FEDERAL PAPER BOARD CO INC
10-K, 1995-03-30
PAPERBOARD MILLS
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<PAGE>   1

===============================================================================

                                  UNITED STATES

                       SECURITIES AND EXCHANGE COMMISSION
                              WASHINGTON, DC 20549

                                    FORM 10-K

              /X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
                       THE SECURITIES EXCHANGE ACT OF 1934
                   For the fiscal year ended December 31, 1994

            / / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
                       THE SECURITIES EXCHANGE ACT OF 1934

                          Commission File Number 1-3838

                        FEDERAL PAPER BOARD COMPANY, INC.
             (Exact name of Registrant as specified in its charter)

         NORTH CAROLINA                                   22-0904830
(State or other jurisdiction of                        (I.R.S. Employer
 incorporation or organization)                       Identification No.)

               75 CHESTNUT RIDGE ROAD, MONTVALE, NEW JERSEY 07645
               (Address of principal executive office)   (Zip Code)

       Registrant's telephone number, including area code: (201) 391-1776

           Securities registered pursuant to Section 12(b) of the Act:

<TABLE>
<CAPTION>
                                                        Name of each exchange
   Title of each Class                                   on which registered
   -------------------                                  ---------------------
   <S>                                                  <C>                                                           
   Common Stock, $5.00 par value per share              New York Stock Exchange
   $1.20 Cumulative Convertible Preferred Stock,
      $1.00 par value per share                         New York Stock Exchange
   $2.875 Cumulative Convertible Preferred Stock,
      $1.00 par value per share                         New York Stock Exchange
   10% Debentures, due 2011                             Not applicable
   8 1/8% Debentures, due 2002                          Not applicable
   8 7/8% Debentures, due 2012                          Not applicable
</TABLE>

Indicate by check mark ("X") 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 twelve months and (2) has been subject to the filing
requirements for at least the past 90 days.

                                    YES X   NO
                                       ---    ---

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. / /

The number of shares outstanding of the Registrant's common stock, as of
February 25, 1995, was 42,599,683 shares. The aggregate market value on February
25, 1995 of voting stock held by non-affiliates of the Company was
$1,136,545,197.

                       DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Registrant's 1994 Annual Report to Shareholders are incorporated
by reference in Part I, Part II and Part IV hereof.

Portions of the Registrant's 1994 Proxy Statement dated March 15, 1995 are
incorporated by reference in Part III hereof.

===============================================================================

<PAGE>   2

                                     PART I

ITEM 1.   BUSINESS

Federal Paper Board Company, Inc. (the "Registrant") was incorporated in the
State of North Carolina in October, 1993. It was incorporated as a wholly owned
subsidiary of Federal Paper Board Company, Inc., a New York corporation,
organized in 1916, which was merged with and into the Registrant on April 20,
1994. The sole purpose of the merger was to change the state of incorporation
from New York to North Carolina. The merger did not result in any change of the
Company's Board of Directors, management, operations or financial condition. The
term "Company" used in this report means the Registrant and its consolidated
subsidiaries unless the context indicates otherwise.

In 1991, the Company sold or leased four of its eight folding carton plants and
its mechanical packaging operation. The folding carton plants located in Palmer,
MA, Versailles, CT, and York, PA were sold to a group of former employees. In
this transaction, the Company received a note for approximately $20.5 million.
In 1993, this note was settled and the Company received cash and preferred
stock. The folding carton plant located in Marseilles, IL was leased with the
option for the lessee to purchase the facility at the end of the lease term. The
mechanical packaging operation was sold and the Company received cash in this
transaction. In 1990, the Company acquired Continental Bondware, Inc., a
manufacturer of paper cups with plants located in Chicago and Shelbyville, IL,
for approximately $146.5 million. In 1989, the Company acquired Imperial Cup
Corp., a manufacturer of paper and plastic cups with plants located in Kenton,
OH; LaFayette, GA; Salisbury, MD and Visalia, CA for approximately $95 million.
These two businesses were combined and operate under the name of Imperial
Bondware Corp.

The Company's products have been grouped into the following three industry
segments: Paper, Paperboard and Pulp, consisting of bleached and recycled
paperboard, bleached softwood and hardwood pulp and uncoated free-sheet paper;
Wood Products, consisting of dimensional lumber, wood chips and land management
activities; and Converting Operations, consisting of disposable foodservice
products and specialty packaging products. Financial information regarding
industry segments is included on pages 24 and 25 of the Company's 1994 Annual
Report to Shareholders (the "Annual Report"), which information is incorporated
herein by reference.

                           PAPER, PAPERBOARD AND PULP

The principal products of this business segment are bleached and recycled
paperboard, hardwood and softwood pulp and uncoated free-sheet paper. Bleached
paperboard is produced on three paperboard machines at the Augusta, GA mill and
on two paperboard machines at the Riegelwood, NC mill. Recycled paperboard is
produced on one paperboard machine at the Sprague, CT mill. The majority of the
paperboard produced at the Company's mills is sold to outside customers and
converted into packaging for various consumer goods or used in printing
applications including menus, greeting cards and brochure covers. Bleached
paperboard produced at the Augusta and Riegelwood mills is also used by the
Company's Converting Operations to produce folding cartons, paper cups and other
disposable foodservice products. Recycled paperboard produced at the Sprague
mill is converted into packaging products by outside customers and the Company's
folding carton plants. The Company's mills produced 937,000 tons of bleached
paperboard and 196,000 tons of recycled paperboard for total paperboard
production of 1,133,000 tons in 1994. The Company's mills sold approximately
935,000 tons of bleached paperboard and 202,000 tons of recycled paperboard for
total sales of 1,137,000 tons of paperboard in 1994. Paperboard accounted for
41% of total sales for the Company in 1994.

The Company produces hardwood and softwood market pulp at the Riegelwood mill,
which is sold in both the domestic and export markets. The Augusta mill produces
softwood pulp which is sold, in slush form, to a neighboring newsprint mill
under a long-term supply contract. In 1994, of the 1,421,000 tons of pulp
produced, approximately 864,000 tons were used to produce paperboard at the
Company's mills and the remaining 557,000 tons were available for sale as market
pulp. Approximately 67% of market pulp shipped was sold in the export market.
The Company's mills sold 567,000 tons of market pulp and this product accounted
for 12% of total sales for the Company in 1994.

                                        2
<PAGE>   3

The Company produces uncoated free-sheet paper at one mill located in Inverurie,
Scotland. Paper is produced on two paper machines and is marketed and sold
throughout Europe. The mill uses bleached pulp as its primary raw material which
it purchases from the Company's Riegelwood mill and outside producers. The mill
produced 189,000 metric tons of uncoated free-sheet paper in 1994. The mill sold
approximately 194,000 metric tons of uncoated free-sheet paper in 1994, and this
product accounted for 9% of total sales for the Company in 1994.

Also in this business segment, the Company operates five distribution centers
and one extrusion coating plant. Four of the distribution centers and the one
extrusion coating plant are located in the United States while one sheeting
distribution center is located in the United Kingdom. These facilities receive
paperboard from the Company's mills which is then sheeted to customer
specifications. The extrusion coating plant provides poly-coated board to the
Company's cup operations and also sells this product to outside customers. These
facilities are geographically located so the Company's customers may be serviced
quickly and efficiently.

Further information regarding the Paper, Paperboard and Pulp business is
included in the Review of Operations on pages 6 through 10 of the Annual Report
and is incorporated herein by reference.

                                  WOOD PRODUCTS

The principal products of this business segment are dimensional lumber and wood
chips. The segment also performs land management activities. The Company
produces both dimensional lumber and wood chips at five lumber plants which are
located near the Company's paperboard and pulp mills. Two of the plants, located
in Augusta, GA and Johnston, SC, are within a 60 mile radius of the Augusta
paperboard and pulp mill and supply 91% and 51% of their wood chips to this
mill, respectively, with the balance being sold to outside customers. The plant
located in Washington, GA supplies approximately 2% of its wood chips to the
Augusta paperboard and pulp mill with the balance being sold to outside
customers. The plant located in Newberry, SC is between the Augusta and
Riegelwood paperboard and pulp mills and supplies approximately 9% of its wood
chips to those mills with the balance being sold to outside customers. The plant
located in Armour, NC is two miles from the Riegelwood paperboard and pulp mill
and provides 100% of its softwood chips to such mill. The Company also owns five
chip mills, which are strategically located to provide the Company's paperboard
and pulp mills with wood chips.

The lumber plants produce dimensional lumber which is used in the construction
and retail home improvement industries. In 1994, the lumber plants produced
618.2 million board feet of lumber and sold 610.3 million board feet.

The Company presently owns or controls under long-term leases approximately
692,000 acres of timberlands. In the vicinity of its Riegelwood paperboard and
pulp mill, the Company directly owns 260,000 acres and holds 116,000 acres under
long-term leases with purchase options. In the vicinity of its Augusta
paperboard and pulp mill, the Company owns 309,000 acres and has lease rights to
7,000 acres.

Further information regarding the Wood Products business is included in the
Review of Operations on pages 10 through 14 of the Annual Report and is
incorporated herein by reference.

                           CONVERTING OPERATIONS

The principal products of this business segment are paper and plastic cups,
plastic lids, containers and packaging products. The Company's cup operations
manufacture paper and plastic disposable drinking cups and food containers at
six locations. These products are marketed for use by industrial vending
operations, fast food restaurants, soft drink bottlers, paper distributors,
theaters and convenience stores. Its primary raw materials are paperboard,
resins and corrugated containers. In 1994, approximately 77% of the paperboard
consumed by the Company's cup operations was obtained from the Company's own
paperboard mills. The cup operations accounted for approximately 15% of total
sales for the Company in 1994.

                                        3
<PAGE>   4

The Company also produces folding cartons, used in the packaging of products
such as food, laundry soap, tobacco, drug and health aids, consumer paper
products, hardware and toys at four folding carton plants. The Company's folding
carton plants are equipped with lithographic, gravure, and flexographic
printing, giving the Company the capability of producing high quality
multi-colored packaging. The packaging products produced are specially designed
to serve the packaging and marketing needs of individual customers, which
include manufacturers of numerous nationally known consumer goods. Approximately
80% of the paperboard consumed in the Company's packaging operations was
obtained from the Company's own recycled and bleached paperboard mills. The
packaging operations accounted for approximately 7% of total sales for the
Company in 1994.

Further information regarding the Converting Operations is included in the
Review of Operations on pages 14 through 16 of the Annual Report and is
incorporated herein by reference.

                            COMPETITION AND CUSTOMERS

The Company's businesses are highly competitive. There are a number of companies
involved in these businesses whose total assets and sales are substantially
greater than those of the Company, although the Company is a nationally
recognized market participant in pulp, recycled paperboard, foodservice
disposables and folding cartons and enjoys a leadership position in the bleached
paperboard market.

The principal method of selling the Company's products is through its
own sales force. Customers may place orders with the Company for various
reasons which may include one or more of the considerations of price, quality
and the ability of the Company to deliver and service the customers' needs on a
timely basis. Bleached and recycled paperboard, market pulp and foodservice
disposables are also sold overseas through the Company's sales force and/or
through agents. Competition in export markets is based on the same
considerations mentioned above. The sale of market pulp is highly competitive
and subject to wide fluctuations in price. No single customer accounted for
more than 10% of the Company's consolidated sales in any of the last three
fiscal years.

