Document:

Exhibit
10.3

 

EXECUTION
COPY

EMPLOYMENT
AGREEMENT

 

EMPLOYMENT
AGREEMENT dated as of September 25, 2001 (this “Agreement”), by and between
CELLU TISSUE HOLDINGS, INC. a Delaware corporation (“Cellu Tissue” or the
“Company”), and RUSSELL C. TAYLOR (“Executive”).

 

RECITALS

 

WHEREAS, Cellu
Tissue desires to employ Executive as President and Chief Executive Officer of
Cellu Tissue and Executive desires to accept such employment.

 

NOW, THEREFORE, in
consideration of the premises and mutual covenants contained herein, and for
other good and valuable consideration, the receipt and adequacy of which is
hereby acknowledged, the parties agree as follows:

 

1.  Employment.

 

1.1  Subject to the terms and conditions of this Agreement, Cellu
Tissue agrees to employ Executive during the Term (as herein defined) as
President and Chief Executive Officer of Cellu Tissue, which shall be the most
senior executive position of Cellu Tissue and shall report only to the Board of
Directors of Cellu Tissue (the “Board”). 
No officer of Cellu Tissue shall be appointed during the Term in any
equal or more senior capacity than the office of President and Chief Executive
Officer and each other officer of Cellu Tissue shall report to Executive or to
a person designated by Executive and not directly to the Board.  As President and Chief Executive Officer of
the Company, Executive shall perform such duties and responsibilities as are
customarily performed by the president and chief executive officer of a company
the size and nature of Cellu Tissue, which duties and responsibilities
generally will utilize his experience prior to the date hereof, and such other
managerial duties and responsibilities with the Company which are appropriate
for his position at the Company as, from time to time, may be assigned to him
by the Board.

 

1.2  Executive’s Representations. Executive hereby
represents that there exists no restriction on the ability of Executive to
fulfill his obligations hereunder.  The
Executive hereby acknowledges and agrees that the truth of this representation
is a material inducement for the Company to enter into this Agreement and that
it is a material term of this Agreement.

 

1.3  Subject to the terms and conditions of this Agreement,
Executive hereby accepts employment as President and Chief Executive Officer of
Cellu Tissue and agrees to devote his full working time and efforts to the
performance of services, duties and responsibilities in connection therewith
(other than during periods of illness, disability or vacation).  Nothing in this Agreement shall preclude
Executive, so long as, in the reasonable determination of the Board, such
activities do not materially interfere with his duties and responsibilities
hereunder, from engaging in charitable and community affairs, from managing any
passive investment made by him in real estate or other property (provided that
no such investment may exceed 5% of the equity securities of any entity,
without the prior approval of the Board), or from serving, subject

 

 

to the prior approval of the Board, as a member of boards of directors
or as a trustee of any other company, association or entity.

 

1.4  It is the intention of the parties that, during the Term,
Executive shall be nominated, and following his election or appointment, shall
serve, as a director of Cellu Tissue and as a member of all committees of the
Board of Directors of Cellu Tissue; provided, however, that Executive shall
resign as a director of the Company and as a member of all committees of the
Board of Directors of Cellu Tissue immediately if his employment hereunder is
terminated by the Company or Executive for any reason.

 

2.  Term of Employment. The term of this Agreement (the
“Term”) shall be for a period commencing on the effective date of the
Restructuring (as defined below) and continuing through September 30, 2004,
subject to earlier termination in accordance with the terms and conditions
contained in Section 7 hereof.  For
purposes of this Agreement, the “Restructuring” shall mean the full execution
of that certain Amended and Restated Credit Agreement by and among Cellu Paper
Holdings, Inc. (“Parent”), Cellu Tissue, Interlake Acquisition Corporation
Limited, Cellu Tissue Corporation, Van Paper Company, Van Timber Company,
Coastal Paper Company, Cellue Tissue Corporation - Natural Dam, Menominee
Acquisition Corporation, various lending institutions and Bankers Trust, as
administrative agent, and Deutsche Bank AG, Canada Branch at Canadian agent,
amended and restated on or about September 25, 2001, and that certain Agreement
and Plan of Merger by and among Parent. 
Cellu Tissue and Cellu Paper Holdings Sub, Inc., dated on or about
September 25, 2001.  The commencement of
the Term is subject to the completion of the Restructuring and, if the
Restructuring shall not be completed, this Agreement shall be of no force and
effect.

 

3.  Place of Employment. During the Term, Executive shall
perform his services at the principal place of business of Cellu Tissue which
is presently located in East Hartford, Connecticut.  Executive shall be furnished with office facilities and services
suitable to his position and suitable for the performance of his duties.  Cellu Tissue hereby covenants and agrees
that during the Term, it will not, without Executive’s consent, move the
location of Cellu Tissue’s principal executive offices or move Executive’s
principal place of employment to a location which is more than 30 miles from
the current principal executive offices of the Company located at Two Forbes
Street, East Hartford, CT 06108. 
Executive acknowledges and agrees that in connection with his
employment, however, he may be required to travel on behalf of Cellu Tissue.

 

4.  Compensation.

 

4.1  Salary. During the Term, Cellu Tissue shall pay
Executive a base salary (“Base Salary”) at the rate of Four Hundred Thousand
Dollars ($400,000) per annum (pro rated for the balance of fiscal 2002 ending
February 28, 2002, and for any partial year during the Term).  The Base Salary shall be payable in
accordance with the ordinary payroll practices of Cellu Tissue for its
executive officers but in no event less frequently than semimonthly.  The Base Salary shall be reviewed annually
by the Board on or before the last day of February of each fiscal year,
commencing with the end of fiscal year 2002 (i.e., before February 28,
2002, to set Base Salary for the fiscal year commencing March 1, 2002), and may
be increased in the sole discretion of the

 

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Board taking into account corporate and individual performance, any
increase in Executive’s responsibilities on account of acquisitions by, or the
general growth of, Cellu Tissue and general business conditions.

