such plan.
The Company may alter, modify, add to or delete its employee benefit plans at
any time as it, in its sole judgment, determines to be appropriate, without
recourse by the Executive.

(f)          Perquisites. During
the term hereof, the Executive shall be entitled to receive any and all
perquisites in effect from time to time for senior executives of the Company
generally, except to the extent such perquisite is otherwise provided to the
Executive. Such receipt shall be subject to (i) generally applicable
Company policies and (ii) the discretion of the Board. The Company may
alter, modify, add to or delete any such perquisite at any time as it, in its sole
judgment, determines to be appropriate without recourse by the Executive.

(g)         Automobile
Allowance. During the term hereof, the Company will pay the Executive an
automobile allowance of Six Hundred and Fifty Dollars ($650.00) per month,
payable in accordance with the normal payroll practices of the Company for its
executives and subject to increase (but not decrease) from time to time by the
Board, in its discretion.

 3
 

(h)         Term Life Insurance.
During the term hereof, and, except as otherwise provided herein, for a period
of one (1) year thereafter, the Company shall bear the cost of a term life
insurance policy covering Executive in the amount of $1,000,000. All benefits
of such term life insurance policy shall inure to the Executive’s designated
beneficiaries. Such term life insurance policy shall become effective as soon
as possible after Executive has complied with the requirements of the insurance
company underwriting such policy (including but not limited to submission to
and satisfactory results of a physical evaluation).

(i)          Business Expenses.
The Company shall pay or reimburse the Executive for reasonable, customary and
necessary business expenses incurred or paid by the Executive in the
performance of the Executive’s duties and responsibilities hereunder, subject
to such reasonable substantiation and documentation as may be specified by the
Board or Company policy from time to time.

5.             Termination
of Employment and Severance Benefits. The Executive’s employment hereunder
shall terminate under the following circumstances:

(a)         Death. In the
event of the Executive’s death during the term hereof, the Executive’s
employment hereunder shall terminate and the Company shall pay or provide to
the Executive’s designated beneficiary or, if no beneficiary has been
designated by the Executive, to the Executive’s estate:  (i) any earned, but unpaid, Base Salary
through the date of termination; (ii) any earned, but unpaid annual bonus
for any fiscal year prior to the fiscal year of the Executive’s termination; (iii) a
pro rata portion (based on the number of days preceding the Executive’s
termination in the fiscal year of termination) of the Target Bonus; (iv) a
lump sum equal to the lesser of (A) twelve (12) months of Base Salary or (B) Base
Salary for the remainder of the term hereof; and (v) any unreimbursed
business expenses. In addition, subject to any employee contribution applicable
to employees and their dependents generally, for the twelve (12) month period
following termination, the Company shall continue to contribute to the premium
cost of coverage for the Executive’s dependents under the Company’s medical and
dental plans provided that a timely COBRA election is made. The payments
referred to in clauses (i), (ii) and (v) above shall be payable in a
lump-sum within thirty (30) days after the date of termination. The Company’s
payments under clauses (iii) and (iv) above, as well as the continued
contribution toward medical and dental premiums, are expressly conditioned upon
the Executive’s designated beneficiary, or if no beneficiary has been
designated, a representative of the Executive’s estate executing and delivering
to the Company a timely and effective separation agreement, including a general
release of claims, in form and substance satisfactory to the Company (“Separation
Agreement”). Payment under clauses (iii) and (iv) will be made
within thirty (30) days after the Company’s receipt of such release of claims
in form and substance satisfactory to the Company. Other than as set forth in
this clause (a), the Company shall have no further obligation to the Executive’s
beneficiary or the Executive’s estate.

(b)         Disability.

 4
 

(i)            The Company may
terminate the Executive’s employment hereunder, upon notice to the Executive,
in the event that the Executive becomes disabled during the Executive’s
employment hereunder through any illness, injury, accident or condition of
either a physical or psychological nature and, as a result, is unable to
perform substantially all of the Executive’s material duties and responsibilities
hereunder for (x) ninety (90) consecutive calendar days or (y) one
hundred and twenty (120) total days during any period of three hundred and
sixty-five (365) consecutive calendar days. The Board may designate another
employee to act in the Executive’s place during any period of the Executive’s
disability.

(ii)           If any question
shall arise as to whether during any period the Executive is disabled through
any illness, injury, accident or condition of either a physical or psycholog­ical
nature so as to be unable to perform substantially all of the Executive’s
duties and responsibilities hereunder, the Executive may, and at the request of
the Company shall, submit to a medical examination by a physician selected by
the Company to whom the Executive or the Executive’s duly appointed guardian,
if any, has no reasonable objection to determine whether the Executive is so
disabled and such determination shall for the purposes of this Agreement be
conclusive of the issue. If such question shall arise and the Executive shall
fail to submit to such medical examination, the Company’s determination of the
issue shall be binding on the Executive.

(iii)          Upon the giving of
notice of termination of the Executive’s employment due to disability
hereunder, the Company shall have no further obligation or liability to the
Executive, other than for (i) any earned, but unpaid, Base Salary through
the date of termination; (ii) any earned, but unpaid annual bonus for any
fiscal year prior to the fiscal year of the Executive’s termination; (iii) a
pro rata portion (based on the number of days preceding the Executive’s
termination in the fiscal year of termination) of the Target Bonus; (iv) a
lump sum payment equal to the lesser of (A) twelve (12) months of Base
Salary or (B) Base Salary for the remainder of the term hereof; and (v) any
unreimbursed business expenses. In addition, (x) the Company shall
continue the benefits contemplated by Section 4(h) for the period
contemplated therein, and (y) subject to any employee contribution
applicable to active employees and their dependents generally, for the twelve
(12) month period following termination, the Company shall continue to
contribute to the premium cost of coverage for the Executive and the Executive’s
dependents under the Company’s medical and dental plans provided that a timely
COBRA election is made. The payments referred to in clauses (i), (ii) and (v) above
shall be payable in a lump-sum within thirty (30) days after the date of
termination. The Company’s payments under clauses (iii) and (iv) above,
as well as the continued contribution toward medical and dental premiums, are
expressly conditioned upon the Executive (or the Executive’s duly appointed
guardian, if any) executing and delivering to the Company a timely and effective
Separation Agreement. Payment under clauses (iii) and (iv) will be
made within thirty (30) days after the Company’s receipt of the Separation
Agreement. Other than as set forth in this clause (b), the Company shall have
no further obligation to the Executive.