                            ENERGY AND RAW MATERIALS

The Company is a large user of electricity and steam in its
manufacturing operations. At the Riegelwood mill, steam and electricity are
produced by its own power plant which utilizes black liquor (spent pulping
chemicals), oil, natural gas and waste wood (bark and sawdust) as fuels. In
1994, approximately 73% of the Riegelwood mill's energy requirements were
self-generated. The Company's Augusta mill also generates steam and electricity
by its own power plant which utilizes coal in addition to similar fuels as
described above for Riegelwood. In 1994, approximately 65% of the Augusta
mill's energy requirements were self-generated. At the Sprague mill, steam and
electric power are produced by the mill's own power plant utilizing oil or
natural gas. In 1993, the Sprague mill completed a capital program which
involved installing a natural gas pipeline allowing the mill to substitute
natural gas for oil in the power plant or propane in the mill. This allows the
mill to choose the source of energy which is more cost effective at a given
time. In 1992, the Company's Inverurie mill reduced energy costs by replacing a
coal fired power plant with a new natural gas power plant. Electricity is
purchased to some degree at all plants to satisfy total demand. The Company
believes its sources of supply with respect to oil, natural gas and purchased
power to be generally adequate.

The Company's annual wood needs supplied from other than Company lands are
available in ample quantities from sources within an economical transportation
area and are believed to be adequate to meet both the present and future needs
of the Company's facilities. The Company's converting operations use
paperboard, resin and corrugated containers in the manufacturing process, and
the Company believes that these materials are in ample supply from sources
within an economical transportation area to meet both the present and future
needs. Approximately 80% of the converting operations' paperboard needs are
supplied by the Company's mills. During 1994, the supply of wastepaper used in
the manufacture of recycled paperboard has become increasingly short. Even
under current difficult market conditions, the Sprague mill has been able
to obtain an adequate supply of wastepaper to meet its present needs. The
Company expects to be able to obtain wastepaper in ample quantities to meet
future needs.
        
                                        4
<PAGE>   5

                          ENVIRONMENTAL CONSIDERATIONS

The Company is subject to various laws and regulations relating to the
environment in the countries in which the Company operates. These regulations
require the Company to obtain permits and licenses from appropriate governmental
authorities with respect to its facilities. The Company has obtained, has
applied for, or in the future will apply for such permits and authorizations and
believes that it is in compliance with all existing material environmental
regulations.

The Company's Riegelwood, NC mill operates its waste water treatment
and disposal facilities under an NPDES (National Pollutant Discharge
Elimination System) permit issued by the State of North Carolina and an
administrative Consent Order which provides temporary relief of the BOD
(biochemical oxygen demand) limitations contained in the NPDES permit. The
Consent Order requires that studies and improvements be completed at various
times extending to October 1995. The Company and the State of North Carolina
have agreed that a new waste water holding pond will be constructed at the
Riegelwood mill no later than October 31, 1995 at a cost of approximately $25
million. However, construction can not begin until all permits are obtained,
which the Company is actively pursuing. Therefore, construction may not be
completed by the October 31, 1995 deadline. This project is included in the
Company's estimates of future environmental capital expenditures as discussed
in the Annual Report on page 23. The Company's Augusta, GA mill was under an
administrative Consent Order with the State of Georgia to build a new landfill.
The landfill was completed in April 1994 at a cost of approximately $8.2
million.

The process of manufacturing bleached kraft pulp produced at both the Riegelwood
and Augusta mills has been found to produce small amounts of dioxin as an
unintended by-product. The Riegelwood mill has a permitted effluent limit for
dioxin of 0.9 parts per quadrillion ("PPQ"). The effluent dioxin found at the
Riegelwood mill is below the limits of detection (10 PPQ) and therefore it is
not known whether the dioxin exceeds the permitted level. The Company has
voluntarily entered into a judicial Consent Order for the Riegelwood mill which
gives the mill relief from its permitted effluent limit until December 1996
while additional mill facilities are being constructed to assure compliance. The
Augusta mill is in compliance with its permitted effluent limit for dioxin of
180 PPQ. Steps are being taken by the Company to further reduce dioxin at both
the Riegelwood and Augusta mills.

The Company's Sprague, CT mill discharges its waste waters under an
NPDES permit from the Connecticut Department of Environmental Protection
("DEP") which expires in May 1995. The mill is evaluating alternatives for
long-term compliance with its future waste water discharge requirements and
expects to submit a plan to the Connecticut DEP in 1995 which could result in
additional operating and/or capital costs. The Sprague mill entered into an
administrative Consent Order with the Connecticut DEP to evaluate and control
sporadic odors originating from the mill site. The Company has made
improvements to its waste water treatment system which has reduced odor
generation. The Consent Order is expected to expire in March 1995.

The Company will also incur further costs at certain of its other properties as
the result of soil contamination from chemical or solvent spills including sites
of former folding carton plants which are now inactive. In some cases, the
remediation projects are subject to Consent Orders with the state environmental
agencies.

A further discussion of environmental issues is included on pages 16 and 23 of
the Annual Report, which information is incorporated herein by reference.

                                    EMPLOYEES

The Company employed approximately 6,890 and 6,850 employees as of February 25,
1995 and February 26, 1994, respectively. Approximately one-half of the
employees are covered by collective bargaining agreements, the majority of which
are at the Company's four mills: the agreement at the Inverurie mill expires in
December 1995; the agreement at the Riegelwood, NC paperboard and pulp mill
expires in September 1995; and the agreements at the Augusta, GA paperboard and
pulp mill and the Sprague, CT recycled paperboard mill expire in August
1996 and July 1996, respectively.

                                        5
<PAGE>   6

ITEM 2.  PROPERTIES.

The following table sets forth the location and use of each of the principal
facilities of the Company. All of the facilities are owned by the Company except
as indicated in the table.

<TABLE>
<CAPTION>
         LOCATION                                       USE
         --------                                       ---
<S>                                   <C>
Paper, Paperboard and Pulp:

     Augusta, Georgia                 Manufacture of bleached paperboard and
                                      softwood pulp.

     Hazleton, Pennsylvania           Service Distribution Center - Sheeting
                                      of paperboard.

     Inverurie, Scotland              Manufacture of uncoated free-sheet paper.

     Ontario, California (a)          Service  Distribution Center - Sheeting
                                      of paperboard.

     Prosperity, South Carolina       Service Distribution Center - Poly-coating
                                      of paperboard.

     Riegelwood, North Carolina       Manufacture of bleached paperboard and
                                      bleached hardwood and softwood pulp.

     Sprague, Connecticut             Manufacture of recycled paperboard.

     Sturgis, Michigan                Service Distribution Center - Sheeting of
                                      paperboard.

     Wharfedale, England              Service Distribution Center - Sheeting of
                                      paperboard.

     Wilmington, North Carolina       Distribution Center - Storage and shipment
                                      of paperboard.
Wood Products:

     Armour, North Carolina           Manufacture of dimensional lumber and chips.

     Augusta, Georgia                 Manufacture of dimensional lumber and chips.

     Johnston, South Carolina         Manufacture of dimensional lumber and chips.

     Newberry, South Carolina         Manufacture of dimensional lumber and chips.

     Washington, Georgia              Manufacture of dimensional lumber and chips.
</TABLE>

                                        6
<PAGE>   7

<TABLE>
<CAPTION>
LOCATION                                                USE
--------                                                ---
<S>                                   <C>
Converting Operations:

     Chicago, Illinois                Manufacture of foodservice disposables.

     Durham, North Carolina           Manufacture of folding cartons.

     Hendersonville, North Carolina   Manufacture of folding cartons.

     Kenton, Ohio                     Manufacture of foodservice disposables.

     LaFayette, Georgia (b)           Manufacture of plastic cups and plastic lids.

     Salisbury, Maryland  (c)         Manufacture of foodservice disposables.

     Shelbyville, Illinois            Manufacture of foodservice disposables.

     Thomaston, Georgia               Manufacture of folding cartons.

     Visalia, California              Manufacture of foodservice disposables.

     Wilmington, North Carolina       Manufacture of folding cartons.
</TABLE>

(a)  Leased through 1997.
(b)  Leased through 1997 with the option to purchase the facility.
(c)  Leased through 1997 with the option to purchase the facility. The Company
     will discontinue the use of this facility for manufacturing purposes in
     1995.

The Company believes that its facilities are in good working condition and are
suitable for its current operations. While the productive capacity is deemed
adequate for each business unit, the Company continually invests in projects
that are designed to improve both the quality and quantity of goods produced. In
some cases, facilities have the ability to expand productive capacity through
additional work shifts as opposed to additional capital requirements.

ITEM 3.  LEGAL PROCEEDINGS.

The Company is not a party to any significant legal proceedings other than those
matters discussed in Item 1, under "Environmental Considerations."

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

None.

                                        7
<PAGE>   8

SPECIAL ITEM.  EXECUTIVE OFFICERS OF THE COMPANY.

The following table sets forth the name, age, principal occupation and business
experience during the last five years for each of the executive officers of the
Company.

JOHN R. KENNEDY(a), 64, Director, President and Chief Executive Officer.
President and Chief Executive Officer from 1975 to date.

QUENTIN J. KENNEDY(a), 61, Director, Executive Vice President, Secretary and
Treasurer. Executive Vice President, Secretary and Treasurer from July 1994 to
date; Executive Vice President and Secretary from 1983 to July 1994.

ROBERT D. BALDWIN, 57, Director and Senior Vice President, Marketing, Forest
Products Division. Senior Vice President, Marketing, Forest Products Division
from 1985 to date.

W. MARK MASSEY, JR., 56, Director and Senior Vice President, Manufacturing,
Forest Products Division. Senior Vice President, Manufacturing, Forest Products
Division from 1990 to date.

MICHAEL J. BALDUINO, 44, Senior Vice President, Converted Products Division from
May 1994 to date; Vice President and General Manager Imperial Bondware Corp.
from February 1992 to May 1994; Vice President of Marketing, Commercial
Products, James River Corp. from September 1990 to February 1992; Director of
Consumer Marketing and Support, James River Corp. from June 1989 to September
1990.

JOHN E. ABODEELY, 51, Vice President and General Manager Packaging Operations
from November 1991 to date; Vice President, Manufacturing, Packaging & Printing
Operations from 1986 to November 1991.

CARL L. BUMGARDNER, III, 37, Vice President, Printing Paper Sales from July 1993
to date; General Manager, Bleached Paperboard Printing Sales from November 1991
to July 1993; Marketing and Sales Manager, Bleached Paperboard Packaging from
July 1991 to November 1991; National Marketing Manager from 1989 to July 1991.

MICHAEL G. CULBRETH, 46, Vice President, Employee Relations from April 1991 to
date; Director, Employee Relations, Forest Products Division from August 1989 to
April 1991.

ROBERT F. DANSBY, 55, Vice President, Augusta Operations from May 1990 to date;
Manager, Manufacturing Services, Augusta Mill from 1987 to May 1990.

THOMAS F. GRADY, JR., 52, Vice President, Sales, Imperial Bondware Corp. from
November 1991 to date; Vice President, Paperboard Sales from May 1989 to
November 1991.

LOUIS O. GRISSOM, 48, Vice President, Riegelwood Operations from 1991 to date;
Assistant Resident Manager, Riegelwood Mill from May 1990 to 1991; Production
Manager, Augusta Mill from 1987 to May 1990.

RICHARD W. HUGHES, 55, Vice President, Woodlands from 1987 to date.

STEWART MONROE, JR., 61, Vice President, Pulp Sales from 1986 to date.

ROGER L. SANDERS, II, 50, Controller from 1989 to date.