 

4.2  Performance-Based
Bonus Compensation.

 

(a)  With respect to the period
commencing on the date hereof and ending on February 28, 2002, Executive shall
be entitled to receive a cash bonus equal to $325,000, which amount shall be
paid no later than March 10, 2002.

 

(b)  In addition to Base Salary
(and without limiting the provisions of Section 4.2(d) below), Executive shall
be eligible to receive bonus compensation of a maximum of up to an aggregate of
100% of his Base Salary (“Bonus Compensation”) for each fiscal year during the
Term commencing March 1, 2002 (i.e., fiscal year 2003).  Bonus Compensation shall consist of two
components: (i) annual bonus payments of up to an aggregate of 80% of
Executive’s Base Salary based on Cellu Tissue achieving certain targets in
respect of Cellu Tissue’s EBITDA (as defined in Section 4.2(f) below)
established in the annual budget based on then-current market and industry
conditions and in good faith and approved by the Board in consultation with
Executive (“Benchmarks”) and (ii) additional annual bonus payments of up to an
aggregate of 70% of Executive’s Base Salary based solely on the Board’s
assessment of extraordinary events (including without limitation, acquisitions
and divestitures), the contribution of Executive to achieving the Benchmarks
and the difficulty of achieving those Benchmarks in a particular year.

 

(c)  Prior to the commencement
of each fiscal year during the Term, Executive shall present to the Board a
proposed annual budget and proposed Benchmarks applicable to the upcoming
fiscal year.  The Board, in its sole
discretion in consultation with Executive, shall determine the annual budget
and Benchmarks applicable to such fiscal year. 
Notwithstanding the foregoing, the Board, in its sole discretion in
consultation with Executive, may adjust the Benchmarks during a fiscal year to
reflect any acquisitions made during said fiscal year.

 

(d)  The Bonus Compensation for
the partial fiscal year commencing on March 1, 2004 and ending upon the
expiration of the Term (such period, “Partial FY 2005”) shall be based on the
same methodology defined in Section 4.2(b) above; provided, however, that (i)
the Benchmarks established for such periods shall take into account only
Partial FY 2005 and (ii) any Bonus Compensation payable with respect to Partial
FY 2005 shall be pro-rated to reflect such partial year.  For example, in the event that 100% of the
Benchmark for Partial FY 2005 is met, Executive shall be entitled to receive
60% of his then-applicable annual Base Salary multiplied by a fraction, the
numerator of which shall the number of days comprising such partial fiscal
year, and the denominator of which shall be 365.

 

(e)  The Bonus Compensation in
respect of the achievement of the Benchmarks shall be a percentage of
Executive’s Base Salary determined as follows (with linear interpolation to be
applied between the stated Benchmarks and the percentage of Base Salary
earned):

 

3

 

	
  %
  Achievement

  of Benchmark

  	
   

  	
  % of Base Salary Earned

  as Bonus Compensation

  
	
  80

  	
   

  	
  40

  
	
  85

  	
   

  	
  45

  
	
  90

  	
   

  	
  50

  
	
  95

  	
   

  	
  55

  
	
  100

  	
   

  	
  60

  
	
  105

  	
   

  	
  65

  
	
  110

  	
   

  	
  70

  
	
  115

  	
   

  	
  75

  
	
  120

  	
   

  	
  80

  

 

The Bonus Compensation shall be payable in a lump sum by Cellu Tissue
no later than thirty (30) days after Cellu Tissue’s audited consolidated
financial statements (which shall be prepared in accordance with generally
accepted accounting principles consistently applied) for such fiscal year have
been made available and Cellu Tissue’s certified public accountants shall have
delivered to the Board their report and opinion thereon which delivery, in any
event, shall be no later than ninety (90) days after the end of such fiscal
year.

 

(f)  “Cellu Tissue’s EBITDA” in
any fiscal year shall mean Cellu Tissue’s consolidated earnings before
interest, taxes, depreciation and amortization and before payment of and
accrual for: (i) any bonuses to Executive and any other employees or
consultants of Cellu Tissue, (ii) any management fees or expenses or
transaction fees or expenses to Charterhouse Group International, Inc. or any
affiliated entity and (iii) transaction fees or expenses related to the
purchase of the Company by Charterhouse Group International, Inc. or any
affiliated entity (the amounts included in (i), (ii) and (iii) above to be
added back to Cellu Tissue’s EBITDA to the extent accrued for or previously
paid); provided, however, that the following items shall be excluded from the
calculation of Cellu Tissue’s EBITDA (i.e., such items shall not
increase or reduce the calculation): extraordinary items of loss or gain (as
determined in accordance with generally accepted accounting principles),
acquisition-related costs and financing-related costs for such fiscal
year.  Within five (5) business days
following the issuance of Cellu Tissue’s audited consolidated financial
statements for such fiscal year.  Cellu
Tissue shall prepare and deliver to Executive a certificate (with the favorable
report thereon of such accountants as to the conformity with the provisions of
this Section 4) setting forth the calculation of Cellu Tissue’s EBITDA for such
fiscal year, with detail as to all items or accounts included in such
calculation, all of which items or accounts shall be as shown on Cellu Tissue’s
audited consolidated financial statements.