 5
 

(c)         By the Company for
Cause. The Company may terminate the Executive’s employment hereunder for
Cause at any time upon notice to the Executive setting forth in reasonable
detail the nature of such Cause. The following, as determined by the Board in
its reasonable judgment, shall constitute Cause for termination:

(i)            the Executive’s repeated and willful
refusal or failure (other than during periods of illness, disability or
vacation) to perform the Executive’s duties hereunder or under any lawful
directive of the Board (consistent with the terms of this Agreement;

(ii)           the Executive’s willful misconduct or
gross neglect in the performance of the Executive’s duties hereunder which in
either case is materially injurious to the Company or any of its Subsidiaries,
monetarily or otherwise;

(iii)          the willful material breach of this
Agreement by the Executive;

(iv)          except as provided in clause (v) below,
the conviction of the Executive of any felony or any other crime
involving dishonesty or moral turpitude or the Executive’s pleading guilty to any felony, other than motor
vehicle offenses, or any other crime involving dishonesty or moral
turpitude;

(v)           the commission of
fraud, embezzlement, theft or other dishonesty by the Executive with respect to
the Company or any of its Affiliates;

(vi)          any other conduct
that involves a breach of fiduciary obligation on the part of the Executive or
otherwise could reasonably be expected to have a material adverse effect upon
the business, interests or reputation of the Company or any of its Affiliates;
or

(vii)         a previous employer of Executive shall
commence against Executive and/or Cellu Tissue an action, suit, proceeding or
demand arising from an alleged violation of a non-competition or other similar
agreement between Executive and such previous employer.

For purposes of this Section 5(c),
no act, or failure to act, on the Executive’s part, will be considered “willful”
unless done or omitted to be done by him not in good faith and without a
reasonable belief that the Executive’s action or omission was in furtherance of
the Company’s business. If the Company desires to terminate the Executive’s
employment pursuant to clause (i), (ii), (iii) or (v) above, it shall
first give the Executive written notice of the facts and circumstances
providing Cause and shall allow the Executive no less than twenty (20) days (x) in
the case of a proposed termination pursuant to clause (i), (ii) or (iii) above
to remedy, cure or rectify the situation giving rise to Cause and (y) in
the case of a proposed termination pursuant to clause (v) above to explain
the circumstances of the Executive’s actions or to show that the circumstances
underlying the indictment do not constitute the type of felony described in
clause (v). Termination by the Company for Cause pursuant to clause (iv) above
may be effected by 

 6
 

written notice of the
Company to the Executive. Upon the giving of notice of termination of
the Executive’s employment hereunder for Cause, the Company shall have no
further obligation to the Executive, other than for (i) Base Salary
earned, but unpaid at the date of termination, (ii) any earned, but unpaid
annual bonus for any fiscal year prior to the fiscal year of termination of the
Executive’s employment; and (iii) any unreimbursed business expenses.

(d)         By the Company
without Cause. The Company may terminate the Executive’s employment
hereunder without Cause at any time upon notice to the Executive. In the event
of such termination, the Company shall have no further obligation or liability
to the Executive, other than for (i) any earned, but unpaid, Base Salary
through the date of termination; (ii) any earned, but unpaid annual bonus
for any fiscal year prior to the fiscal year of the Executive’s termination; (iii) a
pro rata portion (based on the number of days preceding the Executive’s
termination in the fiscal year of termination) of the Target Bonus; (iv) a
lump sum equal to twenty-four (24) months of Base Salary; (v) a lump sum
equal to one times the Target Bonus; and (vi) any unreimbursed business
expenses. In addition, (x) the Company shall continue the benefits
contemplated by Section 4(h) for the period contemplated therein, and
(y) subject to any employee contribution applicable to employees and their
dependents generally, for the twelve (12) month period following termination,
or if earlier, until the date that the Executive becomes eligible for coverage
with a subsequent employer, the Company shall continue to contribute to the
premium cost of coverage for the Executive and the Executive’s dependents under
the Company’s medical and dental plans provided that a timely COBRA election is
made. The payments referred to in clauses (i), (ii) and (vi) above
shall be payable in a lump-sum within thirty (30) days after the date of
termination. The Company’s payments under clauses (iii), (iv) and (v) above,
as well as the continued contribution toward medical and dental premiums, are
expressly conditioned upon the Executive executing and delivering to the
Company a timely and effective Separation Agreement. Payment under clauses
(iii), (iv) and (v) will be made within thirty (30) days after the
Company’s receipt of the Separation Agreement. Other than as set forth in this
clause (d), the Company shall have no further obligation to the Executive.

(e)         By the Executive
for Good Reason. The Executive may terminate the Executive’s employment
hereunder for Good Reason, provided that the Executive shall have given written
notice setting forth in reasonable detail the nature of such Good Reason to the
Company upon the Executive’s becoming aware or at such time as Executive should
have been aware of the occurrence of any such event or condition, and the
Company shall not have fully corrected the situation within ten (10) days
after such notice of Good Reason. The following shall constitute “Good
Reason” for termination by the Executive:

(i)            failure by the Company to pay any
compensation when due hereunder;

(ii)           any significant reduction by the
Company’s of the Executive’s title, duties or responsibilities (except in
connection with termination of the Executive’s 

 7
 

employment
for Cause, as a result of Disability, as a result of the Executive’s death or
by the Executive other than for Good Reason);

(iii)          a reduction by the Company in the
Executive’s Base Salary or any other compensation due hereunder; or

(iv)          any material breach by the Company of
any other provision of this Agreement.