F. JOHN SECURCHER, 50, Vice President, Manufacturing, Imperial Bondware Corp.
from December 1992 to date; Vice President and General Manager, Sherry Cup from
January 1991 to December 1992; Vice President, Systems and Technology, Imperial
Bondware Corp. from October 1990 to January 1991; Vice President, Manufacturing,
Continental Bondware, Inc. (acquired by the Registrant in 1990) from September
1986 to October 1990.

                                        8
<PAGE>   9

L. KIRK SEMKE, 58, Vice President, Manufacturing Technology from 1991 to date;
Vice President, Riegelwood Operations from 1987 to 1991.

WILLIAM R. SNELLINGS, JR., 46, Vice President, Paperboard Sales from April 1991
to date; General Sales Manager, Bleached Board Packaging from August 1989 to
April 1991.

THOMAS J. TAIT, O.B.E., 47, Vice President, Managing Director, Thomas Tait &
Sons, Ltd. from March 1989 to date.

J. RONALD TILLMAN, 50, Vice President, Wood Products from 1991 to date; General
Manager, Wood Products from 1990 to 1991.

IVAN D. WILSON, 58, Vice President, Service Distribution Centers, from April
1992 to date; Controller, Riegelwood Operations from 1973 to April 1992.

Messrs. J. R. Kennedy, Q. J. Kennedy, R. D. Baldwin, and W. M. Massey, Jr. have
Employment Agreements with the Company by the terms of which Mr. J. R. Kennedy
will act as President, Mr. Q. J. Kennedy will act as Executive Vice President,
and Messrs. R. D. Baldwin and W. M. Massey, Jr. will act as Senior Vice
Presidents for the Company or in such other capacities as the Board of Directors
shall determine. The Agreements with Messrs. J. R. Kennedy and Q. J. Kennedy
extend through 1995 and 1998, respectively. The Agreement with Mr. W.M. Massey,
Jr. extends through 1996, the Agreement with Mr. R.D. Baldwin extends through
1997. All other Executive Officers are elected to their respective offices
annually by the Board of Directors.

(a) Messrs. J. R. Kennedy and Q. J. Kennedy are brothers.

                                        9
<PAGE>   10

                                     PART II

ITEM 5.  MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER 
         MATTERS.

The information required by Item 5 is included on page 39 of the Annual Report
and is incorporated herein by reference.

ITEM 6.  SELECTED FINANCIAL DATA.

The information required by Item 6 is included on page 40 of the Annual Report
and is incorporated herein by reference.

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

The information required by Item 7 is included on pages 20 through 23 of the
Annual Report and is incorporated herein by reference.

ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

The information required by Item 8 is included on pages 24 through 39 of the
Annual Report and is incorporated herein by reference.

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

None.


                                    PART III

ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.

The directors of the Company and their business experience are set forth on page
4 of the Company's Notice of Annual Meeting of Stockholders, dated March 15,
1995 (the "Proxy Statement") and are incorporated herein by reference. The
discussion of executive officers of the Company is included in Part I under
"Executive Officers of the Company."

ITEM 11.  EXECUTIVE COMPENSATION.

A description of the compensation of the Company's executive officers is set
forth on pages 6 through 16 of the Proxy Statement, and with the exception of
the section headed "Compensation Committee Report on Executive Compensation" on
pages 13 and 14, is incorporated herein by reference.

ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.

A description of the security ownership of certain beneficial owners and
management is set forth on pages 2 and 3 of the Proxy Statement and is
incorporated herein by reference.

ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

Certain relationships and related transactions with management are described on
pages 5 and 15 of the Proxy Statement and in Items 11 and 12, and are
incorporated herein by reference.

                                       10
<PAGE>   11

                                     PART IV

ITEM 14.  EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.

EXHIBITS:

A list of the exhibits required to be filed as part of this Report on Form 10-K
is set forth in the "Exhibit Index", which immediately precedes such exhibits,
and is incorporated herein by reference.

FINANCIAL STATEMENT SCHEDULES:

The consolidated balance sheets as of December 31, 1994 and January 1, 1994, and
related consolidated statements of income, cash flows and shareholders' equity
for each of the three fiscal years in the period ended December 31, 1994 and the
related notes to financial statements, together with the Independent Auditors'
Report thereon of Deloitte & Touche LLP, dated February 3, 1995, appearing on
pages 24 through 38 of the Annual Report, are incorporated herein by reference.
With the exception of the aforementioned information and the information
incorporated by reference in Items 1 and 5 through 8, the Annual Report is not 
to be deemed filed as part of this report. The additional financial data should
be read in conjunction with the financial statements in the Annual Report.
Schedules not included with this additional financial data have been omitted
because they are not applicable or the required information is shown in the
financial statements or notes thereto.

REPORTS ON FORM 8-K:

The Company filed one report on Form 8-K dated December 19, 1994. The Company
reported that it had reached an agreement with Bankers Trust Company with
respect to various financial instruments. Under the terms of the agreement,
two foreign currency forward contracts and collars were cancelled resulting in a
$12.0 million pre-tax gain. The Company remains a party to two other financial
arrangements with Bankers Trust, with both arrangements terminating in July,
1998. The Company agreed that, except for fulfilling the terms of the two open
financial arrangements, Bankers Trust will have no further responsibilities to
the Company in regard to any such arrangements. No financial statements were
filed as part of this Form 8-K.


                            ADDITIONAL FINANCIAL DATA

                        FISCAL YEARS 1994, 1993 AND 1992

<TABLE>
<CAPTION>
                                                                      Page
                                                                      ----
<S>                                                                    <C>
Independent Auditors' Report                                           12

Financial Statement Schedule:

II       Valuation and Qualifying Accounts                             13
</TABLE>

                                       11
<PAGE>   12

INDEPENDENT AUDITORS' REPORT

To the Shareholders and Board of Directors of
Federal Paper Board Company, Inc.

We have audited the consolidated financial statements of Federal Paper Board
Company, Inc. and its subsidiary companies as of December 31, 1994 and January
1, 1994 and for each of the three fiscal years in the period ended December 31,
1994, and have issued our report thereon dated February 3, 1995, which report
includes an explanatory paragraph as to changes in the method of accounting for
income taxes and in the method of accounting for postretirement benefits other
than pensions; such financial statements and report are included in your 1994
Annual Report to Shareholders and are incorporated herein by reference. Our
audits also included the financial statement schedule of Federal Paper Board
Company, Inc. and its subsidiary companies, listed in Item 14. This financial
statement schedule is the responsibility of the Company's management. Our
responsibility is to express an opinion based on our audits. In our opinion,
such financial statement schedule, when considered in relation to the basic
financial statements taken as a whole, presents fairly in all material respects
the information set forth therein.







/s/DELOITTE & TOUCHE LLP
------------------------
Deloitte & Touche LLP
Parsippany, New Jersey
February 3, 1995



                                       12

<PAGE>   13

SCHEDULE II

                        FEDERAL PAPER BOARD COMPANY, INC.

                        VALUATION AND QUALIFYING ACCOUNTS
                                 (IN THOUSANDS)
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------
                                                           Additions
                                      Balance at     Charged to   Charged to                     Balance at
                                      Beginning      Costs and       Other                         End of
Classification                        of Period       Expenses    Accounts(1)    Deductions(2)     Period
-----------------------------------------------------------------------------------------------------------
<S>                                   <C>            <C>          <C>            <C>             <C>
ALLOWANCE FOR DOUBTFUL ACCOUNTS

Fiscal Year Ended
   December 31, 1994                   $1,284           557           137            460           $1,518


Fiscal Year Ended
   January 1, 1994                     $1,672            89           147            624           $1,284


Fiscal Year Ended
   January 2, 1993                     $2,272           861          (682)           779           $1,672
</TABLE>


(1)   Includes recoveries on accounts previously written-off, purchase
      accounting adjustments, reclassifications and foreign currency translation
      adjustments.

(2)  Represents accounts written-off.

                                       13
<PAGE>   14
For the purposes of complying with amendments to the rules governing Form S-8
under the Securities Act of 1933, the undersigned Registrant hereby undertakes
as follows, which undertaking shall be incorporated by reference into
Registrant's Registration Statements on Form S-8 Nos. 33-64258 and 33-64256
(filed June 11, 1993), 2-56623 (filed June 23, 1983), 33-34440 (filed April 19,
1990) and 33-48654 (filed June 22, 1992).

Insofar as indemnification for liabilities arising under the Securities Act of
1933 may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities Act
of 1933 and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person in the successful defense of any action, suit or proceeding) is asserted
by such director, officer or controlling person in connection with the
securities being registered, the Registrant will, unless in the opinion of its
counsel the matter has been settled by controlling precedent, submit to a court
of appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Act and will be governed by the final
adjudication of such issue.

                                   SIGNATURES

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

                        FEDERAL PAPER BOARD COMPANY, INC.

March 27, 1995             By /s/  QUENTIN J. KENNEDY
                              -----------------------
                                Quentin J. Kennedy

           Director, Executive Vice President, Secretary and Treasurer

Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons, or in their behalf by their duly
appointed attorney-in-fact, on behalf of the Registrant in the capacities and on
the date indicated.

<TABLE>
<CAPTION>
SIGNATURE                                   TITLE                                       DATE
---------                                   -----                                       ----
<S>                                         <C>                                         <C> 
/s/ JOHN R. KENNEDY                         Director, President and                     March 27, 1995
--------------------------------            Chief Executive Officer                                          
(John R. Kennedy)                           (Principal Executive Officer)
                                                                         
                                            
/s/ ROGER L. SANDERS, II                    Controller                                  March 27, 1995
--------------------------------            (Principal Accounting Officer)                            
(Roger L. Sanders, II)                                                    
                                            

/s/ ROBERT D. BALDWIN *                     Director                                    March 27, 1995
--------------------------------                                                                  
(Robert D. Baldwin)
</TABLE>



                                       14

<PAGE>   15

<TABLE>
<CAPTION>
SIGNATURE                                   TITLE                                       DATE
---------                                   -----                                       ----

<S>                                         <C>                                         <C> 
/s/ THOMAS L. CASSIDY *                     Director                                    March 27, 1995
--------------------------------
(Thomas L. Cassidy)


/s/ W. RAN CLERIHUE *                       Director                                    March 27, 1995
--------------------------------                                                              
(W. Ran Clerihue)


/s/ JAMES T. FLYNN *                        Director                                    March 27, 1995
--------------------------------                                                           
(James T. Flynn)


/s/ EDMUND J. KELLY *                       Director                                    March 27, 1995
--------------------------------                                                     
(Edmund J. Kelly)


/s/ JOHN L. KELSEY *                        Director                                    March 27 ,1995
--------------------------------                                                          
(John L. Kelsey)


/s/ W. MARK MASSEY, JR. *                   Director                                    March 27, 1995
--------------------------------                                                        
(W. Mark Massey, Jr.)



*BY /s/ QUENTIN J. KENNEDY
   -------------------------------------
  (Quentin J. Kennedy, Attorney-in-fact)                                                March 27, 1995


</TABLE>




                                       15

<PAGE>   16

                        Federal Paper Board Company, Inc.
                                  Exhibit Index
<TABLE>
<CAPTION>
EXHIBIT NO.
-----------
<S>               <C>
3                 Amended articles of incorporation as of January 18, 1994,
                  filed as Exhibits 3.1 and 3.2 to Form 8-B Registration of
                  Securities of Certain Successor Issuers dated August 19,
                  1994, and is incorporated herein by reference.