 

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(g) In addition to the foregoing Bonus Compensation, Executive may be
eligible to receive such additional bonuses during the Term as may be
determined by the Board in its sole discretion.

 

4.3  Signing Bonus. Upon the 30th day
after Executive reports to work in East Hartford, Cellu Tissue shall pay to
Executive a lump sum in cash equal to $1,000,000, less applicable withholdings
(such payment, the “Signing Bonus”). 
Cellu Tissue agrees to hold an amount equal to the Signing Bonus in
escrow for the period commencing on the date hereof and ending at such time as
the Signing Bonus is paid to Executive.

 

4.4  Equity Incentive.

 

(a) Restricted Stock Grant. Effective as of the date which is 30
days after the date on which Executive first reports to work at the Company’s
headquarters in East Hartford, Connecticut, Parent will grant to Executive a
number of shares of its common stock, par value $0.01 per share (the “Common
Stock”) equal to the quotient obtained by dividing (i) $2,000,000 by (ii) the
per share value of one share of Common Stock as of the date hereof, determined
by the Board in its sole discretion (such shares, the “Restricted
Shares”).  In addition to being subject
to such restrictions on transfer and such other terms and conditions as are set
forth in the agreement evidencing the grant of Restricted Shares, which shall
be substantially in the form attached hereto as Exhibit A, one-quarter (1/4) of
the Restricted Shares shall become vested on the date which is six months after
the date hereof, and an additional one-quarter (1/4) of the Restricted Shares
shall become vested on each of the first three anniversaries of the date
hereof; provided that Executive is employed by the Company under this Agreement
as of each such vesting date.

 

(b) Shareholders Agreement. As a condition to receiving the
grant of Restricted Shares set forth in Section 4.4(a) above, Executive
shall become a party to that certain Stockholders Agreement among Charterhouse
Equity Partners III, L.P., Chef Nominees Limited, Advisory Capital Marketing
Group LLC, Cellu Paper Holdings, Inc. and the other parties thereto, dated on
or about September 25, 2001 with respect to such parties (the “Shareholders
Agreement”).

 

5.  Employee Benefits.

 

5.1  Employee Benefit Programs, Plans and
Practices.

 

(a)  Cellu Tissue shall provide
Executive during the Term, and, except as otherwise provided herein, for a
period of one (1) year thereafter (provided continued participation during such
period is permitted under such plan, program or practice and does not cause a
plan, program or practice to cease to be qualified under any applicable law or
regulation and further provided that continuation under any such plan, program
or practice shall be limited to benefits customarily provided by Cellu Tissue
to its senior executives), with coverage under all employee benefit programs,
plans and practices which Cellu Tissue makes available from time to time to its
senior executives, with at least the same opportunity to participate as the
other senior executives of Cellu Tissue including, without limitation,
retirement, pension, profit sharing,

 

5

 

medical, dental,
hospitalization, life insurance, short- and long-term disability, accidental
death and dismemberment and travel accident coverage.

 

(b)  During the Term, and,
except as otherwise provided herein, for a period of one (1) year thereafter,
Cellu Tissue 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 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.

 

5.2  Vacation and Fringe
Benefits.

 

(a) Executive shall be entitled to no lees than four (4) weeks paid
vacation in each year (pro rated as necessary for partial calendar years during
the Term).  Executive may take his
allotted vacation days at such times as are mutually convenient for Cellu
Tissue and Executive, consistent with Cellu Tissue’s vacation policy in effect
from time to time with respect to its executive officers, Executive shall also
be entitled to all paid holidays given by Cellu Tissue to its executive
officers.

 

(b) Cellu Tissue shall provide a leased Buick Park Avenue automobile or
a substantially equivalent type of automobile for use by Executive.  Upon termination of his employment
hereunder, Executive shall have the option (subject to the consent of the
leasing company) to assume the automobile lease, in which case Executive shall
be responsible for such lease payments, insurance and all other expenses
associated with the automobile.

 

(c) Executive shall be entitled to the perquisites and fringe benefits
normally made available to other senior executives of Cellu Tissue,
commensurate with his position with Cellu Tissue.

 

5.3  Expenses. Executive
is authorized to incur reasonable expenses in carrying out his duties and
responsibilities under this Agreement, (in accordance with the policies and
procedures established from time to time by Cellu Tissue for its senior
executive officers) including, without limitation, entertainment and travel
expenses (and the cost of living while away from home on business or at the
request of, and in the service of Cellu Tissue) and expenses relating to the
automobile which Cellu Tissue has provided to Executive (i.e.,
insurance, gasoline and maintenance), and similar items related to such duties
and responsibilities.  Cellu Tissue will
promptly reimburse Executive in full for all such out-of-pocket expenses upon
presentation by Executive from time to time of a proper account of such
expenditures in accordance with the policies and procedures established by the
Board and applicable to executive officers of Cellu Tissue.

 

5.4  Indemnification.
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 Cellu Tissue’s
Articles of incorporation

 

6

 

and Bylaws, and if not set forth therein, to the maximum extent
available under the laws of Cellu Tissue’s state of incorporation.  In addition, Cellu Tissue shall Continue to
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 & reduced level of coverage for 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.