If the Executive desires to terminate the
Executive’s employment with the Company pursuant to this Section 5(e), the
Executive shall first give written notice of the facts and circumstances
providing Good Reason to the Company, and shall allow the company no less than
twenty (20) days to remedy, cure or rectify the situation giving rise to Good
Reason. The Company’s failure to continue the Executive’s appointment or
election as a director or officer of any of its Affiliates, a change in
reporting relationships resulting from the direct or indirect control of the
Company (or a successor corporation) by another corporation (in the absence of
an independent change constituting Good Reason as defined above) and any
diminution of the business of the Company or any of its Affiliates or any sale
or transfer of equity, property or other assets of the Company or any of its
Affiliates (in the absence of an independent change constituting Good Reason as
defined above) shall not constitute Good Reason. In the event of termination in
accordance with this Section 5(e), then the Executive will be entitled to
receive the payments and benefits in accordance with Section 5(d) hereof
provided the Executive complies with the requirement of executing and
delivering the Separation Agreement. Other than as set forth in this clause
(e), the Company shall have no further obligation to the Executive.

(f)          By the Executive
Without Good Reason. The Executive may terminate the Executive’s employment
hereunder at any time upon sixty (60) days’ written notice to the Company. In
the event of termination of the Executive pursuant to this Section 5(f),
the Board may elect to waive the period of notice, or any portion thereof, and,
if the Board so elects, the Company will pay the Executive the Executive’s Base
Salary for the notice period (or for any remaining portion of the period). The
Company shall also pay the Executive (i) any earned, but unpaid annual
bonus for any fiscal year prior to the fiscal year of the termination of the
Executive’s employment, and (ii) any unreimbursed business expenses.

(g)         Non-Renewal by
Company. The Company may elect not to renew this Agreement in accordance
with Section 2 above. In the event of such non-renewal for a reason other
than Cause (as defined in Section 5(c) above), the Company shall have
no further obligation or liability to the Executive other than for (i) any
earned, but unpaid, Base Salary through the date of termination; (ii) any
earned, but unpaid annual bonus for any fiscal year prior to the fiscal year of
the Executive’s termination; (iii) a pro rata portion (based on the number
of days preceding the Executive’s termination in the fiscal year of
termination) of the Target Bonus; (iv) a lump sum equal to twenty-four
(24) months of Base Salary and (v) any unreimbursed business expenses. In
addition, subject to any employee contribution applicable to employees and
their dependents generally, for the twenty-four (24) month period following 

 8
 

termination, or if earlier until the date that the Executive becomes
eligible for coverage with a subsequent employer, the Company shall continue to
contribute to the premium cost of coverage for the Executive and the Executive’s
dependents under the Company’s medical and dental plans provided that a timely
COBRA election is made. The payments referred to in clauses (i), (ii) and (v) above
shall be payable in a lump-sum within thirty (30) days after the date of
termination. The Company’s payments under clauses (iii) and (iv) above,
as well as the continued contribution toward medical and dental premiums, are
expressly conditioned upon the Executive executing and delivering to the
Company a timely and effective Separation Agreement. Payment under clauses (iii) and
(iv) will be made within thirty (30) days after the Company’s receipt of
such Separation Agreement. Other than as set forth in this clause (g), the
Company shall have no further obligation to the Executive or the Executive’s
estate hereunder.

(h)         Change of
Control/Gross Up Payment. The Company and the Executive agree that in the
event that any of the severance payments or severance benefits under Sections
5(d), 5(e) or 5(g) of this Agreement might be characterized as
parachute payments under Section 280G of the Internal Revenue Code of
1986, as amended (“Section 280G”), the parties shall timely take
reasonable steps to avoid the tax liability under Section 280G and Section 4999
of the Internal Revenue Code of 1986, as amended (the “Code”) to the
extent permitted by law. Accordingly, the Executive agrees to cooperate fully
in procuring a shareholder vote (including, but not limited to, providing any
required consents or waivers) to approve the severance payments or severance
benefits under this Agreement received, to be received by, or payable on behalf
of, the Executive in satisfaction of the shareholder approval requirements
described in Treas. Reg. Section 1.280G-1, Q&A-7, to the
extent applicable. If the shareholder approval requirements described in Treas.
Reg. Section 1.280G-1, Q&A-7 cannot be satisfied and if
the Company determines that any of the severance payments or severance benefits
under this Agreement received, to be received by, or payable on behalf of, the
Executive would be subject to the excise tax imposed by Section 4999 of
the Code, (the “Excise Tax”), then the Company will, on or prior to the
date on which the Excise Tax must be paid or withheld, make an additional lump
sum payment (the “gross up payment”) to the Executive. The gross up
payment will be sufficient, after giving effect to federal, state, and local
income taxes (excluding any taxes imposed under or as a result of Section 409A,
but otherwise including interest and penalties, if any) with respect to the
gross up payment, to make the Executive whole for such taxes and associated
interest and penalties imposed under or as a result of Section 4999. Determinations
under this Section 5(h) will be made by the Company’ s independent
auditors unless the Executive has reasonable objections to the use of that
firm, in which case the determinations will be made by a comparable firm chosen
by the Executive after consultation with the Company (the firm making the
determinations to be referred to as the “Firm”). The determinations of
the Firm will be binding upon the Company and the Executive except as the
determinations are established in resolution (including by settlement) of a
controversy with the Internal Revenue Service to have been incorrect. All fees
and expenses of the Firm will be paid by the Company. If the Internal Revenue
Service asserts a claim that, if successful, would require the Company to make
a gross up payment or an additional gross up payment, the Company and the
Executive will cooperate fully in resolving the controversy with the Internal
Revenue Service. The Company will make or advance such gross up payments as are
necessary 

 9
 

to prevent the Executive from having to bear the cost of the payments
to the Internal Revenue Service in the course of, or as a result of, the
controversy. The Firm will determine the amount of such gross up payments or
advances and will determine after resolution of the controversy whether any
advances must be returned by the Executive to the Company. The Company will
bear all expenses of the controversy.

(i)          Timing of Payments.
If at the time of the Executive’s separation from service, the Executive is a “specified
employee,” as hereinafter defined, any and all amounts payable under this Section 5
in connection with such separation from service that constitute deferred
compensation subject to Section 409A, as determined by the Company in its
sole discretion, and that would (but for this sentence) be payable within six
months following such separation from service, shall instead be paid on the
date that follows the date of such separation from service by six (6) months.
For purposes of the preceding sentence, “separation from service” shall be
determined in a manner consistent with subsection (a)(2)(A)(i) of Section 409A
and the term “specified employee” shall mean an individual determined by the
Company to be a specified employee as defined in subsection (a)(2)(B)(i) of
Section 409A.