3.1               Current bylaws of the Registrant, filed as Exhibit 3.3 to
                  Form 8-B Registration of Securities of Certain Successor
                  Issuers dated August 19, 1994, and is incorporated herein by
                  reference.

4                 Agreement dated March 27, 1995 of the Company to furnish to
                  the Commission upon request copies of certain instruments with
                  respect to long-term debt.

10                Amendment No. 3 to the employment contract of Mr. J.R.
                  Kennedy. Amendments No. 1 and No. 2 to the employment contract
                  of Mr. J.R. Kennedy were filed as Exhibit 10 to the Company's
                  Annual Report on Form 10-K for the 1991 fiscal year ended
                  December 28, 1991 and is incorporated herein by reference. The
                  original contract was filed as Exhibit 10 to the Company's
                  Annual Report on Form 10-K for the 1987 fiscal year ended
                  January 2, 1988, and is incorporated herein by reference.

10.1              Amendments No. 1 and No. 2 to the employment contract of Mr.
                  Q.J. Kennedy filed as Exhibit 10.1 to the Company's Annual
                  Report on Form 10-K for the 1991 fiscal year ended December
                  28, 1991 and is incorporated herein by reference. The original
                  contract was filed as Exhibit 10 to the Company's Annual
                  Report on Form 10-K for the 1987 fiscal year ended January 2,
                  1988, and is incorporated herein by reference.

10.2              The employment contract of Mr. R.D. Baldwin filed as Exhibit
                  10.2 to the Company's Annual Report on Form 10-K for the 1991
                  fiscal year ended December 28, 1991, and is incorporated
                  herein by reference.

10.3              The employment contract of Mr. W.M. Massey, Jr. filed as
                  Exhibit 10.2 to the Company's Annual Report on Form 10-K for
                  the 1990 fiscal year ended December 29, 1990, and is
                  incorporated herein by reference.

10.4              Federal Paper Board Company, Inc. 1992 Key Employees Stock
                  Option Plan filed as Exhibit 28 to Form S-8 Registration
                  Statement No. 33-48654 dated June 22, 1992, and is
                  incorporated herein by reference.

10.5              Federal Paper Board Company, Inc. 1989 Key Employees Stock
                  Option Plan filed as Exhibit 28 to Form S-8 Registration
                  Statement No. 33-34440 dated April 19, 1990, and is
                  incorporated herein by reference.

10.6              Federal Paper Board Company, Inc. 1992 Key Employees Long-Term
                  Compensation Plan, filed as Exhibit 10 to the Company's
                  Quarterly Report on Form 10-Q for the fiscal quarter ended
                  March 26, 1994, and is incorporated herein by reference.

10.7              Federal Paper Board Company, Inc. Supplemental Executive
                  Retirement Plan, dated April 18, 1991, filed as Exhibit 10.8
                  to the Company's Annual Report on Form 10-K for the 1992
                  fiscal year ended January 2, 1993, and is incorporated herein
                  by reference.
</TABLE>



                                       16
<PAGE>   17

                        Federal Paper Board Company, Inc.
                                  Exhibit Index
                                  (Continued)
<TABLE>
<CAPTION>

<S>               <C>
10.8              Federal Paper Board Company, Inc. 1988 plan for the
                  Compensation of Directors, as amended, dated June 18, 1991,
                  filed as Exhibit 10.9 to the Company's Annual Report on Form
                  10-K for the 1992 fiscal year ended January 2, 1993, and is
                  incorporated herein by reference.

10.9              Federal Paper Board Company, Inc. 1992 Stock Option Plan for
                  Non-Employee Directors, filed as Exhibit 10.10 to the
                  Company's Annual Report on Form 10-K for the 1992 fiscal year
                  ended January 2, 1993, and is incorporated herein by
                  reference.

10.10             Federal Paper Board Company, Inc. Retirement Plan for Outside
                  Directors, dated September 20, 1988, filed as Exhibit 10.11 to
                  the Company's Annual Report on Form 10-K for the 1992 fiscal
                  year ended January 2, 1993, and is incorporated herein by
                  reference.

11                Statement of Computation of Earnings Per Common Share.

12                Computation of Ratio of Earnings to Fixed Charges.

13                1994 Annual Report to Shareholders of the Company.

21                List of Subsidiaries.

22                Notice of Annual Meeting of Stockholders and Proxy Statement,
                  dated March 15, 1995 filed with the Commission on March 17,
                  1995 and is incorporated herein by reference.

23                Independent Auditors' Consent.

24                Powers of Attorney.

27                Financial Data Schedule for the fiscal year ended December 31,
                  1994.

99                Annual Report on Form 11-K Savings and Stock Ownership Plan
                  for Salaried Employees (to be filed by amendment).

99.1              Annual Report on Form 11-K Savings and Stock Ownership Plan
                  for Hourly Employees (to be filed by amendment).
</TABLE>

                                      17


<PAGE>   1


                                                                     EXHIBIT 4

In reliance upon Item 601(b)(4)(iii)(A) of Regulation S-K, there are not being
filed various instruments defining the rights of holders of long-term debt of
the Registrant and its subsidiaries because the total amount of securities
authorized and outstanding under each such instrument does not exceed 10% of the
total assets of the Registrant and its subsidiaries on a consolidated basis. The
Registrant hereby agrees to furnish a copy of any such instrument to the
Commission upon request.

Federal Paper Board Company, Inc.
March 27, 1995


                                       


<PAGE>   1

                                                                     EXHIBIT 10

         AMENDMENT NO. 3 to the Agreement dated as of the 1st day of January,
1988 (which together with Amendment Nos. 1 and 2 are hereafter referred to as
the "Agreement") between FEDERAL PAPER BOARD COMPANY, INC. (the "Company") and
JOHN R. KENNEDY (the "Executive").

                              W I T N E S S E T H:

WHEREAS, the Executive remains in the employ of the Company and the Executive
and the Company have agreed to this Amendment No. 3.

NOW, THEREFORE, in consideration of the premises and mutual agreements of the
parties herein contained, it is agreed:

Paragraph 3(c) of the Agreement is hereby revised to read in its entirety as
follows:

(c) If the Executive (i) should be deemed to be eligible for and deemed to have
applied for early retirement pursuant to subparagraph (b) above; (ii) elects
early retirement subsequent to December 31, 1993; (iii) becomes permanently
physically or mentally incapacitated; or (iv) dies during the term of this
Agreement, benefits to be paid to the Executive or his beneficiary pursuant to
the Plan, the Equalization Plan and the SERP will be calculated pursuant to the
formulae set forth in such Plans adjusted for any optional benefits he may have
elected under the Plans (including without limitation any actuarial reduction
attributable to the election of a joint and survivor benefit under the Plans)
and, notwithstanding the provisions of the Equalization Plan and subject to
Paragraph 3(d) of this Agreement, the benefits paid pursuant to the Equalization
Plan shall, if the Executive is married at the starting date of the distribution
of such benefits, be paid in the form of a "100% Joint and Survivor Annuity" in
the case of the occurrence of an event described in clauses (i) through (iii)
immediately above and in the form of a "100% Preretirement Survivor Annuity" in
the case of the occurrence of the event described in clause (iv) immediately
above. A "100% Joint and Survivor Annuity" is an annuity (i) for the life of the
Executive with a survivor annuity for the life of his spouse which is equal to
100 percent of the amount of the annuity payable during the joint lives of the
Executive and his spouse and (ii) which is the actuarial equivalent of a single
life annuity for the life of the Executive, determined pursuant to such
actuarial assumptions as are used by the Company to determine a 50% qualified
joint and survivor annuity under the Plan. A "100% Preretirement Survivor
Annuity" is a survivor annuity for the life of the Executive's surviving spouse
where payments to the surviving spouse under such annuity are equal to the
amounts which would be payable as a survivor annuity under a 100% Joint and
Survivor Annuity (or the actuarial equivalent thereof) if the Executive had
retired with an immediate 100% Joint and Survivor Annuity on the day before his
death, determined pursuant to such actuarial assumptions as are used by the
Company to determine a qualified preretirement survivor annuity under the Plan.
Notwithstanding the foregoing, any benefits payable under the Plan, the
Equalization Plan and the SERP shall not be reduced as provided in any such plan
for early retirement and shall be calculated on a proforma basis as if the
Executive had continued as an employee and a participant in the Plans through
December 31, 1995, at a salary equal to his annual salary at the time of his
early retirement and a bonus equal to the last bonus received or accrued prior
to his early retirement and with both salary and bonuses increased annually
thereafter at a compounded rate of 8%, but in no event calculated at a five year
average of less than $1,878,246 and benefits to be paid to the Executive
pursuant to the SERP will be calculated at a salary equal to his annual salary
at the time of his early retirement and a bonus equal to the last bonus received
or accrued prior to his early retirement and increased annually thereafter at a
compounded rate of 8%, but in no event calculated at a three year average of
less than $2,020,525.

If the Executive continues in the employ of the Company through the term of this
Agreement, benefits to be paid to the Executive or his beneficiary pursuant to
the Plan, the Equalization Plan and the SERP will be calculated pursuant to the
formulae set forth in such Plans, but in no event calculated at a five year
average of less than $1,878,246 for purposes of the Plan and Equalization Plan
and a three year average of less than $2,020,525 for purposes of the SERP.

                                       
<PAGE>   2
                                                                    EXHIBIT 10
                                                                    (Continued)

The Company may not withhold any pension payments hereunder for any reason
unless the Company has first obtained a final decision of an arbitrator,
pursuant to paragraph 8 hereof, to the effect that the Company is legally
entitled to do so.

IN WITNESS WHEREOF, the Company and the Executive have caused this Amendment No.
3 to the Agreement to be executed as of the 15th day of November, 1994.




                                    FEDERAL PAPER BOARD COMPANY, INC.


                                          By: /s/ W. RAN CLERIHUE
                                              -------------------
                                                  W. Ran Clerihue

                                          By: /s/ JOHN R. KENNEDY
                                              -------------------
                                                  John R. Kennedy

                                       

<PAGE>   1

                                                                    EXHIBIT 11

                        FEDERAL PAPER BOARD COMPANY, INC.
                    Computation of Earnings Per Common Share
                     (In thousands except per share amounts)
<TABLE>
<CAPTION>
                                                                                   Fiscal Years
                                                                         1994          1993          1992
                                                                         ----          ----          ----
<S>                                                                    <C>           <C>           <C>
ASSUMING NO DILUTION:
Income Before Cumulative Effect of Accounting Change                   $72,000       $ 6,400       $82,600
(Deduct) Dividends on Convertible Preferred Stock                       (6,519)       (6,610)       (7,060)
                                                                       -------       -------       -------
Income (Loss) Before Cumulative Effect of Accounting Change
  available to Common Shares                                            65,481          (210)       75,540
Cumulative Effect of Accounting Change                                       -            -          9,000
                                                                       -------       -------       -------
  Net Income (Loss) Available to Common Shares                         $65,481       $  (210)      $84,540
                                                                       =======       =======       =======

Actual Weighted Average Number of Common
  Shares Outstanding                                                    42,296        41,995        41,448
                                                                       =======       =======       =======

Income (Loss) Before Cumulative Effect of Accounting Change            $  1.55       $  (.01)      $  1.82
Cumulative Effect of Accounting Change                                       -             -           .22
                                                                       -------       -------       -------
Net Income (Loss) Per Common Share Assuming No Dilution                $  1.55       $  (.01)      $  2.04
                                                                       =======       =======       =======

