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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K

Commission file number 333-118829

Cellu Tissue Holdings, Inc.
(Exact name of registrant as specified in its charter)

        Securities registered pursuant to Section 12(b) of the Act:    None

        Securities registered pursuant to Section 12 (g) of the Act:    None

        Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes ý    No o

        Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes o    No ý

        There is no market for the Registrant's equity. The number of shares of issuer's Common Stock, $.01 par value, outstanding on May 16, 2005 was 11,127 shares.

        Documents incorporated by reference: None

TABLE OF CONTENTS

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PART I

ITEM 1.    BUSINESS

        Cellu Tissue Holdings, Inc. ("we," "us" or "the Company") manufactures and markets a variety of specialty tissue hard rolls and machine-glazed paper used in the manufacture of various end products, including diapers, facial and bath tissue, assorted paper towels and food wraps. In addition, we produce a variety of converted tissue products. Our customers include major North American producers of branded and unbranded disposable consumer absorbent and tissue products for the personal and health care markets; consumer and away-from-home tissue products companies; national and regional tissue products distributors; and third-party converters who sell their products to food, bakery and confections companies. We service a diverse group of high-quality customers, with four of our top 10 customers belonging to the Fortune 150 group of companies. For fiscal year ended February 28, 2005, or fiscal year 2005, we sold 269,834 tons of tissue and machine-glazed paper products, generating net sales of $332.9 million.

        Our business is comprised of two segments: tissue and machine-glazed paper. We own and operate six strategically located manufacturing facilities with an aggregate annual production capacity of approximately 267,000 tons of tissue and machine-glazed paper hard rolls, currently consisting of approximately 180,000 tons of tissue hard roll production capacity and approximately 87,000 tons of machine-glazed paper hard roll production capacity. In addition, our tissue converting equipment and machine-glazed paper converting equipment currently have annual converting production capacities of approximately 69,000 and 29,000 tons, respectively.

        Tissue.    Our tissue segment consists of two product lines: (1) hard roll tissue and (2) consumer and away-from-home converted tissue products.    For fiscal year 2005, our tissue segment sold 182,192 tons of tissue, generating net sales of $230.4 million, or approximately 69.2% of our net sales, and 66% of our gross margin.

        Hard roll tissue.    We produce tissue hard rolls at all of our facilities other than our Michigan facility. Our hard roll tissue is sold as facial and bath tissue, napkin and paper towel stock, as well as absorbent cover stock. We manufacture our hard roll tissue with a variety of pulps and recycled fibers and produce hard roll tissue to our customers' specifications by controlling such attributes as brightness, absorbency, bulk, strength, porosity and color. In addition, we produce our absorbent cover stock in a variety of weights and widths for sale to consumer products companies or third-party converters. Our customers then print, cut and process our absorbent cover stock hard rolls to be used in the manufacture of a variety of disposable absorbent products in the personal and health care markets, such as diapers, adult incontinence and feminine care products, surgical waddings and other medical and sanitary disposable products. We also sell our absorbent cover stock to manufacturers of absorbent bed pads, disposable infant bibs and disposable absorbent pet products.

        Consumer and away-from-home converted tissue.    We convert consumer and away- from- home tissue products at our Wisconsin facility. Our converted tissue products include a variety of private label consumer and away-from-home bath and facial tissue, napkins and folded and rolled towels. We manufacture our converted tissue products according to our customers' specifications for weight, softness, size, color, prints, embossing patterns, grade, fold, package configuration and price. We believe that all of our products are recognized for their softness, strength and absorbency. We offer a complete range of converted facial tissue products as well as dispenser, dinner, cocktail and luncheon napkins. In addition, we ship a full line of bath tissue products, in both jumbo and standard roll bath sizes, and a full line of consumer and away-from-home towel formats. We sell our converted tissue products to regional and national distributors for the private label products market and to large consumer products companies who outsource a portion of their manufacturing needs to us and sell our converted tissue products under their own controlled or private label brands.

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        We entered the consumer and away-from-home converted tissue products market following our August 2002 acquisition of a previously idle manufacturing and converting facility in Wisconsin. We began manufacturing at our Wisconsin facility in August 2002 and began producing our full line of converted tissue products by March 2003. We have significantly increased the sales of products from the Wisconsin facility since its acquisition to $95.6 million in fiscal 2005.

        Machine-glazed paper.    We produce machine-glazed paper hard rolls at our Michigan, Mississippi and Ontario facilities in a variety of weights, widths and surface characteristics. Machine-glazed paper is tissue paper with a glazed coating and, in some cases, other moisture and grease- resistant coatings. We sell our machine-glazed paper hard rolls to third-party converters that manufacture fast food and commercial food wrap, as well as niche market products such as gum wrappers, coffee filters, tobacco papers, wax paper and butter wraps. We use the balance of our machine-glazed paper hard rolls at our Michigan facility to produce converted wax paper products, including wet and dry wax paper, sandwich bags and microwavable wax paper. The majority of our converted wax paper products manufactured at our Michigan facility is sold as branded products to a single customer. For fiscal year 2005, our machine-glazed paper segment sold 87,642 tons of machine-glazed paper hard rolls and converted wax paper products, generating net sales of $102.5 million, or approximately 30.8% of our net sales, and 34% of our gross margin.

        We were incorporated in Delaware in 1984. At the time of our incorporation, we acquired the assets of our Connecticut facility and, in 1995, we purchased our Mississippi facility. Throughout 1998, we acquired the assets of each of our Michigan, New York and Ontario facilities and, in 2002, we purchased our Wisconsin facility.

Business strengths

        Some of our key business strengths are as follows:

        Increased net sales and profitability potential in our converting business.    We entered into the consumer and away-from-home converted tissue products market following the August 2002 acquisition of our Wisconsin manufacturing and converting facility and related equipment for approximately $30.0 million. We believe that the Wisconsin facility is an efficient, low-cost producer of converted tissue products such as bath and facial tissue, napkins and folded and rolled towels. The facility includes five light dry crepe paper machines with approximately 78,000 tons of annual tissue production capacity and 11 converting lines with approximately 69,000 tons of annual converting capacity. In addition, the facility includes a complete distribution center with fully automated unitizing and wrapping capacities. Sales of our converted tissue products in the consumer and away-from-home converted tissue products market generate significantly greater revenue per ton than sales of hard roll tissue. We believe that, as we continue to increase the utilization of our converting capacity, we will increase our profits and generate higher margins on our consumer and away-from-home converted tissue products.

        Low-cost manufacturing operations.    Our strategic manufacturing facility locations and flexible production capacity, combined with our relatively low overhead costs, contribute to our competitive position in the marketplace. We believe that our Wisconsin facility acquired in August 2002 is a low-cost tissue production facility and has helped us continue to improve our competitive position. In addition, since 2001, we have established ongoing cost-saving investments and productivity improvement initiatives.

        Diversified and high-quality customer base.    We sell to a highly diversified customer base, thereby reducing our dependence on any single customer, with only one customer representing more than 10% of our net sales for fiscal year 2005. Our customers include leading branded and private label tissue products companies, tissue and machine-glazed paper converters, distributors of tissue products, fast

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food restaurants and third-party converters who sell their products to food, bakery and confections companies. Notably, our customers include major producers in North America of branded and unbranded disposable consumer absorbent and tissue products for the personal and health care markets and four of our top 10 customers are Fortune 150 companies.

        Experienced and incentivized management team.    We are managed by an experienced team of executive officers that have an average of over 19 years of experience in the paper products industry. Russell C. Taylor has been our president and chief executive officer since 2001 and has over 24 years of industry experience. Prior to coming to our company, he was a senior executive at Kimberly-Clark Corporation, a leading personal care consumer products company. Mr. Taylor leads a team of senior executives with expertise in the paper and paper products industry and proven management and strategic experience.

Business strategy

        Our overall strategy is to increase revenues, optimize our product mix and lower costs to enhance our position within the paper industry. We intend to implement this strategy through our five key initiatives set forth below:

        Maximize utilization of our converting capacity.    Our Wisconsin facility began producing our full line of consumer and away-from-home converted tissue products in March 2003. As part of our growth strategy, we continue to increase the production of converted tissue products across our 11 converting lines by expanding our customer base for our consumer and away-from-home converted tissue products. Toward that end, we continue to promote our "customer delight" program, producing quality products at competitive prices and building on past relationships with customers in our hard roll tissue products line. We have expanded our dedicated sales force in the consumer and away-from-home converted tissue products market to capitalize on these opportunities. As a result, we believe that we can continue to increase the utilization of the converting capacity at our Wisconsin facility.

        Continue to develop our "customer delight" program.    We continually strive to establish and maintain excellent relationships with our customers by providing a high level of customer service and technical support. We focus on critical factors such as competitive pricing, product quality, on-time deliveries and complete shipments. In addition, we provide a full line of products designed to meet the various needs of each of our customers. Our manufacturing process is tailored to our customers' specifications and allows us to offer them flexibility in price, grade, softness, package configuration and size. For example, our products can be manufactured completely with virgin pulp (for premium products) or recycled fiber (for value products) or any combination thereof. We believe that our high-quality customer service and technical support have helped us develop and maintain long-term relationships with our customers that represent a majority of our sales.

        Continue to reduce manufacturing costs.    We continually seek out opportunities to contain and reduce our costs more effectively. As part of our cost management strategy, we benchmark our machines and manufacturing operations against certain world class levels, including those of leading paper manufacturers. Our benchmarking is applied by business sector and by type of machine on a monthly and year-to-date basis. We review metrics such as total machine efficiency, fiber loss and waste percentage, tons produced per machine per person per year, fixed and variable costs per ton produced and total energy per ton produced. We use our benchmarking analyses to help us allocate our strategic capital and non-capital investments in order to reduce our manufacturing costs most effectively. In addition, our cost management strategy focuses on reducing variable costs through increased operating efficiencies and reduced energy consumption, and allows us to better manage our costs and lessen the impact of fiber price cyclicality.

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        Continue our pulp cost management strategy.    Since 2001, we have developed and implemented a pulp cost management strategy that has been highly effective in reducing our pulp costs. In general, pulp is purchased in highly competitive, price sensitive markets. The market price and availability of wood pulp have at times fluctuated greatly due to weather, economic or general industry conditions. As part of our pulp cost management strategy, we have supply agreements with various pulp suppliers on favorable terms, with the last agreement expiring in December 2006. We believe that these supply agreements or equivalent ones will enable us to purchase 65% of our total pulp requirements for fiscal year 2006 at pulp prices below published list prices, and allow us to shift a portion of our pulp purchases to the spot market to take advantage of more favorable spot market prices when such prices fall. We believe that these supply agreements provide us with significant protection against the risk of fluctuating pulp costs and offer a substantial savings from purchasing pulp on the spot market during periods of tight supply. In addition, we believe that we are one of the top five purchasers of pulp by volume in North America.

        Increase higher margin contract and private label manufacturing sales.    A portion of our sales within our tissue segment is generated through various contract manufacturing arrangements for both our hard roll tissue and converted tissue products. Increasingly, major tissue paper manufacturers are outsourcing a portion of their production needs to smaller tissue paper manufacturers, such as ourselves. In addition, many retailers are seeking additional suppliers for their private and controlled label converted tissue product needs. In certain instances, industry leaders have reduced their capacity or determined not to build or rebuild costly paper and converting machines. We have been effective in offering these major tissue product companies an alternative by producing quality hard roll tissue and converted tissue products at attractive prices. This growing trend toward increased contract manufacturing represents a unique opportunity for us to supply major tissue product companies with volume that they no longer wish to produce themselves.