6.             Effect
of Termination. The provisions of this Section 6 shall apply to a
termination pursuant to Section 5 or otherwise.

(a)         A condition precedent
to the Company’s obligations to provide any severance payments or severance
benefits hereunder, including lump-sum payments, vesting of restricted stock
and contributions toward health insurance premiums, shall be the Executive’s
executing and delivering (and not revoking) a timely and effective Separation
Agreement, or in the case of a termination due to the death of the Executive,
the Executive’s beneficiary or representative of the Executive’s estate
executing and delivering a general release of claims in form and substance
satisfactory to the Company.

(b)         Upon termination of
the Executive’s employment with the Company, unless otherwise specifically
provided herein, the Executive’s rights to benefits and payments under any
benefits or welfare plan or under any stock option, restricted stock, stock
appreciation right, bonus unit, management or bonus incentive or other plan of
the Company shall be determined in accordance with the terms and provisions of
such plans and any agreements under which such stock options, restricted stock
or other awards were granted.

(c)         Provisions of this
Agreement shall survive any termination if so provided herein or if necessary or
desirable fully to accomplish the purposes of such provision, including without
limitation the obligations of the Executive under Sections 7, 8 and 9 hereof. The
obligation of the Company to provide any severance payment or benefit is
expressly conditioned upon the Executive’s continued full performance of
obligations under Sections 7, 8 and 9 hereof. The Executive recognizes that,
except as expressly provided in Sections 5(d), 5(e) or 5(g), no compen­sation
is earned after termination of employment.

 10

 

 

(d)         Except as expressly provided herein,
Executive is entitled to no payments or benefits in connection with a
termination of the Executive’s employment.

7.    Confidential
Information.

(a)         The
Executive acknowledges that the Company and its Affiliates continually develop “Trade
Secrets” and “Confidential Information” that the Executive may develop Trade
Secrets and Confidential Information for the Company or its Affiliates and that
the Executive may learn of Trade Secrets and Confidential Information during the
course of employment. The Executive will comply with the policies and
procedures of the Company and its Affiliates for protecting Trade Secrets and
Confidential Information and shall never disclose to any Person (except as
required by applicable law or for the proper performance of the Executive’s
duties and responsibilities to the Company and its Affiliates), or use for the
Executive’s own benefit or gain, any Trade Secrets or Confidential Information
obtained by the Executive incident to the Executive’s employment or other
association with the Company or any of its Affiliates.

(b)         For purposes of this
Agreement, “Trade Secrets means all information that constitutes a trade secret
within the meaning of the Georgia Trade Secrets Act, as amended (the “Georgia
Act”). Under the Georgia Act, a trade secret is defined as:  “Information without regard to form,
including, but not limited to, technical or non-technical data, a formula, a
pattern, a compilation, a program, a device, a method, a technique, a drawing,
a process, financial data, financial plans, product plans, or a list of actual
or potential customers or suppliers which is not commonly known by or available
to the public and which information:  (i) derives
economic value, actual or potential, from not being generally known to, and not
being readily ascertainable by proper means by, other persons who can obtain
economic value from its disclosure or use; and (ii) is the subject of
efforts that are reasonable under the circumstances to maintain its secrecy.”

(c)            For purposes of
this Agreement, “Confidential Information” means any and all information
of the Company and its Affiliates other than Trade Secrets that is not
generally known by others with whom they compete or do business, or with whom
they plan to compete or do business and any and all information, not publicly
known, which, if disclosed by the Company or its Affiliates would assist in
competition against them. Confidential Information includes without limitation
such information relating to (i) the development, research, testing,
manufacturing, marketing and financial activities of the Company and its
Affiliates, (ii) the Products, (iii) the costs, sources of supply,
financial performance and strategic plans of the Company and its Affiliates, (iv) the
identity and special needs of the customers of the Company and its Affiliates
and (v) the people and organizations with whom the Company and its
Affiliates have business relationships and those relationships. Confidential
Information also includes comparable information that the Company or any of its
Affiliates have received belonging to others or which was received by the
Company or any of its Affiliates with any understanding that it would not be
disclosed.

 11
 

 

 

(d)           The foregoing
obligations do not apply to the extent that the Confidential Information is or
becomes generally available to the public through no fault of the Executive. The
Executive understands and agrees that the Executive’s obligations under this
Agreement with regard to Trade Secrets shall remain in effect for as long as
such information shall remain a trade secret under applicable law. The
Executive acknowledge that the Executive’s obligations with regard to the
Confidential Information shall remain in effect while employed or retained by
the Company and for three (3) years after the termination of employment,
regardless of the reason for such termination.

(e)         All documents, records, tapes and other
media of every kind and description relating to the business, present or
otherwise, of the Company or its Affiliates and any copies, in whole or in
part, thereof (the “Documents”), whether or not prepared by the
Executive, shall be the sole and exclusive property of the Company and its
Affiliates. The Executive shall safeguard all Documents and shall surrender to
the Company at the time the Executive’s employment terminates, or at such
earlier time or times as the Board or its designee may specify, all Documents
then in the Executive’s possession or control.

8.    Assignment
of Rights to Intellectual Property. The Executive shall promptly and fully
disclose all Intellectual Property to the Company. The Executive hereby assigns
and agrees to assign to the Company (or as otherwise directed by the Company)
the Executive’s full right, title and interest in and to all Intellectual
Property. The Executive agrees to execute any and all applications for domestic
and foreign patents, copyrights or other proprietary rights and to do such
other acts (including without limitation the execution and delivery of instruments
of further assurance or confirmation) requested by the Company to assign the
Intellectual Property to the Company and to permit the Company to enforce any
patents, copyrights or other proprietary rights to the Intellectual Property.
The Executive will not charge the Company for time spent in complying with
these obligations. All copyrightable works that the Executive creates shall be
considered “work made for hire.”