ASSUMING FULL DILUTION:
Income Before Cumulative Effect of Accounting Change                   $72,000       $ 6,400       $82,600
(Deduct) Dividends on Convertible Preferred Stock                       (6,455)       (6,610)            -
                                                                       -------       -------       -------
Income (Loss) Before Cumulative Effect of Accounting Change
  Applicable to Common Shares, Common Equivalent
  Shares and Dilutive Securities                                        65,545          (210)       82,600
Cumulative Effect of Accounting Change                                       -             -         9,000
                                                                       -------       -------       -------
Net Income (Loss) Applicable to Common Shares, Common
  Equivalent Shares and Dilutive Securities                            $65,545       $  (210)      $91,600
                                                                       =======       ========      =======

Shares:
  Adjusted Weighted Average Number of Common
     Shares Outstanding                                                 42,239        41,995        40,900
  Dilutive Common Equivalent Shares Issuable
     Under Stock Option Plans                                              650            (a)          381
  Common Shares Issuable Upon Conversion of
     $1.20 Convertible Preferred Stock                                     289            (a)          324
  Common Shares Issuable Assuming Conversion of
     $2.875 Convertible Preferred Stock                                     (a)           (a)        5,090
                                                                       -------       -------       -------
  Weighted Average Number of Common and Diluted
    Common Equivalent Shares and Dilutive Securities                    43,178        41,995        46,695
                                                                       =======       =======       =======
Income (Loss) Before Cumulative Effect of Accounting Change            $  1.52       $ ( .01)      $  1.77
Cumulative Effect of Accounting Change                                       -             -           .19
                                                                       -------       -------       -------
Net Income (Loss) Per Common Share Assuming Full
  Dilution, As Reported                                                $  1.52       $  (.01)      $ 1. 96
                                                                       =======       =======       =======
</TABLE>


<PAGE>   2

                                                                    EXHIBIT 11
                                                                    (Continued)

                        FEDERAL PAPER BOARD COMPANY, INC.
                    Computation of Earnings Per Common Share
                     (In thousands except per share amounts)

The calculation of primary earnings per share is presented below in accordance
with Securities Exchange Act of 1934 Release No. 9083 although not required by
footnote 3 paragraph 14 of APB Opinion No. 15 because it results in dilution of
less than 3%. Earnings applicable to common shares are the same as in the
calculation assuming no dilution.

<TABLE>
<S>                                                                    <C>           <C>           <C> 
PRIMARY EARNINGS PER SHARE:
Shares:
  Weighted Average Number of Common Shares Outstanding                  42,296        41,995         41,448
  Dilutive Common Equivalent Shares Issuable Under
      Stock Option Plans                                                   460            (a)           381
                                                                       -------       -------        -------
  Weighted Average Number of Common and Dilutive
      Common Equivalent Shares                                          42,756        41,995         41,829
                                                                       =======       =======        =======



Income (Loss) Before Cumulative Effect of Accounting Change            $  1.53       $  (.01)       $  1.80
Cumulative Effect of Accounting Change                                       -             -            .22
                                                                       -------       -------        -------
Primary Earnings (Loss) Per Common Share Assuming
   No Dilution from Common Equivalent Shares                           $  1.53       $  (.01)       $  2.02
                                                                       =======       =======        =======
</TABLE>

(a)  Antidilutive Issue.


                                       

<PAGE>   1
                                                                     EXHIBIT 12

                        FEDERAL PAPER BOARD COMPANY, INC.
                Computation of Ratio of Earnings to Fixed Charges
                                 (In thousands)
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------------------
                                                                              Fiscal Years

                                                       1994         1993          1992         1991           1990
--------------------------------------------------------------------------------------------------------------------

<S>                                                  <C>          <C>           <C>          <C>            <C>
Income Before Taxes and
  Cumulative Effect of Accounting Change
  per Consolidated Statement of Income               $100,900     $ 26,300      $135,700     $144,200       $202,200

Add:

Interest on Indebtedness                               88,281       84,509        85,018       90,243         43,111
Amortization of Previously
   Capitalized Interest                                 8,528        8,221         7,656        6,716          4,354
Portion of Rents Representative
   of Interest Factor                                   7,817        7,433         8,316        9,451          9,835
                                                     --------     --------      --------     --------       --------
Income as Adjusted                                   $205,526     $126,463      $236,690     $250,610       $259,500
                                                     ========     ========      ========     ========       ========


Fixed Charges:

Interest on Indebtedness                             $ 88,281     $ 84,509      $ 85,018     $ 90,243       $ 43,111
Capitalized Interest                                    6,745        6,136        11,274       18,807         47,247
Portion of Rents Representative
   of Interest Factor                                   7,817        7,433         8,316        9,451          9,835
                                                     --------     --------      --------     --------       --------
       Fixed Charges                                 $102,843     $ 98,078      $104,608     $118,501       $100,193
                                                     ========     ========      ========     ========       ========
Ratio of Earnings to Fixed Charges                       2.00         1.29          2.26         2.11           2.59
                                                     ========     ========      ========     ========       ========
</TABLE>


Note: Interest on indebtedness includes amortization of debenture discount and
      other debt related expenses.


                                       

<PAGE>   1
                                                                      EXHIBIT 13

Review of Operations

PAPER, PAPERBOARD AND PULP

The paper, paperboard and pulp segment is a significant portion of the
Company's business accounting for 62% of net sales in 1994.  Operating profits
for this segment increased substantially in 1994 to $157.3 million, a 77%
increase over 1993.  This segment benefited from increased selling prices for
market pulp and uncoated free-sheet paper along with increased shipments of
paperboard, pulp and uncoated free-sheet paper during 1994.  Demand for these
products increased as the overall economic conditions of the United States and
Europe improved throughout the year.

PAPERBOARD   The Company produces bleached paperboard on five coated paperboard
machines located in Riegelwood, NC and Augusta, GA.  Total 1994 production of
bleached paperboard was 937,000 tons, a slight increase over 1993 production of
925,000 tons.  Both the Riegelwood and Augusta mills operated well during 1994
with new production records being set at both mills.

In mid-1994, the Company completed a modernization program at the Riegelwood
mill at a total cost of approximately $190 million.  This capital project
included the rebuild of the No. 18 paperboard machine and the installation of
new winders, rollwrapping equipment and refiners.  The focus of the
modernization program was to improve quality to better serve the Company's
various customers in the lightweight bleached bristol market.  With the rebuild
and modernization at both the Riegelwood and Augusta mills over the past four
years, the Company is positioned to enhance productivity efficiencies while
providing our customers with quality products.

In early 1994, the Riegelwood mill received International Standards
Organization (ISO) 9002 certification for the manufacture of bleached
paperboard and the production of market pulp.  The award is part of the ISO
9000 series of standards, which were developed in Geneva, Switzerland in 1987
and is given to operations demonstrating excellence in implementing total
quality processes. 

Market conditions and backlogs for bleached paperboard strengthened during the
latter half of 1994 resulting in pricing improvements with a further price
increase announced in January 1995.  Shipments of bleached paperboard in
        
[Illustration 1]
[Paperboard Chart 1]

Federal Paper Board Company, Inc. 1994 Annual Report     Page 6


[photo 1]

Federal Paper Board Company, Inc. 1994 Annual Report     Page 7
<PAGE>   2
1994 increased by 45,000 tons, or 5% over 1993 shipments.  In addition, 1994
shipments included a greater quantity of high margin specialty-type business.
The Company continues to focus on moving its product mix from commodity-type
businesses into value added premium and specialty markets.

The Company's Sprague mill once again achieved a production record in 1994 by
producing 196,000 tons of recycled paperboard, an increase from the record high
of 179,000 tons produced last year.  However, the recycled paperboard business
was negatively impacted during 1994 by the effects of the rising cost of
wastepaper, the primary raw material in recycled paperboard.

With five bleached paperboard machines and one recycled paperboard machine, the
Company is able to supply a wide variety of paperboard grades. The ability to
supply such a wide variety of grades is very beneficial to our customers as
they can choose the total packaging solution best for any particular situation.

The Company's service distribution centers consisting of five sheeting plants
and one extrusion plant, all located near our markets, have given us the
ability to better serve our customers.  To ensure the Company's leadership
position in the printing market and continue to meet the growth and quality
needs in the marketplace, five new state-of-the-art sheeters will be installed
at our various service distribution centers in 1995.

MARKET PULP   The Riegelwood mill produced 540,000 tons of market pulp in 1994
compared to 530,000 tons in 1993.  In addition, the Augusta mill produced
17,000 tons of market pulp which is below the 26,000 tons produced in 1993.
The Augusta mill sells market pulp in slurry form to a neighboring mill and the
decline in production reflects a change in the supply requirements of this
customer.  Shipments of market pulp in 1994 increased 7% over 1993 shipments
including a 7% increase in export shipments.

The market pulp business improved throughout 1994.  Increased worldwide demand
and a number of price increases implemented during the year have brought market
pulp back to profitability.  Additional price increases took effect in January
1995 and further price increases have been announced for the first quarter of
1995.

[Illustration 2]
[Pulp Chart 2]

Federal Paper Board Company, Inc. 1994 Annual Report     Page 8


[photo 2]

Federal Paper Board Company, Inc. 1994 Annual Report     Page 9

<PAGE>   3
EXPORT   The Company is a major exporter, principally of market pulp, to many
parts of the world with export sales in 1994 of $196.3 million, a 49% increase
over 1993.  The Company continues its efforts to expand its presence in foreign
markets.  We currently have sales and marketing offices in Zurich, London and
Tokyo which enhance the Company's ability to better serve our worldwide pulp
and paperboard customers.

UNCOATED FREE-SHEET PAPER    The Company's mill in Inverurie, Scotland
produces, on two paper machines, uncoated free-sheet paper for the United
Kingdom and European markets. 1994 was another record production year for the
Inverurie mill with 189,000 metric tons produced.  Capital projects completed
at the mill during the year have enabled it to increase productive capacity and
thereby reduce overall costs.

Demand for uncoated free-sheet paper improved throughout 1994 enabling the
Company to institute a series of price increases.  The Company continues its
efforts to improve its product mix into higher value-added markets with a new
brighter product, called Presentation, to be introduced in February, 1995. It
will be used for letterheads and color copying.  As the Company enters 1995,
the market for uncoated free-sheet paper remains positive with further price
increases expected.

WOOD PRODUCTS

The wood products segment includes the results of the Company's lumber plants
and land management activities.  This segment accounted for 16% of the
Company's net sales in 1994. Operating profits for this segment decreased from
the prior year due to the rising cost of timber, caused by a combination of
increased demand and the curtailment of logging on certain government owned
lands.

LUMBER PLANTS   The lumber market continued its strong performance during 1994
as average selling prices increased over the prior year due to continued
strength in construction and increased demand in retail home centers.  The
principal product of our lumber plants is dimensional lumber which is used in
the construction and retail home improvement industries.  The plants also
produce wood chips which are the basic raw material used in the

[Illustration 3]
[Paper Chart 3]

Federal Paper Board Company, Inc. 1994 Annual Report     Page 10


[photo 3]

Federal Paper Board Company, Inc. 1994 Annual Report     Page 11

<PAGE>   4
production of pulp and paperboard.  The Company's lumber operations performed
very well in 1994 with net sales and average selling prices above last year.

The Company operates five lumber plants and is committed to maintaining its
position as a low cost producer.  The lumber plants produced a record 618.2
million board feet in 1994.  In recent years the Company has invested in
computerized manufacturing processes in order to reduce costs and optimize
timber yields.  Safety has also played a key role in cost reductions with our
lumber plants incurring no lost workday accidents in 1994. One facility has
operated four years without a lost workday accident.