Manufacturing

        We own and operate five manufacturing facilities located in the United States and one manufacturing facility located in Ontario, Canada. We produce hard roll tissue at our Connecticut, Mississippi, New York, Ontario and Wisconsin facilities for sale to consumer products companies and third-party converters and for use in the production of converted tissue products at our Wisconsin facility. We produce machine-glazed paper at our Michigan, Mississippi and Ontario facilities in a variety of specialty hard rolls. We also produce converted wax paper products at our Michigan facility.

        Our hard roll tissue manufacturing process begins with wood pulp or recycled fiber. These raw materials typically are pulped in large blenders or pulpers and moved via networks of pipes and pumps to a tissue machine where sheets of tissue paper are formed according to customer or grade specifications. The tissue paper is then drawn through the machine and formed on wires as it travels through various press rolls. Once the sheets are formed, they are transferred to a dryer section of the machine that dries the tissue. Following the drying process, the tissue paper is removed from the drying cylinders and wound into hard roll tissue. Hard roll tissue is either used internally for our converting operations at our Wisconsin facility or sold to consumer products companies and third-party converters. We undergo a similar process at each of our Michigan, Mississippi and Ontario facilities in our machine-glazed paper operations, which are designed to produce machine-glazed paper hard rolls.

        Our converting process at our Wisconsin facility involves loading hard roll tissue onto converting machines which unwind, perforate, emboss and print tissue as needed. The converting machines then roll or fold the processed tissue into converted tissue products, such as bath or facial tissue, napkins or paper towels. Similarly, our converting operations at our Michigan facility are designed to convert our machine-glazed paper hard rolls into converted wax paper products.

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        The following table illustrates the annual hard roll production capacity at each of our manufacturing facilities based on current utilization and the type of products produced at each of such facilities:

Connecticut facility

        Our Connecticut facility is a 59,000 square foot facility located in East Hartford, Connecticut. The facility consists of two paper machines, each of which produces dry creped tissue that is used by consumer products companies and third-party converters in the manufacture of disposable baby diapers, adult incontinence products, surgical waddings and disposable bibs. The tissue paper is produced with 100% virgin pulp to insure absolute cleanliness. In addition, our Connecticut facility has the capacity to produce base sheets for facial and bath tissue, napkins and paper towel products.

Michigan facility

        Our Michigan facility is a 397,000 square foot complex located along Lake Michigan's Bay of Green Bay in the City of Menominee. The facility consists of a paper machine for the manufacture of machine-glazed paper hard rolls and 20 converting line operations for both wet and dry wax papers. We believe that this facility is a highly efficient, low-cost producer of machine-glazed paper hard rolls which are used by third-party converters to make food packaging, wrapping, laminating and moisture -resistant and grease-resistant paper products. A portion of the machine-glazed paper hard rolls produced at the Michigan facility is converted through our converting equipment into converted wax paper products, including wet and dry wax paper, sandwich bags and microwavable wax paper. The majority of our converted wax paper products manufactured at the Michigan facility is sold as branded products to the facility's largest customer.

Mississippi facility

        Our Mississippi facility is located in Wiggins, Mississippi. Our facility complex consists of a 163,200 square foot manufacturing and warehousing facility in addition to a 6,800 square foot office. The facility is in close proximity to major interstate highways and a railroad, with a rail spur that runs directly to the facility. In addition, the facility is strategically located near the Mississippi gulf coast and three major seaports, including the Port of Gulfport, from each of which we ship our exports. Our Mississippi facility is centrally located between Atlanta and Dallas, thereby allowing for optimal service to many of our key customers.

        Our manufacturing facilities at the Mississippi facility consists of two paper machines. One machine produces machine-glazed paper hard rolls for food packaging, wrapping, laminating and moisture-resistant and grease-resistant paper products. The second machine produces dry creped paper that is used in the diaper and hygiene products market. In addition, it produces tissue, napkin and towel roll stock.

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New York facility

        Our New York facility is a 242,000 square foot complex located in Gouverneur, New York. It consists of two light dry creped paper machines, each of which produces a variety of specialty tissue products, such as personal hygiene grades, medical and surgical drapes, face mask wadding, filtration grades and tissues used in the personal care markets. In addition, the facility produces flexographic printed (a lower-cost, lower resolution graphic) colored napkins for the party goods industry and premium facial tissue. The facility is in close proximity to major interstate highways and a railroad, with a rail spur that runs directly to the facility.

Ontario facility

        Our Ontario facility is a 256,000 square foot complex located in St. Catharines, Ontario, Canada. The facility consists of three types of machines: through-air dried, machine-glazed and machine-finished. All three of these types of machines have color capability.

        Our through-air dried machine produces highly absorbent bulky sheets in basis weights from nine to 25 pounds used in the manufacture of folded and rolled towels, facial and bath tissue, napkins and absorbent tissues. Our machine- glazed machine produces high-glazed sheets in basis weights between 10 and 35 pounds. The machine-glazed paper produced is used for foil laminating, poly coating, waxing, printing and sheeting applications and is sold to third-party converters for a variety of applications in the quick service food industry and to manufacture niche market products such as gum wrappers, tobacco papers and butter wraps. Our machine-finished machine produces wax paper base stock and wet creped tissue used in the manufacture of coffee filters, masking tape and washroom towel base papers. All of the products manufactured at our Ontario facility are produced in jumbo rolls and sold to North American converters for further processing.

Wisconsin facility

        Our Wisconsin facility is a 1.2 million square foot facility located in Neenah, Wisconsin. We acquired this facility in August 2002 and added converting capacity to the facility subsequent to its acquisition. The facility currently consists of five light dry creped paper machines with up to 78,000 tons of annual hard roll tissue production capacity and 11 converting lines with approximately 69,000 tons of annual converting capacity. A complete distribution center with fully automated unitizing and wrapping capabilities is located adjacent to the facility. This facility produces converted tissue products such as facial and bath tissue, napkins and paper towels, as well as unconverted hard roll tissue, and enables us to offer our customers flexibility in the price, grade, softness, package configuration and size of our products. For example, our products can be manufactured completely with virgin pulp (for premium products) or recycled fiber (for value products) or any combination thereof. Our machines have color and multi-ply capacity. The facility contains full-width Bretting M-fold towel, kitchen roll towel and napkin machines. We also utilize a multi-fold facial line.

        The facility is in close proximity to major interstate highways and supports a rail spur that runs directly to the facility. In addition, the facility enjoys a strategic geographic advantage in servicing the midwestern U.S. markets.

Raw material and energy sources and supply

        The primary raw material used in our various facilities is wood pulp (both virgin pulp and recycled fiber). Other costs include natural gas, electricity and, in our Michigan facility, coal. As part of our pulp cost management strategy, we have supply agreements with various pulp suppliers on favorable terms, with the last agreement expiring in December 2006. We believe that these supply agreements or equivalent ones will enable us to purchase 65% of our total pulp requirements for fiscal year 2006. These agreements require minimum purchases at prices that are discounted from published list prices,

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and allow us to shift a portion of our pulp purchases to the spot market to take advantage of more favorable spot market prices when such prices fall. The balance of our pulp requirements is purchased on the open market. We satisfy all of our energy requirements through purchases of natural gas (other than for our Michigan facility) and electricity from local utility companies. At our Michigan facility, our power boilers generate most of our energy requirements through the use of coal, with the balance being supplied through the purchase of natural gas by contract.

Sales and customer support

Tissue

        Hard roll tissue.    At five of our facilities, our sales group sells our hard roll tissue to consumer products companies and third-party converters. In addition, we have expanded the role of our sales force, which previously focused exclusively on hard roll tissue sales to focus additional efforts on the sale of consumer and away-from-home converted tissue products.

        Consumer and away-from-home converted tissue.    At our Wisconsin facility, we have a dedicated sales group for our converted tissue products. We sell our converted tissue products to a variety of industry customers, directly to end-users or to distributors, which in turn sell to end-users.

Machine-glazed paper

        Our sales group sells our machine-glazed paper in a variety of specialty hard rolls from each of our Michigan, Mississippi and Ontario facilities. In addition, at our Michigan facility, our sales group sells converted wax paper products. The products manufactured in our machine-glazed paper segment are sold to third-party converters, consumer products companies and, in certain instances, directly to distributors.

Competition

        The hard roll tissue market and consumer and away-from-home converted tissue products market are highly competitive and are dominated by a number of large, international corporations, as well as smaller, regional corporations. Among the larger corporations, there is a growing trend to engage in contract manufacturing with smaller, more cost-effective manufacturers, such as ourselves. In such instances, major corporations find it more cost-effective to outsource their manufacturing needs rather than build or rebuild paper and converting machines or increase their production capacity. We believe that we offer an alternative to various major corporations by producing quality hard roll tissue and converted tissue products at attractive prices.

        We also compete in the machine-glazed paper market. Our primary competitors in this market are large, international corporations.

        In all areas, we believe that we compete on the basis of product quality and performance, price, service, sales and distribution. See "Risk factors"—We face significant competition and additional capacity entering the market. We may not be able to compete successfully in the markets we serve, which could reduce our market share and have a material adverse effect on our business, financial condition and operating results.

Major customers

        Our customer base is comprised of leading tissue consumer products companies, tissue and machine-glazed paper converters, manufacturers of private label products and distributors of tissue products. Four of our top 10 customers are Fortune 150 companies. Our 10 largest customers represented 62.9% of sales for the fiscal year ended February 28, 2003, or fiscal year 2003, 64.4% of sales for the fiscal year ended February 29, 2004, or fiscal year 2004, and 64.2% of sales for the fiscal

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year ended February 28, 2005, or fiscal year 2005. Alcoa Inc. represented 13.4% of sales in fiscal year 2003. Kimberly-Clark Corporation, our current largest single customer, and Alcoa represented 11.1% and 10.9% of sales, respectively, in fiscal year 2004, and Kimberly-Clark represented 17.6% of sales in fiscal year 2005. No other customer accounted for more than 10% of our sales in fiscal year 2003, fiscal year 2004 or fiscal year 2005.

Employees and labor relations

        As of February 28, 2005, we employed approximately 909 active full-time employees, consisting of 745 hourly employees and 164 salaried employees. We have collective bargaining agreements with the Paper, Allied—Industrial, Chemical and Energy Workers International Union covering approximately 451 of our hourly employees in our Michigan, New York and Wisconsin facilities, collectively. In addition, we have a collective bargaining agreement with Independent Paperworkers of Canada covering approximately 111 employees in our Ontario facility. Our collective bargaining agreements expire between August 2008 and February 2010.

        Our facilities have active health and safety programs in place. We have not experienced any work stoppages or significant labor disputes and we consider relations with our employees to be satisfactory. All of our facilities are situated in areas where adequate labor pools exist.

Intellectual property

        We are the owner of certain trademarks relating to our products. We are not aware of any existing infringing uses that could materially affect our business. We believe that our trademarks are valuable to our operations in our tissue and machine-glazed paper segments and are important to our overall business strategy.