9.    Restricted
Activities. In exchange for good and valuable consideration including,
without limitation, the grant of restricted stock hereunder, the Executive
agrees that some restrictions on the Executive’s activities during and after
the Executive’s employment are necessary to protect the goodwill, Confidential
Information and other legitimate interests of the Company and its Affiliates:

(a)         While the Executive is employed by the
Company and for a period of twenty-four (24) months after the Executive’s
employment terminates (the “Non-Competition Period”), the Executive shall not,
directly or indirectly, provide services in a Restricted Capacity to any Person
with respect to any product or service of that Person which directly competes
with, or may be used in substitution for, one or more of the Products of the
Company and/or its Subsidiaries with respect to which the Executive has had
access to Confidential Information or customer goodwill as a result of the
Executive’s employment or other association with the Company and/or its
Subsidiaries, but this restriction shall apply only with respect to the
following states:  Alabama, Alaska,
Arizona, Arkansas, California, Colorado, Connecticut,

 12
 

 

 

Florida, Georgia, Hawaii, Illinois, Indiana,
Iowa, Kansas, Kentucky, Louisiana, Maine, Maryland, Massachusetts, Michigan,
Minnesota, Mississippi, Missouri, Nebraska, Nevada, New Jersey, New Mexico, New
York, North Carolina, North Dakota, Ohio, Oklahoma, Oregon, Pennsylvania, Rhode
Island, South Carolina, Tennessee, Texas, Utah, Virginia, Washington and
Wisconsin.  For the purposes of this Section 9,
the business of the Company and its Subsidiaries shall include the research,
development, testing, manufacture, sale, license, lease or distribution of all
Products and the Executive’s undertaking shall encompass all items, products
and services that may be used in substitution for Products.

(b)         The Executive further agrees that while
the Executive is employed by the Company and during the Non-Competition Period,
the Executive will not, and will not assist anyone else to solicit for hiring
any employee of the Company or any of its Affiliates, or seek to persuade any
employee of the Company or any of its Affiliates to discontinue employment. For
purposes of this Agreement, an “employee” of the Company or any of its
Affiliates is any person who was such at any time within the preceding one
year.

(c)         The Executive further agrees that while
the Executive is employed by the Company and during the Non-Competition Period,
the Executive will not directly or indirectly (1) solicit or encourage any
customer of the Company or any of its Affiliates to terminate or diminish its
relationship with them, or, (2) seek to persuade any customer or
prospective customer of the Company or any of its Affiliates to conduct with
any Person any business or activity which such customer or prospective customer
conducts or could conduct with the Company; provided that these restrictions
shall apply (a) only with respect to those Persons who are or have been a
customer of the Company of any of its Affiliates at any time within the
immediately preceding one year period or whose business has been solicited on
behalf of the Company or any of its Affiliates by any of their officers,
employees or agents within said one year period, other than by form letter,
blanket mailing or published advertisement, and (b) only if the Executive
had a business relationship with such Person as a result of the Executive’s
employment or other associations with the Company or one of its Affiliates. Notwithstanding
anything to the contrary contained in this Section 9, after termination of
Executive’s employment, this restriction shall apply only to customers or
prospective customers located in those states within the United States in which
the Company was doing business during the year preceding Executive’s
termination.

(d)         The Executive further agrees that while
the Executive is employed by the Company and during the Non-Competition Period
the Executive shall not willfully make false, misleading or disparaging
statements about the Company including, without limitation, its products,
services, management, direct or indirect equity holders, employees and
customers.

10.  Enforcement
of Covenants. The Executive acknowledges that the Executive has carefully
read and considered all the terms and conditions of this Agreement, including
the restraints imposed upon the Executive’s pursuant to Sections 7, 8 and 9
hereof. The Executive agrees without reservation that each of the restraints
contained herein is necessary for the reasonable and proper protection of the
goodwill, Confidential Information and other legitimate 

 13
 

 

 

interests of the Company
and its Affiliates; that each and every one of those restraints is reasonable
in respect to subject matter, length of time and geographic area; and that
these restraints, individually or in the aggregate, will not prevent the
Executive from obtaining other suitable employment during the period in which
the Executive is bound by these restraints. The Executive further agrees that
the Executive will never assert, or permit to be asserted on the Executive’s
behalf, in any forum, any position contrary to the foregoing.  The Executive further acknowledges that, were
the Executive to breach any of the covenants contained in Sections 7, 8 or 9
hereof, the damage to the Company would be irreparable. The Executive therefore
agrees that the Company, in addition to any other remedies available to it,
shall be entitled to preliminary and permanent injunctive relief against any
breach or threatened breach by the Executive of any of said covenants, without
having to post bond. The parties further agree that, in the event that any
provision of Section 7, 8 or 9 hereof shall be determined by any court of
competent jurisdiction to be unenforceable by reason of its being extended over
too great a time, too large a geographic area or too great a range of
activities, such provision shall be deemed to be modified to permit its
enforcement to the maximum extent permitted by law.

11.  Conflicting
Agreements. The Executive hereby represents and warrants that the execution
of this Agreement and the performance of the Executive’s obligations hereunder
will not breach or be in conflict with any other agreement to which the
Executive is a party or is bound and that the Executive is not now subject to
any covenants against competition or similar covenants that would affect the
performance of the Executive’s obligations hereunder. The Executive will not
disclose to or use on behalf of the Company any proprietary information of a
third party without such party’s consent.

12.  Indemnification.
The Executive shall be entitled, at all times (including after the termination
of this Agreement for any reason), to the benefit of the maximum
indemnification and advancement of expenses available from time to time under
the Company’s certificate of incorporation and Bylaws, and if not set forth
therein, to the maximum extent available under the laws of the State of
Delaware. In addition, the Company shall maintain in full force and effect the
directors’ and officers’ liability insurance policy currently in effect or such
other insurance with reputable insurance carriers which may provide for a
reduced level of coverage for the Executive, provided that such coverage is
identical to that provided by the Company for the benefit of the other directors
of the Company and its other executive officers. The Executive agrees to
promptly notify the Company of any actual or threatened claim arising out of or
as a result of the Executive’s employment with the Company. The Executive
hereby represents and warrants to the Company that, as of the date hereof, the
Executive has no and is aware of no such claim.

13.  Definitions.
Words or phrases which are initially capitalized or are within quotation marks
shall have the meanings provided in this Section 13 and as provided
elsewhere herein. For purposes of this Agreement, the following definitions
apply:

 14
 

 

 

(a)         “Affiliates”
means all persons and entities directly or indirectly controlling, controlled
by or under common control with the Company, where control may be by either
management authority or equity interest.