The customer base of the lumber market has changed recently, as evidenced by
the demand for specialty lumber products in the retail home center segment, and
we have responded to this opportunity.  Our lumber operations' quality
assurance program is dedicated to providing our customers with a high quality
grade lumber product, on time and as ordered.

Demand and industry production is projected to remain high throughout 1995.
The Company's lumber business is expected to perform well in 1995, as our
efficient low cost facilities enable us to maintain our competitive edge.

WOODLANDS   The Company owns 569,000 acres of timberlands and leases another
123,000 acres of timberlands with purchase options, of which the Company owns
the timber on the leased land.  The acreage is located in proximity to our pulp
and paperboard mills and our lumber plants in North Carolina, South Carolina
and Georgia.

Our woodlands are an integral source of current and future timber needs.  The
woodlands operations provided approximately 30% of our softwood needs and
procured the remainder of our timber requirements for our lumber plants and
pulp and paperboard mills through outside sources.

The Company understands the value of our woodlands to our business and our
communities and practices responsible forest management techniques.  To do
this, we follow recognized measures to protect the integrity of the soil, water
and waterways and regenerate harvested lands through the planting of

[Illustration 4]
[Wood Products Chart 4]

Federal Paper Board Company, Inc. 1994 Annual Report     Page 12

[photo 4]

Federal Paper Board Company, Inc. 1994 Annual Report     Page 13

<PAGE>   5
genetically improved seedlings or through natural regeneration.  We continue to
participate in several research cooperatives which provide information for tree
improvement, forest nutrition and forest management.

CONVERTING OPERATIONS

The Company is a leading manufacturer of converted paperboard products
including disposable foodservice products, folding cartons and various other
packaging products.  This segment of the Company's business accounted for 22%
of net sales for the current year.  Strong competitive conditions and a change
in the availability and demand for raw materials contributed to a slight
decline in operating profits.  The converting operations have faced many
challenges in 1994.  The marketplace experienced rapid change during the year
with a tightening in the supply of the major components of the manufacturing
process including bleached paperboard, resins and corrugated containers.
Prices of these raw materials increased significantly in the second half of the
year posing a challenge to all producers of converted paperboard products.
Costs of these raw materials are expected to continue to rise throughout 1995
as the paperboard market continues to improve.  However, we continue to focus
primarily on productivity improvements and cost reductions so that a
streamlined and efficient manufacturing process allows us to compete
effectively in the marketplace.

CUP OPERATIONS   At six strategically located cup manufacturing facilities,
paper and plastic cups and other disposable foodservice products are
manufactured for a wide variety of customers ranging from small convenience
stores to national fast food chains.  The Company's bleached paperboard mills
offer a unique combination of raw material supply and paper-coating
technologies which allows complete control of the production process and a more
reliable source of products during tightening market conditions.

Our cup plants utilize various production processes which make these operations
uniquely positioned to meet any customer's order requirements large or small.
In 1994, the cup operations were recognized by the Flexographic Technical
Association for excellent work in narrow web printing, demonstrating their
commitment to producing quality products.

[Illustration 5]
[Converting Operations Chart 5]

Federal Paper Board Company, Inc. 1994 Annual Report     Page 14

[Photo 5]

Federal Paper Board Company, Inc. 1994 Annual Report     Page 15

<PAGE>   6
Over the past several years, the Company focused on reducing costs and
consolidating various operations of this business.  Results for 1994 reflect
cost savings realized from these programs.  As part of the continuing effort to
be the highest quality producer of low cost converted paper products, the
Company has announced the closing of the Salisbury, MD plant.  Business from
this plant will be divided among the other facilities in order to better meet
the needs of particular customers.  The effect of these cost reduction programs
are expected to benefit the Company and its customers now and in future years.

PACKAGING OPERATIONS   At four packaging facilities, the Company offers a wide
variety of print production and finishing capabilities to its customers.  High
speed printing presses produce some of the most intricate packaging products in
the industry, both in terms of graphic and structural designs.  Various
printing processes are utilized to produce complex multi-colored folding
cartons for many of the nation's most familiar consumer products.  Because of
the operations' investment in modern equipment, its customers benefit from the
most cost effective production methods for their particular needs.  In 1994,
the packaging operations received a formal supplier certification from a major
customer.  This certification signified the operations' commitment to meeting
the exacting standards of process control and improvement.

ENVIRONMENTAL

We are committed to ongoing investments that will protect both the environment
and our ability to operate profitably.  We continue to be environmentally
conscious and our record in the Environmental Protection Agency's (EPA) 33/50
program represents our contribution to the national effort to eliminate
environmental problems.  In 1994, the EPA honored our Company as one of only
seven paper companies to make rapid progress in reducing reported releases of
its high priority toxic chemicals.  We are very pleased with our results so far
and anticipate being able to sustain these reductions on a long-term basis.

[Illustration 6]

Federal Paper Board Company, Inc. 1994 Annual Report     Page 16



<PAGE>   7
Federal Paper Board Company, Inc.

MANAGEMENT'S DISCUSSION AND ANALYSIS OF OPERATIONS



RESULTS OF OPERATIONS

OVERVIEW

Results for the fiscal year 1994 significantly improved over the prior year and
are a reflection of sales price increases implemented during the second half of
the year. Net sales were $1,569.6 million in 1994, an increase of 13% from 1993
and 7% from 1992, and represented a new record sales level for the Company.
Income before cumulative effect of accounting change was $72.0 million in 1994,
a substantial improvement from 1993 but a 13% decrease from 1992. Net income
for 1994 includes a net pre-tax loss of $3.5 million associated with nonhedged
financial instrument transactions, including the release from certain financial
instrument obligations, and an after-tax non-cash gain of $6.0 million due to
the cumulative recalculation of deferred taxes reflecting a change in the
effective state tax rate. Net income for 1993 includes a net pre-tax loss of
$31.9 million associated with financial instrument transactions and a non-cash
charge of $9.5 million resulting from a change in the federal statutory tax
rate from 34% to 35%. Net income for 1992 includes a non-cash gain of $9.0
million from the cumulative effect of accounting change related to the adoption
of Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes".

         Results for fiscal years 1994 and 1993 include 52 weeks while fiscal
1992 includes 53 weeks. The effect of the inclusion of 53 weeks of the
Company's operations in fiscal year 1992 is not deemed material to the
Company's financial position and results of operations.

PAPER, PAPERBOARD AND PULP

The paper, paperboard and pulp segment manufactures bleached and recycled
paperboard, hardwood and softwood market pulp and uncoated free-sheet paper.
The Company operates one recycled paperboard mill, two bleached paperboard and
pulp mills, one uncoated free-sheet paper mill, five sheeting and distribution
centers and one extrusion coating plant.

         Net sales for this segment increased 15% compared to fiscal year 1993.
Paperboard sales increased approximately 6% compared to the prior year
reflecting an increase in shipments during the year slightly offset by a
decline in the overall average selling price. Paperboard accounted for 66% and
72% of the segment's sales for 1994 and 1993, respectively. Market pulp sales
were significantly higher in 1994 compared to 1993, increasing 45% compared to
the prior year. The increase in market pulp sales reflects an increase in
average selling prices along with an increase in shipments for 1994. Shipments
of this product to the export market increased 7% in 1994 reflecting
improvement in the general economic conditions throughout the United Kingdom,
Europe and Asia.  Market pulp accounted for 19% and 15% of the segment's sales
for 1994 and 1993, respectively. Sales of uncoated free-sheet paper increased
31% compared to the prior year reflecting a 22% increase in average selling
prices and an increase in shipments for 1994.  Paper sales accounted for 15%
and 13% of the segment's sales in 1994 and 1993, respectively.

         Operating profits for this segment increased substantially in 1994 to
$157.3 million, 77% above 1993 levels.

         Operating profits for market pulp increased substantially compared to
the prior year. Numerous price increases were implemented in 1994 which helped
return this product line to profitability. Strengthened demand for this
product, the result of improved worldwide economic conditions, resulted in
increased shipments of market pulp of 7% during 1994, while the average selling
price increased 42% compared to the prior year.

         Operating profits for bleached paperboard declined compared to the
prior year. The decrease is attributable to a slight decrease in the average
selling prices and an increase in raw material costs. Shipments for this
product remained strong in 1994, and should continue this trend in 1995. Price
increases implemented in the fourth quarter of 1994 should have a positive
impact on operating profits for this product line in 1995.

         Operating profits for the Company's uncoated free-sheet paper
operation substantially improved compared to the prior year.  Average selling
prices for this product increased 22% compared to the prior year, while
shipments increased 8% in 1994. Average selling prices rebounded from prior
year levels as numerous price increases were implemented during the year, the
result of increased demand as economic conditions improved in Europe.

         Operating profits for recycled paperboard decreased 10% compared to
the prior year. The decrease in 1994 is primarily attributable to increased
wastepaper costs, the primary component of recycled paperboard. Average selling
prices for recycled paperboard declined 2% compared to the prior year, while
shipments of recycled paperboard increased 15% in 1994 compared to the prior
year.

         Overall, the Company's mills operated well during 1994 as production
records were achieved at all of the Company's mills.  Capital expansion
programs completed in prior years contributed to the overall production records
at the mills.

         Net sales in 1993 for this segment declined 12% compared to 1992.
Sales of paperboard were down approximately 6% in 1993 compared to 1992 as a
result of reduced shipments and a decrease in the average selling price. Sales
of market pulp declined approximately 38% in 1993 compared to 1992 as a result
of average selling prices falling 30% below the prior year levels. Decreased
shipments of market pulp during 1993 also contributed to the lower sales,
including an 11% decline in export market shipments reflecting the poor
economic conditions that existed throughout Europe. Sales of uncoated
free-sheet paper improved 3% in 1993 compared to 1992, the result of increased
shipments to meet the rise in demand for paper.

         Operating profits for this segment fell considerably in 1993,
decreasing 55% compared to 1992. The primary factor for the reduction was the
continued deterioration in market pulp prices, which caused the product line to
be unprofitable for the Company.  Increased average selling prices of recycled
paperboard partially offset the decline. Shipments of paperboard and pulp were
slightly lower compared to 1992 levels, while shipments of uncoated free-sheet
paper were up slightly compared to the prior year.

         Operating profits for market pulp decreased substantially in 1993
compared to the prior year due to the continued deterioration in average
selling prices. This product line became unprofitable in 1993 as high worldwide
inventory levels of market pulp and weak economic conditions combined to force
the average selling price of this product well below the cost of production.

 Operating profits for bleached paperboard declined in 1993 compared to the
prior year. The decrease is primarily attributable to 

Federal Paper Board Company, Inc. 1994 Annual Report     Page 20
<PAGE>   8
Federal Paper Board Company, Inc.



lower average selling prices in 1993, as the Company's product mix changed 
during the year, with a greater quantity of lower margin business. Shipments 
for this product declined slightly in 1993, further contributing to the 
decline in operating profits for the year.

         Operating profits for recycled paperboard increased 19% in 1993
compared to the prior year. The increase is attributable to increased average 
selling prices and improved operating efficiencies. In 1993, the Company's 
Sprague recycled paperboard mill was able to use lower cost natural gas in the 
manufacturing process of recycled paperboard which reduced production costs 
for this product.