        We own the trademark Waxtex™ which is used in connection with our machine-glazed paper products brand produced at our Michigan facility. We also own the trademark Magic Soft™ and the trademarks Interlake™ and Interlake Paper™.

Environmental laws

        We are subject to comprehensive and frequently changing federal, state, local and foreign environmental, health and safety laws and regulations, including laws and regulations governing emissions of air pollutants, discharges of wastewater and storm water, storage, treatment and disposal of materials and waste, site remediation and liability for damage to natural resources. We are also subject to frequent inspections and monitoring by government enforcement authorities. Compliance with these laws and regulations is an important factor in our business. From time to time, we incur significant capital and operating expenditures to comply with applicable federal, state and local environmental laws and regulations and to meet new statutory and regulatory requirements. We have implemented practices and procedures at our operating facilities that are intended to promote compliance with environmental laws, regulations and permit requirements. We believe that our facilities and manufacturing operations are currently in material compliance with such laws, regulations and requirements; however, we may not always be in compliance with all such laws, regulations or requirements.

        We may be subject to strict liability for the investigation and remediation of environmental contamination (including contamination that may have been caused by other parties) at properties that we own or operate and at other third-party owned properties where we or our predecessors have disposed of or arranged for the disposal of regulated materials. As a result, we may be involved in administrative and judicial proceedings and inquiries in the future relating to environmental matters. The total of such environmental compliance costs and liabilities cannot be determined at this time and may be material.

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Other governmental regulation

        We are also regulated by the U.S. Food and Drug Administration and the U.S. Occupational Safety and Health Administration. We believe that our manufacturing facilities are in compliance, in all material respects, with these laws and regulations.

        We are committed to ensuring that safe operating practices are established, implemented and maintained throughout our organization. In addition, we have instituted active health and safety programs throughout our company.

Forward-Looking Statements

        This Annual Report on Form 10-K includes "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are those that do not relate solely to historical fact. They include, but are not limited to, any statement that may predict, forecast, indicate or imply future results, performance, achievements or events. They may contain words such as "believe," "anticipate," "expect," "estimate," "intend," "project," "plan," "will" or words or phrases of similar meaning. Forward-looking statements are subject to many uncertainties and other variable circumstances, including those discussed in this Annual Report under the heading "Risk Factors," many of which are outside of our control, that could cause our actual results and experience to differ materially from those we thought would occur. Other risks besides those listed in "Risk Factors" can adversely affect us. New risk factors can emerge from time to time. It is not possible for us to predict all of these risks, nor can we assess the extent to which any factor, or combination of factors, may cause actual results to differ from those contained in the forward-looking statements. Given these risks and uncertainties, we urge you to read this Annual Report completely and with the understanding that actual future results may be materially different from what we plan or expect. We will not update these forward-looking statements even if our situation changes in the future.

        The following listing represents some, but not necessarily all, of the factors that may cause actual results to differ from those anticipated or predicted:

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the cyclicality of the paper industry;



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changes in the cost and availability of raw materials, including future demand for pulp in domestic and export markets;



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the effects on us from competition;



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increases in our energy costs;



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operational problems at our facilities causing significant lost production;



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the maintenance of relationships with customers;



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our ability to realize operating improvements and anticipated cost savings;



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changes in our regulatory environment, including environmental regulations;



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a change in control relating to our company;



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increases in interest rates;



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assessment of market and industry conditions;



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general economic conditions and their effects on our business;



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our ability to service our debt obligations and fund our working capital requirements; and



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increased general and administrative costs arising out of or resulting from becoming a reporting company.

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Risk Factors

The cyclical nature of the paper industry could have a material adverse effect on our business, financial condition and operating results.

        The market for tissue and other paper products is highly cyclical and sensitive to changes in general business conditions, industry capacity, consumer preferences and other factors. We have no control over these factors and they can heavily influence our financial performance.

        Beginning in 2001, prices for tissue and machine-glazed paper end products experienced significant declines. In particular, the away-from-home converted tissue products market has been adversely impacted by a generally weak economy and, specifically, reduced travel and entertainment. The prices for our products may fluctuate substantially in the future, and continued weakness in prices or downturns in market conditions could have a material adverse effect on our business, financial condition and operating results.

Our operating results depend upon our wood pulp costs. An increase in wood pulp costs could have a material adverse effect on our business, financial condition and operating results.

        Wood pulp is the principal raw material used in the manufacture of our tissue and machine-glazed paper products. It is purchased in highly competitive, price sensitive markets. We do not own or control any timberlands or chip mills or manufacture pulp at any of our facilities. Therefore, we must buy our wood pulp and other raw materials either through supply agreements or on the open spot market. We have agreements with six pulp suppliers with the last agreement expiring in December 2006. We believe that these supply agreements or equivalent ones will enable us to purchase 65% of our total pulp requirements for fiscal year 2006. These agreements require minimum purchases at prices that are discounted from published list prices. The balance of our pulp requirements must be purchased in the open market. If any of our supply agreements were to be terminated for any reason, or not renewed upon expiration, or if market conditions were to substantially change, we may not be able to find alternative, comparable suppliers or suppliers capable of providing our wood pulp needs on terms or in amounts satisfactory to us. As a result, our business, financial condition and operating results could suffer.

        In addition, the spot market price and availability of wood pulp have at times fluctuated greatly because of weather, economic or general industry conditions. These factors can increase the price we must pay for wood pulp from our existing suppliers, any new suppliers or on the spot market. Selling prices of our products may not increase in response to raw material price increases. Our operating results may be seriously harmed if we are unable to pass raw material price increases through to our customers.

We face significant competition and additional capacity entering the market. We may not be able to compete successfully in the markets we serve, which could reduce our market share and have a material adverse effect on our business, financial condition and operating results.

        The markets in which we operate are highly competitive. We currently compete in the hard roll tissue, consumer and away-from-home converted tissue products and machine-glazed paper markets. Some of our competitors are able to produce tissue products at a lower cost than we are. Additionally, many of our competitors are large, vertically integrated companies that are more strongly capitalized than we are or have more financial resources than we do. Any of the foregoing factors may enable our competitors to better withstand periods of declining prices and adverse operating conditions in the tissue industry. In addition, changes within the paper industry, including the consolidation of our competitors and consolidation of companies in the distribution channels for our products, have occurred and may continue to occur and may have a material adverse effect on our business, financial condition and operating results.

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        New machines may be built or idle machines activated which would also add more capacity to the tissue market. Increased production capacity in the tissue market could cause an oversupply resulting in lower prices and increased competition, either of which could have a material adverse effect on our business, financial condition and operating results.

        We compete on the basis of product quality and performance, price, service, sales and distribution. Competing in our markets involves the following key risks:

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our failure to anticipate and respond to changing customer preferences and demographics;



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our failure to develop new and improved products;



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aggressive pricing by competitors, which may force us to decrease prices in an attempt to maintain market share;



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consolidation of our customer base that diminishes our negotiating leverage;



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the decision by our larger customers to discontinue outsourcing the production of their products to us and to produce their products themselves;



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acquisition of a customer by one of our competitors, who thereafter replaces us as a supplier for that customer; and



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our failure to control costs.

        Because we do not have long-term contracts with many of our customers, these competitive factors could cause our customers to shift to other producers. Additional competition could result in lost market share or reduced prices, either of which could have a material adverse effect on our business, financial condition and operating results.

Our energy costs may be higher than we anticipated, which could have a material adverse effect on our business, financial condition and operating results.

        We spent approximately $33.5 million in fiscal year 2005 on electricity, natural gas and coal. Our Mississippi and Wisconsin facilities operate in regulated energy markets. Our other four facilities operate in deregulated energy markets. If our energy costs are greater than anticipated, our business, financial condition and operating results may be materially adversely affected. Unforeseen or recurring operational problems at any of our facilities may cause significant lost production, which could have a material adverse effect on our business, financial condition and operating results. Our manufacturing process could be affected by operational problems that could impair our production capability. Each of our facilities contain complex and sophisticated machines that are used in our manufacturing process. Disruptions at any of our facilities could be caused by:

•

maintenance outages;



•

prolonged power failures or reductions, including the effect of lightning strikes on our electrical supply;



•

a breakdown, failure or substandard performance of any of our paper machines, converting machines or other equipment;



•

the effect of noncompliance with material environmental requirements or permits;



•

the effect of a drought or lower than expected rainfall on our water supply;



•

disruptions in the transportation infrastructure, including railroad tracks, bridges, tunnels or roads;



•

fires, floods, earthquakes or other catastrophic disasters;

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•

labor difficulties; or



•

other operational problems.

        Any prolonged disruption in operations at any of our facilities could cause significant lost production, which would have a material adverse effect on our business, financial condition and operating results.

The market for our machine-glazed converted paper products may decline more rapidly than we anticipate, which could have a material adverse effect on our business, financial condition and operating results.

        Our machine-glazed converted paper products accounted for 19.4% of our total machine-glazed products tonnage in fiscal year 2003, 12.1% of our total machine-glazed products tonnage in fiscal year 2004 and 9.2% of our total machine-glazed products tonnage in fiscal year 2005. The North American market for converted machine-glazed paper products is declining as demand declines. If the market for converted machine-glazed paper products declines more rapidly than expected or if we are unable to maintain our share of the converted machine-glazed paper market or the prices of our machine-glazed converted paper products, it could have a material adverse effect on our business, financial condition and operating results.

We are dependent upon continued demand from our large customers. If we lost order volumes from any of our largest customers, our business, financial condition and operating results could be materially and adversely affected.

        Our largest customers account for a significant portion of our sales. Our 10 largest customers represented 62.9% of our sales in fiscal year 2003, 64.4% of our sales for fiscal year 2004 and 64.2% of our sales for fiscal year 2005. Some of our large customers (including four of our 10 largest customers) have the capability of producing the products that we currently manufacture for them. The loss or significant reduction of orders from any of our 10 largest customers could have a material adverse effect on our business, financial condition and operating results.

We may not realize the long-term expected benefits from our acquisition of the Wisconsin facility, which could have a material adverse effect on our business, financial condition and operating results.

        Before we acquired the Wisconsin facility in August 2002, the facility had been idle for approximately nine months. Our long-term success at our Wisconsin facility will depend, in part, on our ability to fully implement our growth strategy. We may be unsuccessful in fully achieving the access to the value-added consumer and away-from-home converted tissue products market that we expect to result from the acquisition. Our efforts to implement our long-term strategy could be affected by a number of factors beyond our control, such as increased competition, general economic conditions and regulatory developments. Any failure to effectively implement our long-term strategy could have a material adverse effect on our business, financial condition and operating results.

Labor disputes could disrupt our business and have a material adverse effect on our financial condition and operating results.

        Approximately 62% of our active full-time employees are represented by either the Paper, Allied-Industrial, Chemical and Energy Workers International Union or Independent Paper Workers of Canada through various collective bargaining agreements that expire between August 2008 and February 2010. Historically, we have not experienced any strikes or work stoppages. It is likely that our workers will seek an increase in wages and benefits at the expiration of each of these contracts.

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We are subject to significant environmental, health and safety laws and regulations and compliance expenditures. The cost of compliance with, and liabilities under, such laws and regulations could materially and adversely affect our business, financial condition and operating results.