(b)         “Change of Control”
means (i) a sale of all or substantially all of the assets of the Company,
Cellu Paper or Cellu Parent to a Person in which the shareholders of Cellu
Parent immediately prior to such transaction do not, directly or indirectly,
own securities representing more than 50% of the voting power of the Person
acquiring such assets immediately following the transaction, (ii) a sale
of shares of capital stock of Cellu Parent by Cellu Parent or its shareholders
resulting in more than 50% of the voting power of Cellu Parent being held,
directly or indirectly, by a Person other than the shareholders of Cellu Parent
immediately prior to such sale, (iii) a sale by Cellu Parent of the equity
securities of Cellu Paper or the Company resulting in more than 50% of the
voting power of Cellu Paper or Cellu Tissue (as the case may be) being held
directly or indirectly by a Person other than Cellu Parent or the shareholders
of Cellu Parent immediately prior to such sale, or (iv) a merger or
consolidation of the Company, Cellu Paper or Cellu Parent with or into another
Person, if and only if, after such merger or consolidation, more than 50% of
the voting power of the Company, Cellu Paper or Cellu Parent (as the case may
be) is directly or indirectly owned by a Person other than Cellu Parent or the
shareholders of Cellu Parent immediately prior to such merger or consolidation.
For the avoidance of doubt, the transaction contemplated by the Merger
Agreement shall not constitute a Change of Control.

(c)         “Intellectual
Property” means inventions, discoveries, developments, methods, processes,
compositions, works, concepts and ideas (whether or not patentable or
copyrightable or constituting trade secrets) conceived, made, created,
developed or reduced to practice by the Executive (whether alone or with
others, whether or not during normal business hours or on or off Company
premises) during the Executive’s employment and during the period of six (6) months
immediately following termination of the Executive’s employment that relate to
either the Products or any prospective activity of the Company or any of its
Affiliates.

(d)         “Person” means
an individual, a corporation, an association, a partnership, an estate, a trust
and any other entity or organization, other than the Company or any of its
Affiliates.

(e)         “Products” mean
all specialty paper products, tissue hard rolls, tissue converted products
and/or deep colored napkin products planned, researched, developed, tested,
manufactured, sold, licensed, leased or otherwise distributed or put into use
by the Company or any of its Affiliates, together with all services provided or
planned by the Company or any of its Affiliates, during the Executive’s
employment.

(f)          “Restricted
Capacity” means a position which is the same or comparable to the position
the Executive held with the Company or in which the Confidential Information or
customer goodwill which the Executive created or to which the Executive had
access during the Executive’s employment with the Company would give that competitor
an unfair

 15
 

 

 

competitive advantage. For the avoidance of doubt, this definition as
used herein shall in no way diminish the Executive’s obligations under Section 7.

14. Withholding. All payments made by the
Company under this Agreement shall be reduced by any tax or other amounts
required to be withheld by the Company under applicable law.

15. Assignment. Neither the Company nor the
Executive may make any assignment of this Agreement or any interest herein, by
operation of law or otherwise, without the prior written consent of the other; provided, however, that
the Company may assign its rights and obligations under this Agreement without
the consent of the Executive in the event that the Company shall hereafter
affect a reorganization, consolidate with, or merge into, any other Person or
transfer all or substantially all of its properties or assets to any other
Person. This Agreement shall inure to the benefit of and be binding upon the
Company and the Executive, their respective successors, executors,
administrators, heirs and permitted assigns.

16.  Severability.
If any portion or provision of this Agreement shall to any extent be declared
illegal or unenforceable by a court of competent jurisdiction, then the
remainder of this Agreement, or the application of such portion or provision in
circumstances other than those as to which it is so declared illegal or
unenforceable, shall not be affected thereby, and each portion and provision of
this Agreement shall be valid and enforceable to the fullest extent permitted
by law.

17.  Waiver. No waiver of any provision hereof shall
be effective unless made in writing and signed by the waiving party. The
failure of either party to require the performance of any term or obligation of
this Agreement, or the waiver by either party of any breach of this Agreement,
shall not prevent any subsequent enforcement of such term or obligation or be
deemed a waiver of any subsequent breach.

18.  Notices.
Any and all notices, requests, demands and other communications provided for by
this Agreement shall be in writing and shall be effective when delivered in
person or deposited in the United States mail, postage prepaid, registered or
certified, and addressed to the Executive at the Executive’s last known address
on the books of the Company or, in the case of the Company, at its principal
place of business, attention of the Chairman of the Board, or to such other
address as either party may specify by notice to the other actually received.

19.  Entire
Agreement. This Agreement constitutes the entire agreement between the
parties and supersedes and terminates all prior communications, agreements and
understandings, written or oral, with respect to the terms and conditions of
the Executive’s employment with the Company. For the avoidance of doubt, in
consideration of the benefits to which the Executive is entitled under this
Agreement and other good and valuable consideration, the Executive hereby
waives any and all rights to any severance payment, change of control payment
or any other payment or benefit that the Executive may have under any agreement
with, or policy of, the

 16
 

 

Company.

20.  Amendment; Section 409A.
This Agreement may be amended or modified only by a written instrument signed
by the Executive and by an expressly authorized representative of the Company. The
parties acknowledge that certain provisions of this Agreement
may be required to be amended, following the issuance of additional guidance by
the Internal Revenue Service with respect to Section 409A, to avoid the
possible imposition of additional tax under Section 409A with respect to
certain payments and benefits under this Agreement. The Company agrees that it
will not unreasonably withhold its consent to any such amendments which in its
determination are (i) feasible and necessary to avoid adverse tax
treatment under Section 409A for the Executive, and (ii) not adverse
to the interests of the Company.

21.  Dispute Resolution. In
the event of any dispute relating to Executive’s employment, the termination
thereof, or this Agreement, other than a dispute in which the primary relief
sought is an equitable remedy such as an injunction, the parties shall be
required to have the dispute, controversy or claim settled by alternative
dispute resolution conducted by JAMS (or, if JAMS is not available, another
mutually agreeable alternative dispute resolution organization), in the city of
Executive’s principal place of employment. Any award entered by JAMS (or such
other organization) shall be final, binding and nonappealable, and judgment may
be entered thereon by either party in accordance with applicable law in any
court of competent jurisdiction. This Section 21 shall be specifically
enforceable. JAMS (or such other organization) shall have no authority to
modify any provision of this Agreement. THE PARTIES IRREVOCABLY WAIVE ANY RIGHT
TO TRIAL BY JURY AS TO ALL CLAIMS HEREUNDER.

