Cto Employment Agreement

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):


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% 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., Che ...