        Our business is subject to a wide range of federal, state, local and foreign general and industry specific environmental, health and safety laws and regulations, including those relating to air emissions, wastewater discharges, solid and hazardous waste management and disposal and site remediation. We are also subject to frequent inspections and monitoring by government enforcement authorities. Compliance with these laws and regulations is a significant factor in our business. From time to time, we incur significant capital and operating expenditures to achieve and maintain compliance with applicable environmental laws and regulations. Our failure to comply with applicable environmental laws and regulations or permit requirements could result in substantial civil or criminal fines or penalties or enforcement actions, including regulatory or judicial orders enjoining or curtailing operations or requiring remedial or corrective measures, installation of pollution control equipment or other actions, which could have a material adverse effect on our business, financial condition and operating results.

        Certain of our operations also require environmental permits or other approvals from governmental authorities, and certain of these permits and approvals are subject to expiration, denial, revocation or modification under various circumstances. Failure to obtain or comply with these permits and approvals, or with other environmental requirements, may subject us to civil or criminal enforcement proceedings that can lead to substantial fines and penalties being imposed against us, orders requiring us to take certain actions or temporary or permanent shutdown of our affected operations. Such enforcement proceedings could also have a material adverse effect on our business, financial condition and operating results.

        In addition, as an owner and operator of real estate, we may be responsible under environmental laws and regulations for the investigation, remediation and monitoring, as well as associated costs, expenses and third-party damages, including tort liability and natural resource damages, relating to past or present releases of hazardous substances on or from our properties. Liability under these laws may be imposed without regard to whether we knew of, or were responsible for, the presence of those substances on our property, may be joint and several, meaning that the entire liability may be imposed on each party without regard to contribution, and retroactive and may not be limited to the value of the property. In addition, we or others may discover new material environmental liabilities, including liabilities related to third-party owned properties that we or our predecessors formerly owned or operated, or at which we or our predecessors have disposed of, or arranged for the disposal of, certain materials. We may be involved in administrative or judicial proceedings and inquiries in the future relating to such environmental matters which could have a material adverse effect on our business, financial condition and operating results.

        New environmental laws or regulations (or changes in existing laws or regulations or their enforcement) may be enacted that require significant expenditures by us. If the resulting expenses significantly exceed our expectations, our business, financial condition and operating results could be materially and adversely affected.

        We are also subject to various federal, state, local and foreign requirements concerning safety and health conditions at our manufacturing facilities. We may also be subject to material financial penalties or liabilities for noncompliance with those safety and health requirements, as well as potential business disruption, if any of our facilities or a portion of any facility is required to be temporarily closed as a result of any noncompliance with those requirements. Such financial penalties or liabilities or business disruptions could have a material adverse effect on our business, financial condition and operating results.

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If we are unable to implement our business strategies, our business, financial condition and operating results could be materially and adversely affected.

        Our future operating results will depend in part on the extent to which we can successfully implement our business strategies on a cost-effective basis. However, our strategies are subject to significant business, economic and competitive uncertainties and contingencies, many of which are beyond our control. If we are unable to successfully implement our business strategies, our business, financial condition and operating results could be materially and adversely affected.

The loss of our key managers could materially and adversely affect our business, financial condition and operating results.

        Our future success depends, in significant part, upon the continued services of our management personnel. The market for qualified individuals is highly competitive and we may not be able to attract and retain qualified personnel to replace or succeed members of our senior management or other key employees, should the need arise. Therefore, the loss of services of one or more of our key senior management could materially and adversely affect our business, financial condition and operating results.

Exposure to interest rate changes and other types of capital market volatility could increase our financing costs.

        We require both short-term and long-term financing to fund our operations, including capital expenditures. We are exposed to changes in interest rates with respect to our working capital facility and any new debt issues. Changes in the capital markets, our credit rating or prevailing interest rates can increase or decrease the cost or availability of financing which may have an adverse effect on our financial condition and operating results. In addition, because some of our operations and sales are in international markets, we could be adversely affected by unfavorable fluctuations in foreign currency exchange rates.

Changes in the political or economic conditions in the United States, Canada and, to a lesser extent, other countries in which our products are sold, could materially and adversely affect our business, financial condition and operating results.

        We sell our products in the United States, Canada, Mexico and South America. The economic and political climate of each of these regions has a significant impact on costs, prices and demand for our products in these areas. Changes in regional economies or political stability, including acts of war or terrorism, and changes in trade restrictions or laws (including tax laws and regulations, increased tariffs or other trade barriers) can affect the cost of manufacturing and distributing our products and the price and sales volume of our products, which could materially and adversely affect our business, financial condition and operating results.

We may not be able to generate sufficient cash flows to meet our debt service obligations.

        Our ability to make scheduled payments on, or to refinance our obligations with respect to, our indebtedness, including the $162,000,000 aggregate principal amount of our 9³/4% senior secured notes due 2010 that we issued in March 2004, referred to as the Notes, or to fund our other liquidity needs. In addition, the guarantee of the Notes by our Canadian subsidiary resulted in the inclusion of the earnings of that subsidiary in our U.S. taxable income and an increase in our U.S. income taxes that was substantial. If we are unable to generate sufficient cash flow to satisfy our debt obligations, we may have to undertake alternative financing plans, such as refinancing or restructuring our debt, selling assets, reducing or delaying capital investments or seeking to raise additional capital. We cannot assure you that any refinancing would be possible, that any assets could be sold, or, if sold, of the timing of

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sales and the amount of proceeds that may be realized from those sales, or that additional financing could be obtained on acceptable terms, if at all. Our inability to generate sufficient cash flows to satisfy our debt obligations, or to refinance our indebtedness on commercially reasonable terms, would materially and adversely affect our financial condition and results of operations and our ability to satisfy our obligations under the Notes.

Our significant debt obligations could limit our flexibility in managing our business and expose us to certain risks.

        We are highly leveraged. As of February 28, 2005, we had $161.1 million of indebtedness outstanding. In addition, we are permitted under our working capital facility and the indenture governing the Notes to incur additional debt, subject to certain limitations. Our high degree of leverage may have important consequences to you, including the following:

•

we may have difficulty satisfying our obligations under the Notes or other indebtedness and, if we fail to comply with these requirements, an event of default could result;



•

we may be required to dedicate a substantial portion of our cash flow from operations to required payments on indebtedness, thereby reducing the availability of cash flow for working capital, capital expenditures and other general corporate activities;



•

covenants relating to our debt may limit our ability to obtain additional financing for working capital, capital expenditures and other general corporate activities;



•

covenants relating to our debt may limit our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate;



•

we may be more vulnerable than our competitors to the impact of economic downturns and adverse developments in our business; and



•

we may be placed at a competitive disadvantage against any less leveraged competitors.

        The occurrence of any one of these events could have a material adverse effect on our business, financial condition, results of operations, prospects and ability to satisfy our obligations under the Notes.

ITEM 2.    PROPERTIES

Properties

        We own and operate six facilities located in East Hartford, Connecticut; Menominee, Michigan; Wiggins, Mississippi; Governeur, New York; St. Catharines, Ontario, Canada; and Neenah, Wisconsin. In addition, we maintain our corporate headquarters in East Hartford, Connecticut.

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        The following table lists each of our facilities and its location, use, approximate square footage and status:

ITEM 3.    LEGAL PROCEEDINGS

        We are, from time to time, party to various routine legal proceedings arising out of our business. These proceedings, primarily involve commercial claims, personal injury claims and workers' compensation claims. We cannot predict the outcome of these lawsuits, legal proceedings and claims with certainty. Nevertheless, we believe that the outcome of any currently existing proceedings, even if determined adversely, would not have a material adverse effect on our business, financial condition and operating results.

ITEM 4.    SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

        Not applicable.

PART II

ITEM 5.    MARKET FOR THE REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.

        Not applicable.

ITEM 6.    SELECTED CONSOLIDATED FINANCIAL DATA

        The following table contains our selected consolidated financial data for the years ended February 28, 2005, February 29, 2004 and February 28, 2003, 2002, and 2001. Our selected consolidated results of operations and other data for fiscal year 2005, fiscal year 2004 and fiscal year 2003, and our selected consolidated balance sheet data at February 28, 2005 and February 29, 2004, have been derived from audited consolidated financial statements included elsewhere in this Annual Report. Our selected consolidated results of operations and other data for fiscal year 2002 and fiscal year 2001, and

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our selected consolidated balance sheet data at February 28, 2003, 2002 and 2001, have been derived from audited consolidated financial statements not included in this Annual Report. You should read the information set forth below in conjunction with our "Management's Discussion and Analysis of Financial Condition and Results of Operation" and our consolidated financial statements and related notes included elsewhere in this Annual Report.

(1)

Excludes capital expenditures relating to the acquisition of our Wisconsin facility in fiscal 2003.

(2)

EBITDA represents earnings before interest expense, income taxes and depreciation and amortization. EBITDA does not represent and should not be considered as an alternative to net income or cash flow from operations, as determined by generally accepted accounting principles, or GAAP, and our calculation thereof may not be comparable to that reported by other companies. We present EBITDA because we believe that it is widely accepted that EBITDA provides useful information regarding a company's ability to service and/or incur indebtedness. EBITDA has limitations as an analytical tool, and you should not consider it in isolation, or as a substitute for analysis of our results as reported under GAAP. Some of the limitations are:

•

EBITDA does not reflect our cash expenditures, or future requirements for capital expenditures or contractual commitments;



•

EBITDA does not reflect changes in, or cash requirements for, our working capital needs;



•

EBITDA does not reflect the significant interest expense, or the cash requirements necessary to service interest or principal payments, on our debts;



•

although depreciation and amortization are non-cash charges, the assets being depreciated and amortized will often have to be replaced in the future, and EBITDA does not reflect any cash requirements for such replacements; and

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•

other companies in our industry may calculate EBITDA differently than we do, limiting its usefulness as a comparative measure.

        Because of these limitations, EBITDA should not be considered as a measure of discretionary cash available to us to invest in the growth of our business. We compensate for these limitations by relying primarily on our GAAP results and using EBITDA only supplementally. See the consolidated statements of cash flow included in our financial statements included elsewhere in this Annual Report. The following is a reconciliation of EBITDA to net income (loss) and net cash provided by operating activities:

ITEM 7.    MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

        The financial and business analysis below provides information which we believe is relevant to an assessment and understanding of our consolidated financial position, results of operations and cash flows. This financial and business analysis should be read in conjunction with the consolidated financial statements and related notes.

Overview

        We manufacture and market specialty tissue and machine-glazed paper used in the manufacture of various end products, including diapers, facial and bath tissue, assorted paper towels and food wraps. In addition, we manufacture and market a broad range of converted tissue products. Our business is comprised of two segments: tissue and machine-glazed paper. In addition, our tissue segment consists of two product lines: (1) hard roll tissue and (2) consumer and away-from-home converted tissue products. We own and operate five facilities in the United States, located in Connecticut, Michigan, Mississippi, New York and Wisconsin, and one facility located in Ontario, Canada.