         Operating profits for the Company's uncoated free-sheet paper
operation improved in 1993 compared to the prior year.  Shipments for this
product improved substantially in 1993, increasing 37% compared to the prior
year, while average selling prices decreased compared to the prior year.
Average selling prices declined in 1993 due to poor economic conditions in
Europe coupled with industry overcapacity.

WOOD PRODUCTS

The wood products segment manufactures dimensional lumber and is responsible
for land management activities. The Company operates five lumber plants and
owns or leases approximately 692,000 acres of timberlands.

         Net sales increased 17% compared to fiscal year 1993. Average selling
prices of lumber achieved record levels during the year and ended 1994
approximately 11% above the prior year. Shipments of lumber were 610.3 million
board feet compared to 579.7 million board feet in 1993. Demand for lumber
remained strong in 1994 due to increased housing starts and a reduced supply of
lumber.

         Operating profits for this segment in 1994 decreased 2% compared to
the prior year. The decline is primarily attributable to an increase in
production costs in 1994. However, operating efficiencies at most of the lumber
plants improved in 1994, primarily the result of the completion of
modernization programs at the plants in prior years.

         Net sales in 1993 for this segment improved 28% compared to 1992.
Average selling prices of lumber were substantially higher in 1993 compared to
1992, increasing 31% during the year. Shipments of lumber were slightly lower
in 1993 compared to 1992.  Demand for lumber increased in the second half of
1993, due to a strong increase in housing starts during this period.

         Operating profits for this segment in 1993 increased substantially
compared to 1992. Favorable market conditions for lumber continued throughout
the year reflecting improved housing starts and a reduced supply of lumber.

CONVERTING OPERATIONS

The converting operations segment manufactures paper and plastic cups,
packaging products and other disposable foodservice products.  The Company
currently operates six cup plants and four folding carton plants.

         Results for this segment were mixed in 1994. Net sales for this
segment increased 6% compared to the prior year. Sales of the cup operations
increased 6% compared to the prior year. Shipments for the cup operations
increased 8% over 1993 levels, reflecting an improving economy and increased
demand for the product in 1994. The increase in shipments was partially offset
by a slight decrease in the average selling price of approximately 2% compared
to the prior year. The cup operations accounted for 70% of this segment's sales
in 1994 and 1993. Sales of packaging products increased 6% compared to the
prior year, the result of increased customer orders. Packaging products
accounted for 30% of this segment's sales in 1994 and 1993.

         Operating profits for this segment declined 8% compared to 1993.
Included in 1994 operating profits is a $2.1 million charge associated with the
restructuring of the cup operations. As part of the restructuring, the Company
has announced the closing of the Salisbury, MD plant. In addition, the Company
has implemented cost reduction programs which are expected to improve operating
and distribution efficiencies in the near future. Excluding the restructuring
charge, the cup operations results improved in 1994 compared to the prior year.
The Company's packaging operations performed well for the year contributing to
operating profits.

         Net sales for this segment in 1993 were slightly lower than the prior
year. A 15% decrease in sales of the packaging operations caused by an
unfavorable change in product mix and reduced volume was slightly offset by a
4% increase in sales of the cup operations. The foodservice disposable market
experienced increased demand in 1993 and this was reflected in the 9% increase
in shipments for this product in 1993. However, average selling prices declined
during the year due to increased competition in this market.

         Operating profits for this segment were sharply lower in 1993,
declining 49% compared to the prior year. The decline is partly attributable to
a $1.0 million charge associated with the restructuring of the cup operations.
The restructuring, combined with capital expenditures and various cost
reduction programs, has enhanced manufacturing and distribution efficiencies
for these operations. Lower average selling prices, reduced volume and a change
in product mix for the packaging operations coupled with lower average selling
prices for the cup operations further contributed to the decline.

OTHER ITEMS

The Company entered into several nonhedged off-balance-sheet financial
instrument transactions in 1994, 1993 and 1992. The value of these instruments
changes as currency markets and interest rates fluctuate, requiring adjustments
of the market value to be recorded. Net losses of approximately $3.5 and $31.9
million were recorded in 1994 and 1993, respectively, and a net gain of
approximately $5.3 million was recorded in 1992 associated with nonhedged
financial instrument transactions. In fiscal year 1994, the Company was
released from its obligation on two foreign currency forward contracts as part
of a settlement with an outside party. The net loss for fiscal year 1994
includes a gain of $12.0 million as a result of this settlement. The items
above are included in Other - net in the Consolidated Statement of Income.

INCOME TAXES

The Company's overall effective tax rate for 1994 was 28.6%, compared to 75.7%
in 1993 and 39.1% in 1992. The lower effective rate for 1994 compared to 1993
is attributable to various factors. In 1994, the Company recorded a favorable
adjustment of $2.9 million reflecting the settlement of prior year tax audits
and recorded a $6.0

                Federal Paper Board Company, Inc. 1994 Annual Report     Page 21
<PAGE>   9
Federal Paper Board Company, Inc.



million favorable adjustment of deferred taxes due to a
change in the Company's effective state tax rate due to the withdrawal from
several states. In 1993, the overall effective tax rate was significantly
impacted by the federal statutory tax rate change from 34% to 35%. As a result,
the Company's 1993 provision for income taxes included $9.2 million for the
cumulative effect of the recalculation of the deferred tax liability under
Statement No. 109, "Accounting for Income Taxes". The Company adopted this
Statement in 1992, recording a gain of $9.0 million from the cumulative effect
of an accounting change in the Consolidated Statement of Income. The adoption
of Statement No. 109 resulted in higher depreciation expense for 1994, 1993 and
1992.

OTHER ACCOUNTING MATTERS

Effective January 2, 1994 the Company adopted Statement No. 112, "Employers'
Accounting for Postemployment Benefits". This Statement requires the Company to
accrue for postemployment benefits provided to former or inactive employees,
their beneficiaries and covered dependents after employment but before
retirement. The Company previously expensed the cost of these benefits as
claims were incurred. The impact of adopting this Statement was not material to
the Company's financial position and results of operations for fiscal year
1994.

CAPITAL RESOURCES AND LIQUIDITY

Cash flows generated from operations in 1994 were $239.6 million compared to
$232.3 million in 1993 and $223.8 million in 1992. The slight increase in 1994
is attributable to increased operating earnings and proceeds on hedged
financial instrument transactions partially offset by a change in working
capital in the current year. The deferred income tax provision for 1994
includes a favorable adjustment of $2.9 million reflecting the settlement of
prior year tax audits and a $6.0 million favorable adjustment reflecting a
change in the Company's overall effective state tax rate. The deferred income
tax provision for 1993 includes a charge of $9.2 million for the recalculation
of the deferred tax liability due to an increase in the federal statutory tax
rate. The major changes in working capital reflect an increase in receivables
and an increase in inventory levels in 1994. The increase in receivables in
1994 is attributable to a higher level of sales during the year, partially
offset by an increase of the amount of sold receivables.  Inventory levels
increased reflecting increased production during the year in response to
improved market demand for the Company's products as discussed in the Results
of Operations.

         The Company is party to an agreement, initially entered into in 1991,
which allows for the sale of a fractional interest in a defined pool of trade
accounts receivable. During 1994, the maximum allowable amount of receivables
to be sold, initially $88 million, was increased to $105 million. During 1993,
the maximum allowable amount of receivables to be sold, initially $75 million,
was increased to $88 million. Proceeds from the increase in the receivables
sold of $17 million and $13 million in 1994 and 1993, respectively, are
reported as operating cash flows.

         Cash flows used for investing activities are primarily associated with
capital investment programs. Capital expenditures, including capitalized
interest, were $139.1 million in 1994, $161.2 million in 1993 and $149.1
million in 1992. In 1994, capital spending was primarily attributable to the
capital program at the Company's Riegelwood mill. The mill underwent a
modernization program which has improved quality and ensured the Company's
leadership position in the lightweight bleached bristol market. Capital
spending also includes the construction of a new warehouse at the Company's
Shelbyville cup plant which will improve distribution efficiencies. In 1993,
the major portion of capital spending pertained to the Riegelwood mill program
and the Shelbyville plant program mentioned above, as well as other ongoing
capital investment programs for the paper, paperboard and pulp segment.
Spending in 1992 was primarily attributable to various ongoing programs for the
paper, paperboard and pulp segment, including the Riegelwood mill program.
Capital expenditures for 1995, including capitalized interest, are expected to
be approximately $175 million. The majority of the spending in 1995 will be for
the capital project to upgrade the fiber capacity at the Company's Riegelwood
mill.

         Cash flows used for financing activities pertain to payments of
long-term borrowings and dividends. Cash paid for dividends was $48.8 million,
$48.6 million and $48.4 million in 1994, 1993 and 1992, respectively. In the
fourth quarter of 1994, the Company's cash dividend increased from a quarterly
rate of $.25 to a quarterly rate of $.30 per common share. For 1993 and 1992,
the quarterly dividend rate was $.25 per common share. Total debt of the
Company was reduced by $35.5 million and $28.8 million in 1994 and 1993,
respectively. The ratio of total debt to total capitalization was 52.6% and
54.2% in 1994 and 1993, respectively.

         During 1994, the Company entered into a revolving credit agreement
providing for borrowings of up to $250 million which expires in December 1999.
This agreement replaced the existing $75 million and $225 million revolving
credit agreements. In 1994, the Company also repaid a $25 million bank note and
subsequently borrowed $25 million under a new bank note maturing in 1996. In
addition, in 1994, $25 million of debt pertaining to the Senior Notes - Series
H was repaid.

         Debt repayments in 1995 are expected to be $74.5 million. The Company
is confident that cash flows from operations supplemented by the revolving
credit agreement and $75 million remaining under a previously filed shelf
registration statement will be sufficient to meet the repayment requirements
and fund capital spending programs. At December 31, 1994, the Company was in
compliance with all loan covenant requirements and does not foresee
noncompliance with any of its loan covenant requirements in 1995.

         The Company has entered into a variety of interest rate swap
agreements to manage the impact of interest rate fluctuations.  During 1994,
the Company was a party to both hedged and nonhedged interest rate swap
agreements. The Company's outstanding hedged interest rate swap agreements
effectively converted $175 million of fixed rate debt to variable rate debt at
December 31, 1994 and January 1, 1994. These agreements have various expiration
dates through 1998. The Company's market risk under these agreements is
primarily subject to changes in the London Inter Bank Offered Rate (LIBOR). The
Company does not believe a reasonably likely change in LIBOR rates would have a
material impact on its financial position and results of operations.

         The Company also had nonhedged interest rate swap agreements
outstanding at December 31, 1994 and January 1, 1994. One nonhedged interest
rate swap agreement which was outstanding at December 31, 1994 and January 1,
1994 is based on a notional



Federal Paper Board Company, Inc. 1994 Annual Report     Page 22
<PAGE>   10
Federal Paper Board Company, Inc.



amount of $175 million. In this agreement, the Company will receive LIBOR and
will pay LIBOR in arrears plus 1.72% plus a leveraged coupon rate based on
various interest rate spreads. At December 31, 1994 the estimated fair value of
this agreement was a loss of $10.5 million. At January 1, 1994, the Company had
two other nonhedged interest rate swap agreements outstanding which were both
terminated during fiscal year 1994. One agreement was based on a notional
amount of $25 million in which the Company received a fixed rate of 10% and
paid LIBOR plus 4.228% plus a leveraged coupon rate based on various interest
rate spreads. The other agreement was based on a notional amount of $50 million
in which the Company received a fixed rate of 10% and paid LIBOR plus 4.4% plus
a leveraged coupon rate based on various interest rate spreads.