 

6.  Key-Person Insurance. Executive
agrees that, so long as Cellu Tissue’s obligations under Section 5.1(b) are not
affected, Cellu Tissue may at any time and from time to time, and for Cellu
Tissue’s own benefit, apply for and take out term life, health, accident,
and/or other insurance covering Executive (“Key-Person Insurance”) in an amount
to be determined in the sole discretion of the Board in consultation with
Executive.  Cellu Tissue shall own all
rights in any such Key-Person Insurance policies and proceeds thereof and
Executive shall not have any right, title or interest therein; except that if
Executive is no longer employed by Cellu Tissue (other than as a result of his
death or Disability (as herein defined)) then Cellu Tissue shall terminate such
Key-Person Insurance policies or, at the option of Executive, arrange for such
Key-Person Insurance policies to be assigned to Executive; provided, however,
that said policies permit such assignment and Executive is solely responsible
for the payment of any premiums after such assignment. Executive agrees to
assist Cellu Tissue at Cellu Tissue’s expense in obtaining any such Key-Person
Insurance by, among other things, submitting to the customary examinations and
correctly preparing, signing and delivering such applications and other
documents as may be required by insurers.

 

7.  Termination of Employment.

 

7.1  Executive shall be entitled
to terminate his employment for “Good Reason.” 
For purposes of this Agreement, “Good Reason” shall mean (without
Executive’s express prior written consent as a shareholder, Board member or
otherwise) (i) failure by Cellu Tissue to pay any compensation when due
hereunder, (ii) any significant reduction by Cellu Tissue of Executive’s authorities,
powers, functions, duties or responsibilities or the assignment of duties to
Executive by the Board inconsistent with Executive’s position (except in
connection with termination of Executive’s employment for Cause, as a result of
Disability, as a result of Executive’s death or by Executive other than for
Good Reason), (iii) a reduction by Cellu Tissue in Executive’s Base Salary or
any other compensation due hereunder, or (iv) any material breach by Cellu
Tissue of any other provision of this Agreement.  If Executive desires to terminate his employment with the Company
pursuant to this Section 7.1, he 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.

 

7.2  Disability. If
Executive shall fail during the Term, because of illness, physical or mental
disability or other incapacity, for a period of 180 days in any 365 consecutive
days, to render the services provided for by this Agreement or be adjudged an
incompetent (“Disability”); provided that the date on which the Disability will
be deemed to occur shall be such 180th day or the date on which Executive is
adjudged an incompetent, as the case may be, Cellu Tissue may terminate
Executive’s employment on not less than two (2) weeks written notice thereof,
setting

 

7

 

forth the facts and circumstances claimed to provide a basis for termination
of Executive’s employment under this Section 7.2.

 

7.3  Death. Executive’s employment
hereunder will terminate automatically if he should die.

 

7.4  Termination for Cause. Cellu Tissue
shall have the right to terminate the employment of Executive for cause (as
hereinafter defined).  The term “Cause,”
as used herein, shall mean (i) Executive’s continuing, repeated and willful
refusal and failure (other than during periods of illness, disability or
vacation) to perform his duties hereunder or under any lawful directive of the
Board (consistent with the terms of this Agreement), (ii) Executive’s willful
misconduct or gross neglect in the performance of his duties hereunder which in
either case is materially injurious to the Company, monetarily or otherwise,
(iii) the willful material breach of this Agreement by Executive, (iv) except
as provided in clause (v) below, the final, non-appealable conviction of
Executive of any felony or Executive’s pleading guilty to any felony, other
than motor vehicle offenses, (v) the indictment of Executive for any felony on
account of action taken by Executive constituting theft or embezzlement from
the Company or other fraudulent action against the Company or (vi) 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
7.4, no act, or failure to act, on 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 his action or omission was in furtherance of
the Company’s business.  If the Company
desires to terminate Executive’s employment pursuant to clause (i), (ii), (iii)
or (v) above, it shall first give Executive written notice of the facts and
circumstances providing Cause and shall allow 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 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 Executive.

 

8.  Compensation upon Termination.

 

8.1  Termination by Executive for Good Reason;
Termination by Company without Cause. If Executive terminates his
employment for Good Reason or if his employment is terminated by the Company
without Cause, Executive shall be entitled to receive the following payments
and benefits: (i) Executive’s Base Salary paid consistent with the Company’s
payroll practices for the longer of the balance of the Term or one (1) year,
(ii) Executive’s Bonus Compensation to the extent that the Benchmarks for such
period or periods are attained, for the period during which Executive is being
paid his Base Salary (pro rated for a partial fiscal year) and (iii) the
benefits set forth in Section 5.1 for the period during which Executive is
being paid his Base Salary, except to the extent that such continued
participation is not permitted under the plan, program or policy or would cause
the plan, program or policy to cease to be qualified under any applicable law
or regulation.

 

8

 

8.2  Termination Due to Disability. If
Executive’s employment hereunder is  terminated
due to his Disability, Executive shall be entitled to receive the following
payments and benefits: (i) Executive’s Base Salary paid consistent with the
Company’s payroll practices for the shorter of the balance of the Term or one
(1) year, (ii) Executive’s Bonus Compensation to the extent that the Benchmarks
are attained for the period during which Executive is paid his Base Salary (pro
rated for a partial fiscal year) and (iii) the benefits set forth in Section
5.1 for the period during which Executive is being paid his Base Salary, except
to the extent that such continued participation is not permitted under the
plan, program or policy or would cause the plan, program or policy to cease to
be qualified under any applicable law or regulation.

 

8.3  Termination Due to Death.
If Executive’s employment hereunder is terminated due to his death, Executive’s
estate or designated beneficiaries shall be entitled to receive the following
payments and benefits: (i) a lump sum payment equal to the lesser of
Executive’s Base Salary for the balance of the Term or one (1) year, (ii)
Executive’s Bonus Compensation to the extent that the Benchmarks are attained
for the shorter of the balance of the Term or one (1) year (pro rated for a
partial fiscal year), (iii) benefits for Executive’s family as set forth in
Section 5.l(a) for the period of one (1) year and (iv) in the event that
Executive shall die prior to payment of the Signing Bonus, the Signing Bonus.