        In our tissue segment, we derive our revenues from the sale of (1) tissue hard rolls sold as facial and bath tissue, napkin and paper towel stock, as well as absorbent cover stock, and (2) converted tissue products, including a variety of private label consumer and away-from-home bath and facial tissue, napkins and folded and rolled towels. We derive our revenues in our machine-glazed paper segment from the sale of (1) machine-glazed paper hard rolls to third-party converters that manufacture fast food and commercial food wrap, as well as niche market products such as gum

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wrappers, coffee filters, tobacco papers, wax paper and butter wraps and (2) converted wax paper products, including wet and dry wax paper, sandwich bags and wax paper. For fiscal year 2005 and fiscal year 2004, our tissue segment generated $230.4 million and $189.8 million, respectively, or approximately 69.2% and 65.4%, respectively, of our total net sales, and our machine-glazed paper segment generated $102.5 million and $100.5 million, respectively, or approximately 30.8% and 34.6%, respectively, of our net sales. For fiscal year 2003, our tissue segment generated net sales of $134.9 million or approximately 58.0% of our net sales, and our machine-glazed paper segment generated net sales of $97.5 million, or approximately 42.0% of our net sales.

        We entered the consumer and away-from-home converted tissue products market following the August 2002 acquisition of our Wisconsin manufacturing and converting facility. Our Wisconsin facility has added approximately 78,000 tons of annual hard roll tissue production capacity and 11 converting lines with approximately 69,000 tons of annual converting production capacity. Sales of our converted tissue products in the consumer and away-from-home converted tissue products market generate significantly greater revenue per ton than sales of hard roll tissue. Our Wisconsin facility began producing our full line of consumer and away-from-home converted tissue products in March 2003. We believe that, as we continue to increase the utilization of our converting capacity, we will increase our profits and generate higher margins on our consumer and away-from-home converted tissue products.

        The primary component of cost of goods sold for each of our segments is pulp, which represented approximately 46%, 45% and 42% of our cost of goods sold in fiscal year 2005, fiscal year 2004 and fiscal year 2003, respectively. We have supply agreements with six pulp suppliers, with the last agreement expiring in December 2006. We believe under these agreements or their equivalents, we will purchase 65% or our total pulp requirements for fiscal year 2006. These supply agreements permit us to purchase pulp at prices that are discounted from published list prices and allow us to shift a portion of our pulp purchases to the spot market to take advantage of more favorable spot market prices when such prices fall. The balance of our pulp requirements are purchased on the open market.

        Our labor, manufacturing, energy, other materials and depreciation costs in the aggregate represented approximately 54%, 55% and 58% of our cost of goods sold for fiscal year 2005, fiscal year 2004 and fiscal year 2003, respectively. Those costs are broken down as follows: (1) wages and benefits made up approximately 10%, 10% and 11%, for fiscal year 2005, fiscal year 2004 and fiscal year 2003, respectively; (2) manufacturing overhead represented approximately 18%, 19% and 20% for fiscal year 2005, fiscal year 2004 and fiscal year 2003, respectively; (3) energy costs represented approximately 11%, 11% and 12%, for fiscal year 2005, fiscal year 2004 and fiscal year 2003, respectively; (4) other materials (including chemicals, wax, dye and packaging) represented approximately 10%, 9% and 9%, for fiscal year 2005, fiscal year 2004 and fiscal year 2003, respectively; and (5) depreciation represented approximately 5%, 6% and 6% for fiscal year 2005, fiscal year 2004 and fiscal year 2003, respectively.

        We have collective bargaining agreements with the Paper, Allied—Industrial, Chemical and Energy Workers International Union in each of our Michigan, New York and Wisconsin facilities covering 451 of our hourly employees. In addition, we have a collective bargaining agreement with Independent Paperworkers of Canada covering 111 hourly employees in our Ontario facility. Our agreements expire between August 2008 and February 2010. Historically, we have not experienced any significant labor disputes or work stoppages.

        We satisfy all of our energy requirements through purchases of natural gas (other than for our Michigan facility) and electricity from local utility companies. At our Michigan facility, our power boilers generate most of our energy requirements through the use of coal, with the balance being supplied through the purchase of natural gas by contract.

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Results of operations

        The following table sets forth certain sales and operating data for our business segments for the periods indicated:

Fiscal year ended February 28, 2005 (fiscal year 2005) compared to fiscal year ended February 29, 2004 (fiscal year 2004)

        Net sales for fiscal year 2005 increased approximately $42.6 million, or 14.7%, to $332.9 million from $290.3 million for fiscal year 2004. The increase in net sales is attributable to improved product mix, higher selling prices and an increase in volume sold over the prior year. For fiscal year 2005, we sold 269,834 tons of tissue and machine-glazed products, compared to 253,403 tons sold in fiscal year 2004.

        Net sales for our tissue segment for fiscal year 2005 increased $40.6 million, or 21.4%, to $230.4 million from $189.8 million for fiscal year 2004. The increase in net sales for the tissue segment is primarily attributable to improved product mix, higher selling prices and an increase in volume sold over the prior year. For fiscal year 2005, we sold 182,192 tons of tissue, compared to 163,434 tons sold in fiscal year 2004. Net sales for our machine-glazed segment for fiscal year 2005 increased approximately $2.0 million, or 2.0%, to $102.5 million from $100.5 for fiscal year 2004. The increase in net sales for the machine-glazed segment is attributable to improved product mix and higher net selling prices, despite a decrease in tons sold. For fiscal year 2005, we sold 87,642 tons of combined hard roll machine-glazed paper and converted wax paper products, compared to 89,969 tons for fiscal year 2004.

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        Gross profit for fiscal year 2005 increased to $40.4 million from $33.0 million, an increase of $7.4 million, or 22.4%, over fiscal year 2004. As a percentage of net sales, gross profit increased to 12.2% for fiscal year 2005, compared to 11.4% for fiscal year 2004. The increase in gross profit in fiscal year 2005 was primarily attributable to improved product mix, higher net selling prices and increased volume. This increase was partially offset by increased pulp, energy and freight costs.

        Gross profit for our tissue segment for fiscal year 2005 was $26.7, an increase of $5.6 million, or 26.6%, over fiscal year 2004. Gross profit for our machine-glazed segment for fiscal year 2005 was $13.7, an increase of $1.8 million, or 15.1%, over fiscal year 2004. The increase in gross profit for the tissue segment was attributable to improved product mix, higher net selling prices and increased volume, which was partially offset by increased pulp, energy and freight costs. The increase in gross profit for the machine-glazed segment was attributable to improved product mix and increased net selling prices, partially offset by increased pulp costs. As a percentage of net sales, gross profit for the tissue segment increased to 11.6% for fiscal year 2005 from 11.1% in fiscal year 2004. As a percentage of net sales, gross profit for the machine-glazed segment increased to 13.4% for fiscal year 2005 from 11.8% in fiscal year 2004.

        Selling, general and administrative expenses for fiscal year 2005 increased $1.4 million, or 11.0%, to $14.5 million from $13.1million in fiscal year 2004. The increase is primarily due to the accrual of bonuses due to stronger year over year performance and additional staffing requirements and professional fees to achieve and maintain compliance with required rules and regulations of the Securities and Exchange Commission, or the SEC, associated with our becoming a public reporting company (See "Liquidity and Capital Resources"). As a percentage of net sales, selling, general and administrative expenses in fiscal year 2005 decreased slightly to 4.4% from 4.5% in fiscal year 2004.

        Compensation from redemption of stock options and accelerated vesting of stock options included as expenses in fiscal year 2005 income from operations was $3.9 million; $3.4 million related to compensation from the redemption of stock options of our parent, Cellu Paper Holdings, Inc., and $.5 million related to accelerated vesting of certain stock options, both triggered by the issuance of the Notes in March 2004. With respect to the $.5 million related to accelerated vesting of certain stock options, $.3 million was recorded in the second quarter and $.2 million was recorded in the first quarter of fiscal 2005. Management may need to recognize additional expense should management's estimate of the number of employees that will actually benefit from the accelerated vesting of the options need to be adjusted. Management will continue to update its estimate of the number of employees that will actually benefit from the accelerated vesting of the options each reporting period and adjust the total expense recognized until the original vesting period associated with the options has expired.

        Write-off of debt issuance costs and prepayment penalties of $3.3 million included in fiscal year 2005 income from operations is an expense incurred primarily related to the write-off of debt issuance costs (noncash) previously capitalized and associated with debt that was extinguished in March 2004 in connection with the issuance of the Notes in March 2004.

        Interest expense, net for fiscal year 2005 increased $9.9 million to $16.0 million, compared to $6.1 million in fiscal year 2004. The increase is due to the increased level of long-term debt outstanding as a result of the issuance of the Notes in March 2004.

        Other (income) expense for fiscal year 2005 included a $2.4 million gain on sale of equipment, resulting from the sale of a previously idled paper machine at our Menominee mill in the second quarter of 2005. Net proceeds from the sale were $4.0 million (gross proceeds of $5.2 million less brokerage fees and other direct costs of $1.2 million).

        Income tax (benefit) expense for fiscal year 2005 was a benefit of 2.4% compared to expense of 41.9% for fiscal year 2004. Included in the fiscal year 2005 benefit was $1.0 million related to the reversal of a valuation allowance against foreign deferred taxes resulting from net operating loss

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carryforwards. As our foreign operations were profitable in fiscal year 2005, we utilized our foreign net operation losses and accordingly, the valuation allowance was no longer necessary. Without this $1.0 million benefit, income tax expense for the fiscal year 2005 was 31%. The decrease in the rate from fiscal year 2004 was due to the availability of federal net operating loss carryforwards and alternative minimum tax credits to be utilized in fiscal year 2005. The decrease in the actual overall effective tax rate anticipated for fiscal year 2005 from that anticipated in the third quarter of fiscal year 2005 of 48% was primarily related to a revision in our overall earnings for fiscal year 2005 compared to anticipated results.

        Net income for fiscal year 2005 was $3.1 million, compared to $7.1 million for fiscal year 2004. The decrease in net income was attributable to the increase in expenses, including interest expense, partially offset by an increase in net sales as discussed above.

Fiscal year ended February 29, 2004 (fiscal year 2004) compared to fiscal year ended February 28, 2003 (fiscal year 2003)

        Net sales.    Net sales for fiscal year 2004 increased approximately $57.9 million, or 24.9%, to $290.3 million from $232.4 million for fiscal year 2003. For fiscal year 2004, we sold 253,403 tons of tissue and machine-glazed products, compared to 212,871 tons sold in fiscal year 2003. Approximately $45.6 million of the increase in net sales and 91.7% of the increase in tons sold were attributable to our Wisconsin facility, which we acquired in August 2002.

        Net sales for our tissue segment for fiscal year 2004 increased approximately $54.9 million, or 40.7%, to $189.8 million from $134.9 million for fiscal year 2003. For fiscal 2004 year, we sold 163,434 tons of tissue, compared to 124,768 tons sold in fiscal year 2003. The increase in net sales for our tissue segment was primarily attributable to (i) the sale of additional hard rolls and converted tissue products following the acquisition of our Wisconsin facility and (ii) converted premium facial tissue product sold by our New York facility that was converted by a third-party converter. In addition, for fiscal year 2004, sales of converted facial tissues, one of our value-added, higher margin products, produced at our Wisconsin facility accounted for approximately 58% of our net sales in the consumer and away-from-home converted tissue product line.