22  
Headings. The headings and captions in this Agreement are for
convenience only and in no way define or describe the scope or content of any
provision of this Agreement.

23.  Counterparts.
This Agreement may be executed in two or more counterparts, each of which shall
be an original and all of which together shall constitute one and the same instrument.

24.  Governing
Law, Choice of Forum. This is a New York contract and shall be construed
and enforced under and be governed in all respects by the laws of the State of
New York, without regard to the conflict of laws principles thereto. The
parties consent to the jurisdiction of any state or federal court sitting in
the State of New York and waive any objection either party may have to the
laying of venue of any such suit, action or proceeding in any such court. The
Company and the Executive each also irrevocably and unconditionally consent to
service of any process, pleadings, notices or other papers in a manner
permitted by the notice provisions of Section 18 of this Agreement.

 17

 

 

IN WITNESS
WHEREOF, this Agreement has been executed as a sealed instrument by the
Company, by its duly authorized representative, and by the Executive, as of the
date first above written.

	
  THE EXECUTIVE:

  	
   

  	
  THE COMPANY:

  
	
   

  	
   

  	
  CELLU TISSUE HOLDINGS,
  INC.

  
	
   

  	
   

  	
   

  
	
  /s/ Dianne M.
  Scheu

  	
   

  	
  By: /s/ Russell C.
  Taylor

  
	
  Dianne M. Scheu

  	
   

  	
   

  
	
   

  	
   

  	
  Title: President

  

 

 

EXHIBIT A

[Form of
Restricted Stock Award Agreement]

 

THE SHARES
RECEIVED PURSUANT TO THIS AWARD SHALL BE SUBJECT TO THE RIGHTS, RESTRICTIONS,
AND OBLIGATIONS APPLICABLE TO SUCH SECURITIES, ALL AS PROVIDED IN THE
SHAREHOLDERS AGREEMENT DATED AS OF JUNE 12, 2006 BETWEEN THE COMPANY AND IT
SHAREHOLDERS, AS AMENDED AND IN EFFECT FROM TIME TO TIME (THE “SHAREHOLDERS
AGREEMENT”).

Ms. Dianne Scheu

CELLU
PARENT CORPORATION

2006 STOCK OPTION AND RESTRICTED STOCK PLAN

Restricted Stock Award Agreement

Cellu Parent Corporation

c/o Weston Presidio

Pier 1, Bay 2

San
Francisco, CA 94111

Attn:       Chief Executive
Officer

Ladies
and Gentlemen:

The undersigned (i) acknowledges that she has received an award
(the “Award”) of restricted stock from Cellu Parent Corporation (the “Company”)
under the Cellu Parent Corporation 2006 Stock Option and Restricted Stock Plan
(the “Plan”), subject to the terms set forth below and in the Plan; (ii) further
acknowledges receipt of a copy of the Plan as in effect on the date hereof; and
(iii) agrees with the Company as follows:

1.               Effective Date. This Agreement shall take effect as of June 12,
2006, which is the date of grant of the Award.

2.               Shares Subject to Award. The Award consists of 1,349 shares (the “Shares”)
of common stock of the Company (“Stock”). The undersigned’s rights to the
Shares are subject to the restrictions described in this Agreement and the Plan
(which is incorporated herein by reference with the same effect as if set forth
herein in full) in addition to such other restrictions, if any, as may be
imposed by law.

3.               Meaning of Certain Terms. Except as otherwise expressly provided, all
terms used herein shall have the same meaning as in the Plan. The term “vest”
as used herein with respect to any Share means the lapsing of the restrictions
described herein with respect to such Share.

4.               Nontransferability of Shares. The Shares acquired by the undersigned
pursuant to this Agreement shall not be sold, transferred, pledged, assigned or
otherwise encumbered or disposed of except as provided below and in the Plan.

5.               Forfeiture Risk. If the undersigned ceases to be employed by
the Company and its subsidiaries any then outstanding and unvested Shares
acquired by the undersigned hereunder shall be automatically and immediately
forfeited; provided, however, that if the
undersigned ceases to be employed by the Company due to the undersigned’s death
or disability, fifty  percent (50%) of
the Shares granted under this Award that are not then already vested shall

 

 

vest;
and further provided that if the
undersigned ceases to be employed by the Company by reason of the Company’s
election not to renew the undersigned’s employment agreement with the Company
dated June 12, 2006 (the “Employment Agreement”) and at the time the
Company elects not to renew such Employment Agreement there exists no Cause for
the termination of the undersigned, one hundred percent (100%) of the Shares
granted under this Award that are not then already vested shall vest. For
purposes of the preceding sentence, Cause shall be as defined in the Employment
Agreement. The undersigned hereby (i) appoints the Company as the
attorney-in-fact of the undersigned to take such actions as may be necessary or
appropriate to effectuate a transfer of the record ownership of any such shares
that are unvested and forfeited hereunder, (ii) agrees to deliver to the
Company, as a precondition to the issuance of any certificate or certificates
with respect to unvested Shares hereunder, one or more stock powers, endorsed
in blank, with respect to such Shares, and (iii) agrees to sign such other
powers and take such other actions as the Company may reasonably request to
accomplish the transfer or forfeiture of any unvested Shares that are forfeited
hereunder.

6.               Retention of Certificates. Any certificates representing unvested
Shares shall be held by the Company. If unvested Shares are held in book entry
form, the undersigned agrees that the Company may give stop transfer
instructions to the depository to ensure compliance with the provisions hereof.

7.               Vesting of Shares. The shares acquired hereunder shall vest in
accordance with the provisions of this Paragraph 7 and applicable provisions of
the Plan, as follows:

25% of the Shares on and
after June 12, 2007;

an additional 25% of the
Shares on and after June 12, 2008;

an additional 25% of the
Shares on and after June 12, 2009; and

an additional 25% of the
Shares on and after June 12, 2010.