 

8.4  Termination by Executive
Other Than for Good Region; Termination by Company for Cause.

 

(a)  If Executive’s employment
is terminated (i) by the Company for Cause or (ii) by Executive other than for
Good Reason, Executive only shall be entitled to receive Executive’s Base
Salary (see Section 4.1) and benefits (see Section 5) to which Executive
is entitled up to and including the effective date of Executive’s termination
of employment hereunder.  After such
termination of employment, the obligations of Cellu Tissue under this Agreement
to make any further payments, or to provide any benefits specified herein, to
Executive shall thereupon cease and terminate.

 

(b)  In the event that
Executive’s employment it terminated under clause (i) of Section 8.4(a)
pursuant to clause (vi) of Section 7.4, Executive shall, within 10 business
days following the effective date of such termination, repay to the Company an
amount in cash equal to the Signing Bonus, net of amounts withheld by the
Company at the time of the original payment in respect of its withholding
obligations, and surrender to the Company that number of shares of Common Stock
that had previously vested pursuant to the terms of the Restricted Stock grant
provided for in Section 4.4(a).

 

(c)  In the event that
Executive’s employment is terminated under clause (ii) of Section 8.4(a) during
the first six months of the Term, Executive shall, within 10 business days
following the effective date of such termination, repay to the Company an
amount in cash equal to the Signing Bonus, net of amounts withheld by the
Company at the time of the original payment in respect of its withholding
obligations, and surrender to the Company that number of shares of Common Stock
that had previously vested pursuant to the terms of the Restricted Stock grant
provided for in Section 4.4(a).

 

9

 

8.5  No Substitution. Nothing contained in
Section 8.1, 8.2, or 8.3 shall be construed to represent a substitution for
compensation already paid to or earned by Executive.  In addition, Executive shall be entitled to receive all amounts
in respect of the period prior to the date of termination otherwise payable
herein (without double counting), including such payments provided for in
Sections 4 and 5.

 

9.  Mitigation of Damages.
Executive shall not be required to mitigate damages or the amount of any
payment provided for under this Agreement by seeking other employment (which
may include self-employment) or otherwise, and, after his termination of
employment hereunder, any payments made by Cellu Tissue hereunder shall not be
reduced by any amount Executive receives from any other such employment.

 

10.  Non-disclosure of
Confidential Information; Non-competition.

 

10.1  Executive shall not during
the Term and thereafter, without the prior written consent of Cellu Tissue,
divulge, disclose or make accessible to any other person, firm, partnership,
corporation or other entity any Confidential Information (as herein defined)
pertaining to the business of Cellu Tissue, except (i) while employed by Cellu
Tissue, in the business of and for the benefit of Cellu Tissue or (ii) when
required to do so by a court of competent jurisdiction, by any governmental
agency having supervisory authority over the business of Cellu Tissue, or by
any administrative body or legislative body (including a committee thereof)
with purported or apparent jurisdiction to order Executive to divulge, disclose
or make accessible such information. 
For purposes of this Agreement, “Confidential Information” shall mean
non-public information concerning Cellu Tissue’s financial data, strategic
business plans, product development (or other proprietary product data),
customer information, information relating to governmental relations,
discoveries, practices, processes, methods, marketing plans and other material
non-public, proprietary and confidential information of Cellu Tissue, that, in
any ease, is not otherwise generally available to the public or others in the
paper-products industry.  In the event
Executive’s employment is terminated hereunder, he shall either (i) immediately
return to Cellu Tissue all Confidential Information in his possession or (ii)
within five (5) business days following the effective date of termination,
deliver to Cellu Tissue a sworn affidavit attesting to the destruction of all
Confidential Information in his possession, in either case, other than
information which Executive is entitled to receive in his capacity as a
shareholder of Cellu Tissue. 
“Confidential Information” shall not include information which becomes
available to Executive on a non-confidential basis from a source other than
Cellu Tissue or was available to Executive on a non-confidential basis prior to
its disclosure to Executive by Cellu Tissue.

 

10.2  During the period of his
employment with Cellu Tissue (other than on behalf of Cellu Tissue) and for
twelve (12) months after the date of termination of his employment with Cellu
Tissue, if Executive terminates his employment with Cellu Tissue other than for
Good Reason or if Executive is terminated by Cellu Tissue for Cause, Executive
agrees that, without the prior written consent of Cellu Tissue: (i) he will
not, directly or indirectly, either as principal, manager, agent, consultant,
officer, stockholder, partner, investor, lender or employee, or in any other
capacity carry on, be engaged in or employed by or be a consultant to or have
any financial interest in, any business which is in competition with the business
of Cellu Tissue (as

 

10

 

defined in Section 10.3) and (ii) be shall not, on his own behalf or on
behalf of any person or entity, directly or indirectly, solicit or offer
employment to any employee who has been employed by Cellu Tissue at any time
during twelve (12) months immediately preceding such solicitation.