        Net sales for our machine-glazed paper segment for fiscal year 2004 increased approximately $3.0 million, or 3.1%, to $100.5 million from $97.5 million for fiscal year 2003. For fiscal year 2004, we sold 89,969 tons of combined hard roll machine-glazed paper and converted wax paper products, compared to 88,103 tons sold for fiscal year 2003. For fiscal year 2004, we increased net sales of machine-glazed paper hard rolls (primarily due to increased productivity and sales at our Mississippi and Ontario facilities) and decreased net sales of converted wax paper products. The decrease in the wax converting business included the loss of sales to a major customer that began producing dry wax converting products on its own.

        Gross profit.    Gross profit for fiscal year 2004 increased approximately $1.5 million, or 4.8%, to $33.0 million from $31.5 million for fiscal year 2003. The increase in gross profit in fiscal year 2004 was attributable to increased sales volume and an improvement of sales mix. This increase was partially offset by a rise in cost of goods sold due to an average pulp price increase of approximately $51 per ton for fiscal year 2004 compared to fiscal year 2003. Gross profit as a percentage of net sales decreased to 11.4% in fiscal year 2004 from 13.6% in fiscal year 2003 due to the ramp-up of the Wisconsin facility and margin pressure attributable to rising pulp costs.

        Gross profit for our tissue segment for fiscal year 2004 increased approximately $4.2 million, or 24.9%, to $21.1 million from $16.9 million for fiscal year 2003. Gross profit as a percentage of net sales for our tissue segment decreased to 11.1% in fiscal year 2004 from 12.5% in fiscal year 2003. This decrease was due to increased costs during our ramp-up of our Wisconsin facility.

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        Gross profit for our machine-glazed paper segment for fiscal year 2004 decreased approximately $2.7 million, or 18.5%, to $11.9 million from $14.6 million for fiscal year 2003. The decrease in gross profit was attributable in part to an increase in pulp costs, which has a greater impact on the machine-glazed paper segment than the tissue segment. In general, machine-glazed paper products are sold into commodity markets where it is more difficult for us to pass cost increases through to the customer. Gross profit as a percentage of net sales for the machine-glazed paper segment decreased to 11.8% in fiscal year 2004 from 14.9% in fiscal year 2003 due largely to rising pulp costs as described above.

        Selling, general and administrative expenses.    Selling, general and administrative expenses for fiscal year 2004 decreased approximately $0.1 million, or 1.0%, to $13.1 million from $13.2 million for fiscal year 2003. As a percentage of net sales, selling, general and administrative expenses for fiscal year 2004 were 4.5% compared to 5.7% for fiscal year 2003.

        Interest expense.    Interest expense for fiscal year 2004 increased approximately $3.6 million to $6.1 million from $2.5 million for fiscal year 2003. This increase was largely due to a restructuring of our then existing credit facility in September 2001. As a result of the restructuring, no interest expense with respect to the credit facility was recognized in fiscal year 2003 until we refinanced the restructured credit facility in September 2002.

Liquidity and capital resources

        Our principal liquidity requirements are to service debt and meet working capital, tax and capital expenditure needs. Our total debt at February 28, 2005 was $161.1 million. Although we expect to be able to meet our liquidity requirements for 2006 through cash provided by operations, we cannot provide assurance that this will be the case.

        In March 2004, we completed a private offering of the Notes. We raised $152.2 million, net of debt issuance costs of $8.0 million and original issuance discount of $1.8 million. At the same time, we entered into a $30.0 million revolving working capital facility with CIT Group/Business Inc. A portion of the proceeds, along with a drawdown from the working capital facility, were used to pay off existing debt of approximately $56.0 million. In addition, we used an aggregate $100.2 million of the proceeds to fund a stockholder dividend in the amount of $96.8 million to Cellu Paper Holdings, Inc., our parent, to repurchase a portion of its common stock and warrants, and compensation from the redemption of stock options of our parent in the amount of $3.4 million.

        The Notes mature on March 15, 2010 and require semi-annual interest payments on March 15th and September 15th.

        The working capital facility has a term of three years, subject to a one-year extension at our option. Advances are made available from the lender in an aggregate principal amount of up to $30.0 million, subject to a borrowing base limitation based on eligible inventory and accounts receivable. Interest accrues on borrowings under our working capital facility at floating rates equivalent to, in the case of U.S. dollars loans, the JPMorgan Chase Bank prime rate of interest in effect from time to time plus .50% or LIBOR (London Interbank Offered Rate) plus 2.75%, or, in the case of Canadian dollar loans, the Canadian Imperial Bank of Commerce prime rate of interest in effect from time to time plus 1.20% or the "BA Rate" (CDOR-Canadian Dollar Offered Rate) plus .10%) plus 2.95%. Beginning after fiscal year 2005, interest rates may go up or down by as much as .5%, depending upon our financial results. As of February 28, 2005, we have no outstanding borrowings under the working capital facility.

        Net cash provided by operations was $32.2 million for fiscal year 2005, $20.3 million for fiscal year 2004 and $21.3 million for fiscal year 2003. Significant noncash items included in fiscal year 2005 were $2.9 million for the write-off of debt issuance costs and $.5 million related to accelerated vesting of stock options, both of which are related to the issuance of the Notes in March 2004. These charges are

25

offset by a gain on sale of equipment of $2.4 million. Net of these items, noncash items for fiscal year 2005 totaled $18.4 million, consistent with fiscal year 2004. Cash flows provided by changes in working capital totaled $9.7 million for fiscal year 2005 compared to net cash used by changes in working capital of $5.3 million for fiscal year 2004. With respect to changes in accounts receivable and inventory, cash provided by these items were $1.6 million for fiscal year 2005 compared to cash used by these items of $9.4 million for fiscal year 2004. This improvement was attributable to shorter collection periods on accounts receivable and continued focus on inventory levels. Cash used by changes in prepaid expenses and other current assets was $.7 million for fiscal year 2005 compared to cash provided by changes in prepaid expenses and other current assets of $3.5 million for fiscal year 2004. Cash provided by changes in cash overdraft, accounts payable, accrued expense and income taxes was $8.8 for fiscal year 2005 compared to $.6 million for fiscal year 2004. The fluctuation was primarily due to the increase in accrued interest based on the timing of interest payments relative to the Notes. The decrease in cash provided by operations for fiscal year 2004 compared to fiscal year 2003 was due primarily to a decrease in deferred income tax adjustment offset by an increase in depreciation and amortization for fiscal year 2004.

        Net cash used in investing activities was $7.4 million in fiscal year 2005, $10.5 million in fiscal year 2004 and $42.1 million in fiscal year 2003. The decrease in net cash used in investing activities for fiscal year 2005 as compared to fiscal year 2004 relates to the level of capital spending period over period, offset by machine sale proceeds. The decrease in net cash used in investing activities for fiscal year 2004 as compared to fiscal year 2003 was attributable in large part to the acquisition of our Wisconsin facility and related equipment in August and September 2002, respectively.

        Net cash provided by financing was $1.4 million for fiscal year 2005; net cash used by financing for fiscal year 2004 was $10.2 million; and net cash provided by financing for fiscal year 2003 was $16.9 million. In fiscal year 2005, gross proceeds of $160.2 million, net of $1.8 million of original issue discount, from issuance of the Notes (as discussed above) were offset by (i) net payments on long-term debt and revolving line of credit of $43.9 million and $11.0 million, respectively; (ii) a stockholder dividend to our parent in the amount of $96.8 to purchase shares of its common stock and warrants; (iii) prepayment penalties of $.4 million; and (iv) payment of fees and expenses related to the issuance of the Notes in the amount of $6.7 million. Net cash used for financing for fiscal year 2004 was primarily attributable to payments of $9.0 million on our then existing Term A and B loans and $250,000 on our industrial revenue bond, partially offset by borrowings under our then existing revolving line of credit of $2.5 million. Net cash provided by financing in fiscal year 2003 was attributable to our refinancing.

        Cash as of February 28, 2005 increased to $27.0 million from an overdraft position of $4.8 million as of the end of the prior fiscal year. The improvement in our cash position is primarily due to the significant cash provided by operations during fiscal year 2005.

        Receivables, net as of February 28, 2005 decreased to $35.8 million from $37.2 million as of the end of the prior fiscal year. The decrease is the result of our continued effort to reduce days' sales outstanding.

        Assets held for sale as of February 28, 2005 decreased to zero from $2.3 million as of the end of the prior fiscal year. These assets related to the previously idled paper machine at our Menominee mill that was sold in the second quarter of fiscal 2005.

        Debt issuance costs as of February 28, 2005 increased to $7.2 million from $4.7 million as of the end of the prior fiscal year due primarily to the costs incurred in connection with the issuance of the Notes in March 2004, offset by amortization expense through the end of fiscal year 2005. Unamortized debt issuance costs totaling $2.9 million associated with the previous refinancing were written off during the first quarter of fiscal year 2005.

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        Accounts payable as of February 28, 2005 increased to $19.0 million from $16.9 million as of the end of the prior fiscal year due to increased sales volume and timing of payments.

        Accrued expenses as of February 28, 2005 increased to $15.2 million from $11.0, primarily as the result of increased sales volume, an accrual of bonuses due to stronger year over year performance and an increase in accrued utilities due to increased utility costs during fiscal year 2005.

        Accrued interest as of February 28, 2005 increased to $7.4 million from $.3 million as of the end of the prior fiscal year due to the timing of semi-annual payments of interest on the Notes.

        Stockholders' equity (deficiency) as of February 28, 2005 decreased to a deficiency of $7.6 million compared to equity of $84.5 million as of the end of the prior fiscal year. We used approximately $96.8 million of the proceeds from the issuance of the Notes to fund a stockholder dividend to our parent to purchase shares of its common stock and warrants. Approximately $66.0 million was charged to capital in excess of par value and the remaining $30.8 million was charged to accumulated earnings, resulting in the deficiency at February 28, 2005. Net income generated for fiscal year 2005 reduced the deficiency.

        Accumulated other comprehensive income as of February 28, 2005 increased to $.9 million compared to $.2 million as of the end of the prior fiscal year due to the fluctuation in the Canadian currency during the current fiscal year.

Capital spending summary

        Capital expenditures were $11.4 million, $10.5 million and $16.1 million for fiscal year 2005, fiscal year 2004 and fiscal year 2003, respectively. We have increased capital expenditures since fiscal year 2002 to support ongoing cost savings programs (cost improvements) and growth in our manufacturing capacity. We have concentrated the growth in our manufacturing capacity since fiscal year 2003 on our converting operations at our Wisconsin facility for the production of value-added converted tissue products.

Contractual obligations

        At February 28, 2005, our material obligations under firm contractual arrangements, including commitments for future payments under long-term debt arrangements, operating lease arrangements and other long-term obligations, are summarized below.

(1)

Interest incurred at 9³/4%, payable semi-annually

Net operating loss carryforwards

        At February 28, 2005, we had state net operating loss carryforwards, or NOLs, of approximately $8,054,000, which begin to expire in 2017, and foreign net operating loss carryforwards of approximately

27

$102,000, which begin to expire in 2006. At February 28, 2005 and February 29, 2004, we had recorded a valuation allowance for the amount of the foreign NOLS. We currently anticipate fully utilizing recorded state NOLs prior to their expiration.

        In assessing the realizability of deferred tax assets, we consider whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. We consider the scheduled reversal of deferred tax liabilities, projected future taxable income and tax planning strategies in making this assessment. Based on the level of historical taxable income and projections for future taxable income over the periods in which the deferred tax assets are deductible, we believe it is more likely than not that we will realize the benefits of these deductibles differences, net of valuation allowances provided.