Notwithstanding the foregoing, no shares
shall vest on any vesting date specified above unless the undersigned is then,
and since the date of grant has continuously been, employed by the Company or
its subsidiaries.

8.               Shareholders Agreement. The granting of this Award and the issuance
of Shares received under this Award shall be subject to the Plan and the
Shareholders Agreement, and the issuance of this Award shall be conditional
upon the execution and delivery by the undersigned of the Shareholders
Agreement. Any Shares received under this Award shall be subject to the rights,
restrictions and obligations applicable to options and shares of Stock of the
Company as provided from time to time in such Shareholders Agreement.

9.               Legend. Any certificates representing unvested
Shares shall be held by the Company, and any such certificate shall contain a
legend substantially in the following form:

THE TRANSFERABILITY OF THIS CERTIFICATE AND
THE SHARES OF STOCK REPRESENTED HEREBY ARE SUBJECT TO THE TERMS AND CONDITIONS
(INCLUDING FORFEITURE) OF THE CELLU PARENT CORPORATION 2006 STOCK OPTION AND
RESTRICTED STOCK PLAN AND A RESTRICTED STOCK AWARD AGREEMENT ENTERED INTO
BETWEEN THE REGISTERED OWNER

 2
 

 

 

AND CELLU PARENT CORPORATION. COPIES OF SUCH
PLAN AND AGREEMENT ARE ON FILE IN THE OFFICES OF CELLU PARENT CORPORATION.

THE SECURITIES
REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO THE TERMS AND CONDITIONS,
INCLUDING CERTAIN RESTRICTIONS ON TRANSFER, OF A SHAREHOLDERS AGREEMENT DATED
AS OF JUNE 12, 2006 BETWEEN CELLU TISSUE CORPORATION AND ITS SHAREHOLDERS, AS
AMENDED FROM TIME TO TIME, AND NONE OF SUCH SECURITIES, OR ANY INTEREST
THEREIN, SHALL BE TRANSFERRED, PLEDGED, ENCUMBERED OR OTHERWISE DISPOSED OF
EXCEPT AS PROVIDED IN THAT AGREEMENT. A COPY OF THE SHAREHOLDERS AGREEMENT IS
ON FILE IN THE OFFICES OF CELLU PARENT CORPORATION.

As soon as practicable
following the vesting of any such Shares the Company shall cause a certificate
or certificates covering such Shares, without the aforesaid legend, to be
issued and delivered to the undersigned. If any Shares are held in book-entry
form, the Company may take such steps as it deems necessary or appropriate to
record and manifest the restrictions applicable to such Shares.

10.         Dividends, etc..
The undersigned shall be entitled to (i) receive any and all dividends or
other distributions paid with respect to those Shares of which she is the
record owner on the record date for such dividend or other distribution, and (ii) vote
any Shares of which she is the record owner on the record date for such vote; provided, however, that any property (other than cash)
distributed with respect to a share of Stock (the “associated share”) acquired
hereunder, including without limitation a distribution of Stock by reason of a
stock dividend, stock split or otherwise, or a distribution of other securities
with respect to an associated share, shall be subject to the restrictions of
this Agreement in the same manner and for so long as the associated share
remains subject to such restrictions, and shall be promptly forfeited if and
when the associated share is so forfeited; and further provided,
that the Administrator may require that any cash distribution with respect to
the Shares other than a normal cash dividend be placed in escrow or otherwise
made subject to such restrictions as the Administrator deems appropriate to
carry out the intent of the Plan, consistent with Section 409A of the Code
to the extent applicable. References in this Agreement to the Shares shall  refer, mutatis mutandis,
to any such restricted amounts.

11.         Sale of Vested Shares.
The undersigned understands
that she will be free to sell any Share once it has vested, subject to (i) satisfaction
of any applicable tax withholding requirements with respect to the vesting or
transfer of such Share; (ii) the completion of any administrative steps
(for example, but without limitation, the transfer of certificates) that the
Company may reasonably impose; (iii) applicable requirements of federal
and state securities laws; and (iv) the terms and conditions of the
Shareholders Agreement.

12.         Certain Tax Matters.
The undersigned expressly acknowledges the following:

a.               The undersigned has been advised to confer
promptly with a professional tax advisor to consider whether the undersigned
should make a so-called “83(b) election” with respect to the Shares. Any
such election, to be effective, must be made in accordance with applicable
regulations and within thirty (30) days following the date of this Award. The
Company has made no recommendation to the undersigned with respect to the
advisability of making such an election. In the event that the undersigned

 3
 

 

 

makes an 83(b) election
and incurs a tax liability as a result, the Company will, on a date prior to
the date on which the taxes must be paid or withheld, make a lump sum payment
(a “Gross Up Payment”) to the undersigned that will be sufficient, after giving
effect to federal, state, and local income taxes with respect to the Gross Up
Payment, to pay any marginal increase in tax liability of the undersigned as a
result of such 83(b) election. For this purpose, a tax liability will be
treated as incurred only to the extent that the inclusion of the income by
reason of the grant will increase the undersigned’s tax liability for the year
of inclusion, after giving effect to all losses, credits, carry-forwards,
carry-backs, etc. that the undersigned may be able to utilize in such year and
without regard to any decrease in losses, credits, carry-forwards, carry-backs,
etc. and the effect of any such decrease on other tax years.

b.              The award or vesting of the Shares acquired
hereunder, and the payment of dividends with respect to such Shares, may give
rise to “wages” subject to withholding. The undersigned expressly acknowledges
and agrees that her rights hereunder are subject to her promptly paying to the
Company in cash (or by such other means as may be acceptable to the Company in
its discretion, including, if the Administrator so determines, by the delivery
of previously acquired Stock or shares of Stock acquired hereunder or by the
withholding of amounts from any payment hereunder) all taxes required to be
withheld in connection with such award, vesting or payment.

 

	
   

  	
   

  	
   

  	
  Very truly yours,

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
  (Signature of
  Employee)

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Dated:
  June 12, 2006

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  The foregoing
  Restricted Stock

  	
   

  	
   

  	
   

  
	
  Award Agreement
  is hereby accepted:

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  CELLU PARENT
  CORPORATION

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  By

  	
   

  	
   

  	
   

  	
   

  

 

 4

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