 

10.3  For purposes of this Section 10, a person or
entity which is “in competition with the business of Cellu Tissue” shall mean
an entity primarily engaged in the business of manufacturing specialty paper
products in North America.  Nothing in
this Section 10 shall be construed so  as
to preclude Executive from (i) investing in any publicly or privately held
company provided Executive’s beneficial ownership of any class of such
company’s securities does not exceed 3% of the outstanding securities of such
class, (ii) owning memberships, or other similar rights or interests therein,
of any United States or foreign securities, commodities, options or similar
exchange, board of trade, contract market or terminal association (collectively
“Exchanges”) and exercising the rights and privileges attendant to  such ownership for his own personal
account or for the account of any spouse, child, parent or sibling or any trust
created for the benefit of Executive or any of the foregoing or for the account
of any entity wholly owned by Executive or any of the foregoing relatives or
trusts or (iii) trading or dealing on any Exchanges for Executive’s own
personal account or for the account of any relative or any trust created for
the benefit of any relative of Executive.

 

10.4  Executive and Cellu Tissue agree that this
Covenant not to compete is a reasonable covenant under the circumstances, and
further agree that if in the opinion of any court of competent jurisdiction
such restraint shall be held to be excessively broad as to duration, geographic
scope, activity or subject, such provisions shall be construed by limiting and
reducing them in order that such provisions be enforceable to the maximum
extent compatible with applicable law. 
Executive agrees solely for purposes of any attempt by Cellu Tissue to
obtain an injunction for breach of any covenant contained in this Section 10
such breach would irreparably injure Cellu Tissue.  Accordingly, Executive agrees that Cellu Tissue, in addition to
pursuing any other remedies it may have in law or in equity, may obtain an
injunction against Executive from any court having jurisdiction over the
matter, restraining any further violation of this Section 10 without the
necessity of posting a bond or security.

 

10.5  Provided that Executive complies with
Section 10.1 hereof, Executive may fully utilize to the future the professional
knowledge, expertise and experience he has developed or information he has
acquired during the course of his career prior to the date hereof or subsequent
to the date hereof while employed by Cellu Tissue (collectively, “Accumulated
Knowledge”).  Accordingly, provided that
Executive complies with Section 10.l hereof, Executive may use his Accumulated
Knowledge for the benefit of himself or any third party with whom he is
affiliated or employed so long as he is not engaged in a business which is in
competition with the business of Cellu Tissue (as defined in Section 10.3),
prior to the expiration of the time period set forth in the first sentence of
Section 10.2.  Further, this Section 10
is not intended and shall not be construed to prevent Executive from engaging
(i) in any business, other than a business described in Section 10.3, prior to
the expiration of the time period set forth in the first sentence of Section
10.2 or (ii) in any business whatsoever on and after the expiration of the time
period set forth in the first sentence of Section 10.2.

 

11

 

11.  Notices. Any notice, request, demand
or other communication required or permitted hereunder shall be in writing and
shall be deemed to have been duly given when delivered by hand, electronic
transmission (with a copy following by hand or by overnight courier), by
registered or certified mail, postage prepaid, return receipt requested or by
overnight courier addressed to the other party.  All notices shall be addressed as follows, or to such other
address or addresses as may be substituted by notice in writing:

 

To Cellu Tisane:

 

Cellu Tissue Holdings, Inc.

Two Forbes Street

East Hartford, Connecticut 06108

Attention: 
Paul H. Mullan

 

with a copy to:

 

Skadden, Arps, Slate, Meagher & Flom LLP

Four Times Square

New York, New York 10036

Attention: 
Eileen Nugent

 

To Executive:

 

Russell C. Taylor

Cellu Tissue Holdings, Inc.

Two Forbes Street

East Hartford, Connecticut 06108

 

with a copy to:

 

Sonjui L. Kumar

Law Office of Sonjui L. Kumar, P.C.

1584 Roswell Road

Marietta, GA 30062

 

Communications delivered by hand or by overnight courier shall be
deemed received on the date of delivery; communications sent by electronic
means shall be deemed received one (1) business day after the sending thereof,
and communications sent by registered or certified mail shall be deemed
received three (3) business days after the sending thereof.

 

12.  Separability; Legal Fees. If any
provision of this Agreement shall be declared to be invalid or unenforceable,
in whole or in part, such invalidity or unenforceability shall not affect the
remaining provisions hereof which shall remain in full force and effect.  Each party shall bear the coats of any legal
fees and other fees expenses which may be incurred in respect of enforcing its
respective rights under this Agreement.

 

12

 

13.  Assignment. This contract shall be
binding upon and inure to the benefit of the heirs and representatives of
Executive and the assigns and successors of Cellu Tissue.  Neither this Agreement nor any rights
hereunder shall be assignable or otherwise subject to hypothecation by
Executive (except by will or by operation of the laws of intestate succession)
or by Cellu Tissue, except that (i) subject to Executive’s right to terminate
this Agreement for Good Reason, Cellu Tissue may assign this Agreement to any
successor (whether by merger, acquisition of stock, purchase or otherwise) to
all or substantially all of the assets or business of Cellu Tissue, if such successor
expressly agrees in writing to assume the obligations of Cellu Tissue
hereunder, and (ii) Executive may assign any payments received hereunder.

 

14.  Amendment; Waiver. This Agreement may
only be amended by written agreement signed by the parties hereto.  A waiver by Cellu Tissue or Executive of a
breach of any provision of this Agreement by the other party shall not operate
or be construed as a waiver of any subsequent breach by the other party.

 

15.  Beneficiaries;
References. Executive shall be entitled to select (and change, to the
extent permitted under any applicable law) a beneficiary or beneficiaries to
receive any compensation or benefit payable hereunder following Executive’s
death, and may change such election, in either case by giving Cellu Tissue
written notice thereof.  In the event of
Executive’s death or a judicial determination of his incompetence, reference in
this Agreement to Executive shall be deemed, where appropriate, to refer to his
beneficiary, estate or other legal representative.  Any reference to the masculine gender in this Agreement shall
include, where appropriate, the feminine.