New accounting standards

        Refer to Note 2 (Summary of Significant Accounting Policies) of the notes to our consolidated financial statements included elsewhere in this Annual Report for a discussion of new accounting pronouncements and the potential impact to our consolidated results of operations and financial position.

Critical accounting policies and estimates

        Preparation of our financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses. Significant accounting policies used in the preparation of our consolidated financial statements are described in Note 2 (Summary of Significant Accounting Policies), included elsewhere in this Annual Report. Management believes the most complex and sensitive judgments, because of their critical nature, result primarily from the need to make estimates about the effects of matters with inherent uncertainty. The most critical areas involving management estimates are described below. Actual results in these areas could differ from management's estimates.

Allowance for doubtful accounts

        We estimate our allowance for doubtful accounts using two methods. First, we determine a specific reserve for individual accounts where information is available that the customer may have an inability to meet its financial obligation. Second, we estimate additional reserves for all customers based on historical write-offs. If circumstances change, for example the occurrence of higher than expected defaults or a material adverse change in a major customer's ability to meet its financial obligation to us, estimates of the recoverability of receivable amounts due could be reduced.

Goodwill

        Effective March 1, 2002, we adopted SFAS No. 142, "Goodwill and Other Intangible Assets." Under SFAS No. 142, goodwill and intangible assets with indefinite useful lives are no longer amortized. Instead, we evaluate the carrying value of long lived assets for impairment at least annually, or whenever indicators of impairment are deemed to exist. Impairment losses are recognized in operating results in the period the impairment is recognized. We performed the initial impairment test upon adoption of SFAS No. 142 and again as of February 28, 2003, February 29, 2004 and February 28, 2005. There was no impairment as of any of these dates.

Income taxes

        We recognize deferred tax assets and liabilities for expected future tax consequences of events that have been included in the financial statements or income tax returns. Under this methodology, deferred

28

tax assets and liabilities are determined based on the difference between the financial statements and the tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse.

ITEM 7A.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

        In March 2004, we completed a private offering of the Notes. At the same time, we entered into a $30.0 million revolving working capital facility. We raised approximately $152.0 million, net of debt issuance costs and original discount on the Notes. The proceeds, along with a drawdown from the revolver, were used to pay off existing debt of approximately $56.0 million and to fund a stockholder dividend to our parent to purchase shares of its common stock and warrants and fund compensation from the redemption of stock options of our parent, in the amount of $100.2 million. As a result of these transactions, we are highly leveraged. As of February 28, 2005, there were no borrowings under our working capital facility but we have the ability to borrow funds under this facility up to an aggregate of $30.0 million and could be adversely affected by a significant increase in interest rates. We also have obligations under an industrial revenue bond (balance as of February 28, 2005 of $.6 million) that is payable in annual installments with interest ranging from 4.8% to 6.65%.

        We have minimal foreign currency translation risk. All international sales other than sales originating from our Canadian subsidiary are denominated in U. S. dollars. Due to our Canadian operations, however, we could be adversely affected by unfavorable fluctuations in foreign currency exchange rates.

ITEM 8.    FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

        See Item 15 for an index to financial statements and financial statement schedules. Such financial statements and financial statement schedules are incorporated herein by reference.

ITEM 9.    CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

        None.

ITEM 9A.    CONTROLS AND PROCEDURES

        (A)  We carried out an evaluation, under the supervision and with the participation of our management, including our chief executive officer and principal financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e)), under the Securities Exchange Act of 1934, as amended.    Based upon that evaluation, our chief executive officer and principal financial officer have concluded that, as of February 28, 2005, our disclosure controls and procedures were effective in ensuring them that material information related to the Company was properly disclosed in our periodic SEC filings.

        (B)  There have been no significant changes in our internal controls over financial reporting or in other factors during the fiscal year ended February 28, 2005 that have materially affected or are reasonably likely to materially affect our internal control over financial reporting.

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ITEM 9B.    OTHER INFORMATION

        None.

PART III

ITEM 10.    DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

        The following table sets forth certain information regarding the members of our board of directors and our executive officers. Each of our directors will hold office until removal by our parent as sole stockholder. Our officers serve at the discretion of our board of directors.

        Russell C. Taylor has been our president and chief executive officer since October 2001. Mr. Taylor became a member of our board of directors upon assuming his role as chief executive officer in October 2001. Prior to that, he was employed by Kimberly Clark Corporation, a manufacturer of personal care paper products, from May 1997 to January 1999 as president, Kimberly Clark, Professional/Pulp, North America/Europe, and from January 1999 to October 2001 as group president, Kimberly Clark, Professional Pulp/Tissue Paper/Environmental, North America/Europe.

        Dianne M. Scheu has been our chief financial officer and senior vice president, finance since July 2003. From March 2003 to July 2003, she served as our senior vice president, finance. She was self-employed as a financial consultant from September 2002 to March 2003. From September 2001 to September 2002, Ms. Scheu was employed by Kimberly Clark Corporation on the "go-to-market" project team. From May 2001 to September 2001, Ms. Scheu was on a leave of absence. From April 2000 to May 2001, Ms. Scheu was employed by Kimberly Clark Corporation as director of K C Professional Worldwide/Napkins/Private Label. From March 1999 to March 2000, Ms. Scheu was employed by Kimberly Clark Corporation as director of AFH Sales.

        Hugo E. Vivero has been our senior vice president, machine-glazed paper segment and secretary, since July 2003. From September 1989 until July 2003, he served as our senior vice president and chief financial officer.

        Thomas D. Moore has been our senior vice president, sales and marketing since November 1987.

        Kevin M. French has been our senior vice president, manufacturing since March 2004. From March 1998 through March 2004, Mr. French held various manufacturing management positions within the Company.

        Paul H. Mullan has been the chairman of our board of directors since January 1998. From January 1, 2001 to September 30, 2001, Mr. Mullan served as our acting chief executive officer. Since 1997, Mr. Mullan has served as strategic partner at Charterhouse Group, Inc., a private equity investment company (Charterhouse). Prior to joining Charterhouse, Mr. Mullan served as chairman and chief executive officer of Fleer Corp. and co-chairman and co-chief executive officer of Del Monte Corporation, two prior Charterhouse portfolio companies.

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        Merril M. Halpern has been a member of our board of directors since January 1998. Since 1973, Mr. Halpern has served as chairman at Charterhouse.

Stockholders' agreement

        Our parent, Cellu Paper Holdings, Inc., has entered into a Stockholders' Agreement, dated as of September 28, 2001, as amended, with certain of its stockholders, including CEP III, Russell C. Taylor, our chief executive officer and president and a member of our board of directors, and certain other non-stockholder senior management, including Hugo E. Vivero, senior vice president, machine-glazed paper segment, Thomas D. Moore, senior vice president, sales and marketing, and Dianne M. Scheu, chief financial officer and senior vice president of finance. The agreement created certain rights and restrictions with respect to our parent's common stock, including restrictions on the transfer of stock, tag-along rights, pre-emptive rights, call rights, registration rights and the right of CEP III and another stockholder, in certain circumstances, to compel other stockholders to sell their stock.

Compensation Committee Interlocks and Insider Participation

        There are no compensation committee interlocks (none of our executive officers serves as a member of the board of directors or the compensation committee of another entity that has an executive officer serving on our board of directors).

Board of Directors and Committees

        The board of directors held three meetings during fiscal year 2005. During 2005, each director then in office attended 100% of the aggregate total number of meetings of the board of directors held during the period in which he was a director and the total number of meetings held by all of the committees of the board of directors on which he served. The only standing committees of the board of directors is an audit committee and compensation committee.

Audit Committee

        Paul Mullan and Merril Halpern are members of the audit committee. This committee is empowered to: (i) appoint, fix the compensation of and oversee the work of our independent auditors (including the power to resolve any disagreements between management and the independent auditors), with the independent auditors reporting directly to the audit committee; (ii) pre-approve all audit services and permissible non-audit services; (iii) establish procedures for whistleblower complaints; and (iv) engage and determine funding for independent counsel and other advisors. The board of directors has determined that Mr. Halpern is an audit committee financial expert within the meaning of the rules of the Securities and Exchange Commission.

Compensation Committee

        Paul Mullan and Russell Taylor are members of the compensation committee. The compensation committee is responsible for (i) compensation of our executives; (ii) equity-based compensation plans, including, without limitation, stock option plans, in which officers or employees participate; and (iii) arrangements with executive officers, relating to their employment relationships with us, including, without limitation, employment agreements and restrictive covenants. The compensation committee has overall responsibility for approving and evaluating our executive officer compensation plans, policies, and programs, as well as all equity-based compensation plans and policies. In addition, the compensation committee oversees, reviews and approves all of our ERISA and other employee benefit plans.

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Code of Ethics

        We have adopted a Code of Ethics that applies to our chief executive officer, senior financial officer, and other senior officers (as that term is defined in the Code of Ethics). A copy of the Code of Ethics has been filed as Exhibit 14.1 to this Annual Report on Form 10-K.

ITEM 11.    EXECUTIVE COMPENSATION

        The following table sets forth information regarding compensation for fiscal year 2005 and fiscal year 2004 awarded to or earned by our chief executive officer, and the four other most highly compensated executive officers and senior management:

(1)

Includes bonuses earned for fiscal year 2005 to be paid in fiscal year 2006. None of the named executive officers earned a bonus in fiscal year 2004 that would have been paid in fiscal year 2005. The fiscal year 2004 amount for Ms. Scheu related to a sign-on/retention bonus.    The fiscal year 2005 amount for Ms. Scheu also included $24,000 related to a sign-on/retention bonus.

(2)

In 2002, our parent, Cellu Paper Holdings, Inc. granted Mr. Taylor 1,672 shares of restricted common stock. These shares of restricted common stock vested 50% in fiscal year 2003 and 25% in each of fiscal year 2004 and 2005. As of February 28, 2005, all shares were fully vested.

(3)

Includes matching contributions under our 401(k) plan for fiscal year 2005 and fiscal year 2004, respectively to Mr. Taylor ($9,840 and $13,004), Ms. Scheu ($8,215 and $3,138), Mr. Vivero ($9,840 and $12,151), Mr. Moore ($9,887 and $10,483) and Mr. French ($10,304).

(4)

Reflects options granted under the Cellu Paper Holdings, Inc. 2001 Stock Incentive Plan to purchase shares of common stock of our parent upon exercise of such options.

(5)

Includes the dollar value of insurance premiums paid by us for fiscal year 2005 and fiscal year 2004, respectively, with respect to term life insurance for the benefit of Mr. Vivero ($7,548 and $4,782), Mr. Moore ($9,230 and $9,063) and Mr. Volpe ($2,134).

(6)

Mr. French assumed the position of senior vice president, manufacturing effective March 2004.

(7)

Mr. Volpe resigned as senior vice president, sales and marketing effective August 11, 2004.

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        The following table sets forth information concerning options to purchase shares of common stock of our parent, Cellu Paper Holdings, Inc., granted to the named executive officers during fiscal year 2005.

*

Reflects options granted under the Cellu Paper Holdings, Inc. 2001 Stock Incentive Plan to purchase shares of common stock of our parent upon exercise of such options.