 

16.  Survivorship. The
respective rights and obligations of the parties hereunder shall survive any
termination of this Agreement to the extent necessary to the intended
preservation of such rights and obligations. 
The provisions of this Section 16 are in addition to the survivorship
provisions of any other section of this Agreement.

 

17.  Governing Law. This
Agreement shall be construed, interpreted and governed in accordance with the
laws of the State of New York, without reference to rules relating to conflicts
of law.

 

18.  Entire Agreement. This Agreement,
together with the Shareholders Agreement, contain the entire understanding
among Executive and Cellu Tissue and supersede in all respects any prior or
other agreement or understanding between Cellu Tissue and Executive as to the
matters set forth herein and therein. 
Except for the obligations specifically set forth herein and in the
Shareholders Agreement, Cellu Tissue does not owe any obligations to Executive
and Executive does not owe any obligations to Cellu Tissue with respect to the
matters set forth herein and therein.

 

19.  Withholding. Cellu Tissue shall
withhold from any payments due to Executive hereunder, all taxes, FICA or other
amounts required to be withheld pursuant to any applicable law.

 

13

 

20.  Headings. The section headings
contained in this Agreement are for the convenience of reference only and shall
not affect the construction of any provision of this Agreement.

 

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

 

14

 

IN WITNESS
WHEREOF, the parties hereto have caused this Agreement to be signed on the date
and year first above written.

 

	
   

  	
  CELLU TISSUE HOLDINGS, INC.

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ PAUL H. MULLAN

  	
   

  
	
   

  	
  Name: 

  	
  Paul H. Mullan 

  
	
   

  	
  Title: 

  	
  Chairman

  
	
   

  	
   

  
	
   

  	
   

  	
   /s/ RUSSELL C. TAYLOR

  	
   

  
	
   

  	
   

  	
  Russell C. Taylor

  
	
   

  	
   

  
	
  ACCEPTED AND AGREED

  as to Section 4.4

  	
   

  
	
   

  	
   

  
	
  CELLU PAPER HOLDINGS, INC.

  	
   

  
	
   

  	
   

  
	
   

  	
   

  
	
  By:

  	
  /s/ PAUL H. MULLAN

  	
   

  	
   

  
	
  Name:  

  	
  Paul H. Mullan

  	
   

  
	
  Title: 

  	
  Chairman

  	
   

  
							

 

15Exhibit 10.4

 

FINANCIAL ADVISORY AND MANAGEMENT SERVICES AGREEMENT

 

THIS FINANCIAL ADVISORY AND MANAGEMENT SERVICES AGREEMENT (the “Agreement”), dated as of September 30,
2002, is between Cellu Tissue Holdings,
Inc., a Delaware corporation (“Cellu Tissue”),
and Charterhouse Group
International, Inc., a Delaware corporation (the “Consultant”). 

 

BACKGROUND

 

WHEREAS, the Consultant is engaged in the business of, among other
things, providing financial advisory services, management consulting services
and transaction services to various companies;

 

WHEREAS, Cellu Tissue believes it is in its best interests and in the
best interests of its stockholders to utilize the financial advisory services,
management consulting services and transaction services provided by the
Consultant; and

 

WHEREAS, the Consultant is willing to provide financial advisory
services, management consulting services and transaction services to Cellu
Tissue and its subsidiaries and affiliates on the terms and conditions set
forth below.

 

NOW, THEREFORE, in consideration of the premises and the mutual
covenants and agreements herein contained, the parties hereto, intending to be
legally bound, do hereby agree as follows:

 

1.               Services
to be Performed.

 

(a)                                  The
Consultant shall, during the term of this Agreement, provide the following
financial advisory services, management consulting services and transaction
services (collectively, the “Services”) to
Cellu Tissue and, if requested by Cellu Tissue: assistance in connection with
the preparation of financial budgets, forecasts, cash flow projections and
return on investment analysis relating to capital expenditures; services
relating to Cellu Tissue’s banking and other financial relationships,
including, without limitation, assistance in connection with the financing and
refinancing of corporate indebtedness; analysis, from both a financial and
operational standpoint, and assistance in connection with Cellu Tissue’s
entering into additional business areas, and expanding or consolidating or
eliminating existing business operations; services in connection with marketing
activities, including the development of marketing plans; and other
miscellaneous services primarily of a financial, management and/or marketing
nature.  The Services shall be provided
by the Consultant from time to time during normal business hours upon the prior
request of the Chief Executive Officer of Cellu Tissue.  The Consultant shall be paid, in accordance
with Section 2 hereof, regardless of the actual number of hours of
Services provided by the Consultant.

 

(b)                                 The
Services to be performed by the Consultant hereunder shall not be required to
be performed at any particular place, nor shall the Consultant be required to
perform the Services to be performed by it hereunder except during normal
business hours.

 

 

(c)                                  The
persons or affiliates, employees or representatives of the Consultant who shall
perform Services shall be designated by the Consultant in its sole
discretion.  Cellu Tissue shall not have
the right to designate particular persons, affiliates, employees or
representatives to perform the Services hereunder.  Cellu Tissue shall not have the right to direct the time and
manner for performance of the Services by Consultant affiliates, employees,
representatives or persons designated by the Consultant, and such persons shall
not become employees of Cellu Tissue or its subsidiaries or affiliates.