Aggregated option exercises in last fiscal year and fiscal year-end option values

(1)

Approximately $100.2 million of the proceeds from the sale of the Notes was used to fund a stockholder dividend to our parent to purchase, on a pro rata basis, approximately 45.3% of (a) its outstanding common stock at a price of $9,613 per share and (b) the outstanding warrants and options to purchase its common stock, including the options surrendered by the named executive officers as listed herein. Of such amount, we recognized approximately $3.4 million of compensation expense resulting from the redemption of the stock option held by employees. The amount paid for each warrant or option was equal to the difference between $9,613 per share minus the exercise price of the warrant or option. We retained an investment bank to provide a valuation opinion regarding the fair market value of the shares of our parent's common stock and such investment bank determined the value to be $9,613 per share.

(2)

Represents the difference between the valuation of our parent's common stock of $9,613 on the day the options were surrendered and the exercise price of the options surrendered multiplied by the number of shares underlying the options surrendered.

(3)

Represents options granted under the Cellu Paper Holdings, Inc. 2001 Stock Incentive Plan to purchase shares of common stock of our parent upon exercise of such option.

(4)

Represents the difference between the valuation of our parent's common stock of $9,613 and the exercise price per share of the in-the-money options multiplied by the number of shares underlying

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the in-the-money options. The exercise price for the fiscal year 2005 grants is equal to the fair value of the underlying common stock.

Compensation of directors

        Members of our board of directors do not receive director's fees or other compensation for serving as directors. All members of our board of directors are reimbursed for actual expenses incurred in connection with attendance at board meetings.

Employment agreement

        Pursuant to his employment agreement, as amended, Mr. Taylor receives an annual base salary determined by our compensation committee, currently set at $425,000. Base salaries are reviewed annually by our compensation committee. Mr. Taylor is also eligible for an annual performance based bonus, up to 100% of base compensation, based on our achievement of certain corporate benchmarks and other factors.

        The current terms of the employment agreement with Mr. Taylor expires on September 30, 2005.

        The employment agreement can be terminated by us with or without "cause" or on account of the executive's disability, by the executive with or without "good reason" or automatically on account of an executive's death. Generally upon a termination by us without "cause" or by the executive for "good reason," the executive is entitled to receive severance payments and continued benefits for a specified period of time following such termination. The executive (or, in the case of the executive's death, the executive's estate or designated beneficiaries) is also entitled to receive severance payments and continued benefits for a specified period of time following the executive's termination on account of disability or death. The executive is subject to a confidentiality covenant both during and after the term of employment and, if the executive's employment is terminated by the executive other than for "good reason" or by us for "cause," the executive is subject to a one-year competition and solicitation restriction following such termination.

Employee restricted stock award

        In 2002, our parent, Cellu Paper Holdings, Inc., granted Mr. Taylor 1,672 shares of restricted common stock. These shares of restricted common stock vested 50% in fiscal year 2003 and 25% in each of fiscal year 2004 and 2005. As of February 28, 2005, all shares of restricted common stock held by Mr. Taylor were fully vested.

Severance Pay Plan

        Our board of directors has adopted a severance pay plan covering all of our salaried employees located in the United States (excluding employees who have written contracts with us which have been approved by the President and Chief Executive Officer or another authorized officer), including all of the named executive officers set forth in the Summary Compensation Table other than Mr Taylor. Under the terms of the plan, if we terminate a named executive officer without "cause" (as defined in the plan) or if a named executive officer terminates employment for "good reason" (as defined in the plan), the officer will be entitled to a severance benefit, provided the officer first delivers (and does not revoke) a general release of claims, equal to (i) the officer's annual base salary payable in equal installments in accordance with our regular payroll practices and (ii) a pro-rata portion of the annual bonus for the year in which such termination occurs based on our actual results for such year payable at the time annual bonuses are paid to other employees. Terminated employees may also be entitled to continued participation in certain of our employee benefit plans at our cost (subject to co-payment of premiums on the same level as active employees) during the period severance is being paid.

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ITEM 12.    SECURITY OWNERSHIP OF CERTAIN BENEFCIAL OWNERS AND MANAGEMENT

        We are a wholly owned subsidiary of Cellu Paper Holdings, Inc. As of the date of this report, our parent's outstanding capital stock consisted of 11,127 shares of common stock, par value $0.01 per share. The following table sets forth information with respect to the beneficial ownership of our parent's common stock as of May 16, 2005 by:

•

each person who is known by us to beneficially own more than 5% of the outstanding shares of common stock;



•

each executive officer named in the summary compensation table;



•

each member of our board of directors; and



•

all members of our board of directors and executive officers as a group.

        To our knowledge, each of the holders of common stock listed below has sole voting and investment power as to the shares of common stock beneficially owned by such holder, unless otherwise noted. Shares of common stock subject to warrants and/or options that are currently exercisable or exercisable within 60 days of May 16, 2005 are deemed outstanding for computing the ownership percentage of the stockholder holding such warrants and/or options, but are not deemed outstanding for computing the ownership of any other stockholder.

*

Represents less than 1%.

(1)

The address for Charterhouse Equity Partners III, L.P., or CEP III, is 1105 North Market Street, Suite 1300, Wilmington, Delaware 19899 and for each of Messrs. Mullan and Halpern is c/o Charterhouse, 535 Madison Avenue, New York, New York 10022-4299.

(2)

The general partner of CEP III is CHUSA Equity Investors III, L.P., whose general partner is Charterhouse Equity III, Inc., a wholly owned subsidiary of Charterhouse. As a result of the foregoing, all of the shares beneficially owned by CEP III would be deemed to be beneficially owned by Charterhouse.

(3)

Includes 174 shares of common stock of our parent that may be acquired through the exercise of a warrant.

(4)

The address for each of our officers is c/o Cellu Tissue Holdings, Inc., 333 East River Drive East, Hartford, Connecticut 06108.

(5)

Includes 457 shares of common stock of our parent held by a family charitable remainder trust in which Mr. Taylor owns an indirect beneficial ownership.

(6)

Consists solely of shares of common stock of our parent that may be acquired through the exercise of options.

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(7)

Messrs. Mullan and Halpern are executive officers and directors of Charterhouse and, as such, are deemed to have shared voting and investment power (along with other executive officers and directors of Charterhouse) as to the shares of common stock beneficially owned directly by CEP III. Each of Messrs. Mullan and Halpern disclaims beneficial ownership with respect to the shares beneficially owned by CEP III.

(8)

Includes 474 shares of common stock of our parent that may be acquired through the exercise of options and warrants.

(9)

Mr. Volpe resigned effective August 11, 2004 and his options were forfeited.

        The following table summarizes shares of common stock of our parent, Cellu Paper Holdings, Inc., to be issued upon exercise of options, the weighted-average exercise price of outstanding options and options available for future issuance as of February 28, 2005.

        The 2001 Stock Incentive Plan authorizes the award of incentive stock options, which are stock options that qualify for special federal income tax treatment. The exercise price of any stock option granted under the 2001 Stock Incentive Plan may not be less than the fair market value of the common stock on the date of grant. In general, each option granted under the 2001 Stock Incentive Plan vests evenly over a three-year period and expires ten years from the date of grant, subject to earlier expiration in case of termination of employment. The vesting period is subject to certain acceleration provisions if a change in control occurs. No award will be granted under the 2001 Stock Incentive Plan on or after October 4, 2011.

ITEM 13.    CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Management agreement

        We have entered into a Financial Advisory and Management Services Agreement, dated September 30, 2002, with Charterhouse, pursuant to which Charterhouse has agreed to provide us with certain financial advisory and management consulting services. Charterhouse wholly owns Charterhouse Equity III, Inc., which is a general partner of CHUSA Equity Investors III, L.P., which in turn is a general partner of CEP III, our parent's majority stockholder. In addition, two of our directors, Paul Mullan and Merril M. Halpern, are executive officers and directors of Charterhouse. In consideration for such services provided, we have agreed to pay Charterhouse an annual fee of $450,000, to be paid in equal monthly installments. As permitted under the terms of the agreement, Charterhouse has designated Mr. Mullan to receive, as its designee, all amounts due and payable to Charterhouse under the agreement, and all such fees are paid directly to Mr. Mullan. See "Management—Stockholders'

36

Agreement," "—Employment Agreement" and "—Severance Pay Plan" for information on other agreements relating to management.

ITEM 14.    PRINCIPAL ACCOUNTANT FEES AND SERVICES

        Aggregate fees for professional services rendered to us by Ernst & Young LLP as of or for the fiscal years ended February 28, 2005 and February 29, 2004 are set forth below. The aggregate fees included in the Audit category are fees billed for the fiscal years for the audit of our annual financial statements and review of regulatory filings. The aggregate fees included in each of the other categories are for fees billed in the fiscal years.

        Audit Fees:    Fees for audit services include fees associated with the annual audits and reviews of our quarterly reports on Form 10-Q and annual report on Form 10-K.

        Audit- Related Fees:    Fees for audit-related services relate to the audit of our 401(k) plan and services provided in connection with our private offering of the Notes and Registration Statement on Form S-4.

        Tax Fees:    Fees for tax services related to the preparation of U.S. and Canadian tax returns, other miscellaneous compliance matters and foreign tax planning.

37

PART IV

ITEM 15.    EXHIBITS and FINANCIAL STATEMENT SCHEDULE

        (a)   Index to documents filed as part of this report:

        1. and 2. Financial Statements and Financial Statement Schedules

The response to this portion of Item 15 is submitted as a separate section of this report beginning with an index thereto on page F-1.

        (b)   Exhibits

The following exhibits are filed with this report or incorporated by reference:

INDEX TO EXHIBITS

38

*

Filed herewith.

(c) See Financial Statements immediately following Index to Consolidated Financial Statements and Consolidated Financial Statement Schedule.

39

SIGNATURES

        Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

May 25, 2005

        Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

40

FORM 10-K
ITEM 15(a) (1) and (2)
CELLU TISSUE HOLDINGS, INC.

INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE

        All other schedules for which provision is made in the applicable accounting regulation of the Securities and Exchange Commission are not required under the related instructions or are inapplicable, and therefore have been omitted.

F-1

Report of Independent Registered Public Accounting Firm

To the Board of Directors
Cellu Tissue Holdings, Inc. and Subsidiaries

        We have audited the accompanying consolidated balance sheets of Cellu Tissue Holdings, Inc. and Subsidiaries (the "Company") as of February 28, 2005 and February 29, 2004, and the related consolidated statements of income, changes in stockholders' equity, and cash flows for each of three fiscal years in the period ended February 28, 2005. Our audits also include the financial statement schedule listed in the Index at Item 15(a). These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.

        We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. We were not engaged to perform an audit of the Company's internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

        In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Cellu Tissue Holdings, Inc. and Subsidiaries at February 28, 2005 and February 29, 2004, and the consolidated results of their operations and their cash flows for each of the three fiscal years in the period ended February 28, 2005 in conformity with U. S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, present fairly in all material respects the information set forth therein.

/s/ Ernst & Young

Hartford, Connecticut
April 8, 2005

F-2

Cellu Tissue Holdings, Inc. and Subsidiaries
Consolidated Balance Sheets

See accompanying notes to consolidated financial statements.

F-3

Cellu Tissue Holdings, Inc. and Subsidiaries
Consolidated Statements of Income