 

(d)                                 It
is the mutual intent of the parties that the Consultant shall act strictly in a
professional consulting capacity as an independent contractor for all purposes,
including without limitation, federal, state and local withholding, employment
and payroll tax purposes, and shall not be considered an employee of Cellu
Tissue.

 

2.               Compensation.  For services rendered, Cellu Tissue shall
pay the Consultant or its designee a fee in an amount equal to Four Hundred
Fifty Thousand Dollars ($450,000.00) per calendar year (the “Fee”).  The Fee shall
be due and payable in equal monthly installments on the last business day of
each calendar month, or on such other dates as the parties shall otherwise
agree.  The Consultant shall be
reimbursed for all reasonable out-of-pocket costs incurred in connection with
providing Services pursuant to this Agreement. 
Reimbursement shall be made against statements presented to Cellu
Tissue, in accordance with the Cellu Tissue’s policy in effect from time to
time.  As long as the Financing
Agreement, dated the date hereof, between Cellu Tissue, The CIT
Group/Business Credit, Inc. and the other parties thereto and the Financing
Agreement, dated the date hereof, between Cellu Tissue, Ableco Finance LLC
and the other parties thereto (collectively, the “Financing Agreements”) are in effect, the Fee shall not accrue
or be payable at any time during which a Default (as defined in either such
Financing Agreement) or Event of Default (as defined in either such Financing
Agreement) shall have occurred and be continuing; provided, however, that once
the Financing Agreements are no longer in effect, any amount that would have
been payable but for this sentence shall become immediately due and payable
together with interest thereon at a rate equal to the highest rate at which
term loans accrue interest under the Financing Agreements.

 

3.               Assignability.  This Agreement may not be assigned by any
party without the prior written consent of the other parties; provided, however,
that Consultant may, with the prior written consent of the Agent (as defined in
each of the Financing Agreements) and the Required Lenders (as defined in each
of the Financing Agreements), designate any person or one or more of any of its
affiliates, with experience in financial and/or management consulting matters,
to perform all or a part of the Services and to receive all or any part of the
Fee.  The designation of a designee to
receive payments under Section 2 hereof shall not be considered an
assignment for purposes of this Section 3.

 

4.               Non-Exclusivity.  The Services to be rendered by the
Consultant hereunder are not to be deemed to be exclusive, and the Consultant
shall be free to render similar or different services to others.

 

5.               Governing
Law.  This Agreement shall be
governed and construed in accordance with the laws of the State of New York,
without regard to its principles of conflicts of laws.

 

2

 

6.               Entire
Agreement; Amendment.  This
Agreement sets forth the entire agreement and understanding of the parties
hereto in respect of the subject matter contained herein and supersedes all
other prior agreements, promises, covenants, representations or warranties,
whether oral or written, by any officer, employee or representative of any of
the parties hereto.  This Agreement may
only be amended in writing by a document executed by all of the parties hereto.

 

7.               Severability.  In the event that any terms or provisions of
this Agreement shall for any reason, be held to be illegal, invalid or
unenforceable, under the laws, regulations or ordinances of any federal, state
or local governmental authority to which this Agreement is subject, such term
or provision shall be deemed severed from this Agreement, and the remaining
terms and provisions will be unaffected thereby.

 

8.               Notices.  All notices or other communications required
or permitted hereunder shall be in writing, shall be given by hand delivery,
U.S. Express Mail (return receipt requested), overnight courier guaranteeing
next business day delivery, or facsimile, and shall be deemed duly given when
received, addressed as follows:

 

	
  If to Consultant:

  Charterhouse Group International, Inc.

  535 Madison Avenue

  New York, NY  10022

  Telephone:  (212) 584-3200

  Facsimile:  (212) 750-9704

  

 

or to such other person or address as Consultant shall furnish to the
other parties in writing.

 

	
  If to Cellu Tissue:

  Cellu Tissue Holdings, Inc.

  333 East River Drive

  East Hartford, CT  06108

  Attention:  Chief Executive Officer

  Telephone (860) 289-2131

  Facsimile:  (860) 291-0184

  

 

or to such other person or address as Cellu Tissue shall furnish to the
other parties in writing.

 

9.               Term.

 

(a)                                  This
Agreement shall be effective as of the date hereof and shall continue until the
Agreement is otherwise terminated.  Upon
termination of this Agreement, the Consultant will be entitled to receive all
accrued but unpaid Fees and all incurred but unreimbursed expenses, in
accordance with Section 2 hereof.

 

(b)                                 This
Agreement may be terminated by either party at any time and for any reason,
upon providing to the other party thirty (30) days’ written notice to the other
party, provided, however, that for so long as the Financing
Agreement shall be in effect the parties may

 

3

 

not terminate this Agreement at any time during which a Default (as
defined in either such Financing Agreement) or Event of Default (as defined in
either such Financing Agreement) shall have occurred and be continuing.

 

[Signature
Page Follows]

 

4

 

IN WITNESS WHEREOF, each of the undersigned has caused this Agreement
to be duly executed and delivered as of the date first above written.

 

 

	
   

  	
  CHARTERHOUSE GROUP INTERNATIONAL, INC.

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ Phyllis Haberman

  	
   

  
	
   

  	
   

  	
  Name: Phyllis Haberman

  
	
   

  	
   

  	
  Title:

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  CELLU TISSUE HOLDINGS, INC.

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ Hugo E. Vivero

  	
   

  
	
   

  	
   

  	
  Name:

  	
  Hugo E. Vivero

  
	
   

  	
   

  	
  Title:

  	
  Senior Vice President Finance

  
	
   

  	
   

  	
   

  	
  and Chief Financial Officer

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