         The Company is exposed to credit loss in the event of nonperformance
by the counterparty to its interest rate swap agreements. The risk of loss to
the Company in the event of nonperformance by the counterparty under these
agreements is not significant. The Company does not anticipate nonperformance
by the counterparty.

         The Company utilized nonhedged foreign currency option contracts since
the majority of the Company's export sales are sold in U.S. dollars, and a rise
in the value of the dollar could have adversely effected sales prices and
volumes. Strategic hedges were used to provide the Company with currency gains
to offset reduced profits resulting from the rising U.S. dollar. The strategic
hedge program was global in nature and was not intended to hedge firm
commitments.

         During 1994, the Company entered into and terminated various nonhedged
foreign currency option contracts. At December 31, 1994, the Company was not a
party to any nonhedged foreign currency option contracts. The impact of
terminating the nonhedged foreign currency option contracts in 1994 is
discussed in Other Items. The net losses include $14.9 million associated with
two complex foreign currency contracts which were entered into and terminated
by the Company during 1994. However, as part of a settlement with an outside
party, the Company was released from $12.0 million of this obligation.

ENVIRONMENTAL MATTERS

The Company operates in an industry subject to extensive environmental
regulations. In order to meet the standards established by the various federal,
state and local environmental laws and regulations, the Company has made
substantial capital and operating expenditures. Over the past three years, the
Company spent $449.4 million on its capital investment program of which $61.0
million was related to environmental capital expenditures. In fiscal years
1994, 1993 and 1992, $11.6 million, $17.2 million and $32.2 million,
respectively, was spent on environmental capital projects. Capital expenditures
for environmental purposes are estimated to be approximately $66.7 million and
$46.6 million for fiscal years 1995 and 1996, respectively. However, spending
on these environmental projects may be undertaken in years beyond 1996.
Additional amounts to be incurred for environmental purposes in future years
will depend on new laws and regulations, other changes in legal requirements,
changes in environmental control technology and changes in the economic
environment. The Environmental Protection Agency ("EPA") Cluster Rules,
proposed in 1993, could have a significant impact on future environmental
expenditures for the Company and our industry. Based on the current proposed
EPA Cluster Rules, the Company will be required to spend between an estimated
$250 million and $400 million to comply. All companies in our industry are
subject to the same or similar environmental laws and regulations and the
Company does not believe that compliance with applicable laws and regulations
will materially affect its competitive position within the United States.
However, the Company does believe that the EPA Cluster Rules may impact its own
and the industry's competitive edge in the world market.

         The Company has been designated a potentially responsible party, under
the Comprehensive Environmental Response, Compensation and Liability Act and by
certain state agencies, with respect to the cleanup of hazardous substances at
approximately 13 sites which are not owned or controlled by the Company. In all
of these sites, other potentially responsible parties also have been
designated. The total costs to the Company to remediate these sites cannot be
predicted with certainty due to the amount of time necessary to complete the
cleanups, the extent to which contributions will be available from other
parties or the availability of insurance coverage. However, based upon its
experience with such matters, the Company does not believe that its expected
share of such known actual and potential cleanup costs will have a materially
adverse effect on its financial position and results of operations.

         The Company has recorded accruals in the Consolidated Balance Sheet
for environmental costs of $7.0 million and $4.7 million at December 31, 1994
and January 1, 1994, respectively. In the opinion of management, these accruals
are sufficient to cover probable and estimable environmental costs.

EFFECTS OF INFLATION

Inflation increased during fiscal year 1994 as the overall economic conditions
improved in the Company's domestic and foreign markets. However, the current
level of inflation is moderate in comparison to prior historical levels and has
not had a material impact on the Company's operating results in recent years.
Prices and volumes for the Company's products are more closely related to
supply and demand factors in specific markets than by inflationary factors.

FUTURE OUTLOOK

The Company finds itself well positioned to capitalize upon the favorable
economic and market conditions that exist as we enter into 1995. Economic
conditions in the United States, Europe and Asia are all showing improvement
from prior years. The Company anticipates increased average selling prices in
1995 due to expected price increases along with increased demand for its major
products. Recent capital expenditures coupled with ongoing Company-wide cost
reduction programs will enhance manufacturing and distribution efficiencies and
reduce production costs which will further benefit the Company in 1995. The
absence of significant new capacity for any of the Company's product lines
should ensure strong demand for the Company's products. The combination of
improved average selling prices, increased demand and improved operating
efficiencies in 1995 should result in improved operating results for the
Company compared to recent years.

                Federal Paper Board Company, Inc. 1994 Annual Report     Page 23
<PAGE>   11
Federal Paper Board Company, Inc.



INDUSTRY SEGMENT INFORMATION

<TABLE>
<CAPTION>
                                                                                           
-------------------------------------------------------------------------------------------
                                Net Sales to
                                Unaffiliated           Intersegment                   Total
In thousands                       Customers                  Sales                   Sales
-------------------------------------------------------------------------------------------
<S>                                                 <C>                       <C>
FOR FISCAL YEAR 1994
  Paper, Paperboard and Pulp      $  971,968             $   98,993              $1,070,961
  Wood Products                      251,479                 16,422                 267,901
  Converting Operations              346,130                     --                 346,130
-------------------------------------------------------------------------------------------
  Total segment operations         1,569,577                115,415               1,684,992
  Intersegment eliminations               --               (115,415)               (115,415)
  General corporate items - net           --                     --                      --
-------------------------------------------------------------------------------------------
  Consolidated total              $1,569,577             $       --              $1,569,577
-------------------------------------------------------------------------------------------
FOR FISCAL YEAR 1993
  Paper, Paperboard and Pulp      $  843,775             $   91,302              $  935,077
  Wood Products                      214,913                 19,217                 234,130
  Converting Operations              327,698                     --                 327,698
-------------------------------------------------------------------------------------------
  Total segment operations         1,386,386                110,519               1,496,905
  Intersegment eliminations               --               (110,519)               (110,519)
  General corporate items - net           --                     --                      --
-------------------------------------------------------------------------------------------
  Consolidated total              $1,386,386             $       --              $1,386,386
-------------------------------------------------------------------------------------------
FOR FISCAL YEAR 1992
  Paper, Paperboard and Pulp      $  955,978             $   93,039              $1,049,017
  Wood Products                      168,330                 19,286                 187,616
  Converting Operations              336,511                     --                 336,511
-------------------------------------------------------------------------------------------
  Total segment operations         1,460,819                112,325               1,573,144
  Intersegment eliminations               --               (112,325)               (112,325)
  General corporate items - net           --                     --                      --
-------------------------------------------------------------------------------------------
  Consolidated total              $1,460,819             $       --              $1,460,819
-------------------------------------------------------------------------------------------
</TABLE>


The Paper, Paperboard and Pulp segment consists of the Company's operations at
Riegelwood, NC; Augusta, GA; Sprague, CT; Inverurie, Scotland; Sturgis, MI;
Ontario, CA; Hazleton, PA; Prosperity, SC; Wharfedale, England and Wilmington,
NC. Net sales to unaffiliated customers are as follows:

<TABLE>
<CAPTION>
                                                                                           
-------------------------------------------------------------------------------------------
In thousands                            1994                   1993                    1992
-------------------------------------------------------------------------------------------
<S>                                 <C>                    <C>                     <C>
Paper                               $148,766               $113,263                $109,601
Paperboard                           641,829                605,632                 644,844
Pulp                                 181,373                124,880                 201,533
-------------------------------------------------------------------------------------------
</TABLE>

  The Wood Products segment includes the results of the Company's lumber plants
and land management group. The Converting Operations segment includes the
results of the Company's cup operations and packaging operations.

  Intersegment sales are comprised principally of the sale of paperboard at
market prices to the Converting Operations and the sale of wood chips and
pulpwood at cost or market prices from the lumber plants and woodlands to the
Paperboard and Pulp Operations.

Federal Paper Board Company, Inc. 1994 Annual Report     Page 24
<PAGE>   12
Federal Paper Board Company, Inc.



<TABLE>
<CAPTION>
                                                                                           
-------------------------------------------------------------------------------------------
 Income Before Taxes                                  Depreciation,
and Cumulative Effect           Identifiable  Amortization and Cost                 Capital
of Accounting Change                  Assets    of Timber Harvested            Expenditures
-------------------------------------------------------------------------------------------
           <S>                  <C>                      <C>                      <C>
            $157,264              $1,850,112               $110,167                $ 99,549
              69,892                 300,590                 13,094                  10,813
               7,197                 335,823                 19,290                  24,124
-------------------------------------------------------------------------------------------
             234,353               2,486,525                142,551                 134,486
                (796)                     --                     --                      --
            (132,657)                123,124                  3,895                   4,572
-------------------------------------------------------------------------------------------
            $100,900              $2,609,649               $146,446                $139,058
-------------------------------------------------------------------------------------------
            $ 88,646              $1,845,876               $106,303                $130,901
              71,633                 309,228                 12,997                  14,760
               7,829                 312,509                 20,898                  15,054
-------------------------------------------------------------------------------------------
             168,108               2,467,613                140,198                 160,715
               1,399                      --                     --                      --
            (143,207)                 94,290                  3,889                     523
-------------------------------------------------------------------------------------------
            $ 26,300              $2,561,903               $144,087                $161,238
-------------------------------------------------------------------------------------------

            $198,361              $1,860,734               $106,817                $121,891
              31,431                 290,763                 13,475                  12,050
              15,480                 321,008                 22,347                  14,993
-------------------------------------------------------------------------------------------
             245,272               2,472,505                142,639                 148,934
                 (92)                     --                     --                      --
            (109,480)                100,994                  3,927                     196
-------------------------------------------------------------------------------------------
            $135,700              $2,573,499               $146,566                $149,130
-------------------------------------------------------------------------------------------
</TABLE>


     Identifiable assets by segment are principally those assets which are used
in the Company's operations in each industry. Corporate assets primarily include
cash, prepaid items, non-trade receivables, investments and non-operating
assets.  General corporate items - net include administrative expenses,
interest expense and other items.

     Export sales from the Company's United States operations to unaffiliated
customers by major geographic area were as follows:

<TABLE>
<CAPTION>
                                                           
-----------------------------------------------------------
In thousands             1994           1993           1992
-----------------------------------------------------------
<S>                 <C>            <C>            <C>
North America       $  23,832      $  16,033      $  14,727
Europe                 54,762         43,324         91,794
Asia                  112,614         67,377         96,338
Other                   5,083          5,278          6,980
-----------------------------------------------------------
Total               $ 196,291      $ 132,012      $ 209,839
-----------------------------------------------------------
</TABLE>

                Federal Paper Board Company, Inc. 1994 Annual Report     Page 25
<PAGE>   13
Federal Paper Board Company, Inc.



CONSOLIDATED STATEMENT OF INCOME

<TABLE>
<CAPTION>
                                                                                                                             
--------------------------------------------------------------------------------------------------------------------------------
In thousands except per share amounts
For Fiscal Year                                                                        1994                  1993           1992
--------------------------------------------------------------------------------------------------------------------------------
<S>                                                                              <C>                    <C>           <C>
NET SALES                                                                        $1,569,577             $1,386,386    $1,460,819
--------------------------------------------------------------------------------------------------------------------------------
COSTS AND EXPENSES:                                                                                                
   Cost of products sold                                                          1,143,382              1,038,785     1,034,854
   Depreciation, amortization and cost of timber harvested                          146,446                144,087       146,566
   Selling and administrative expenses                                               74,187                 60,149        64,769
   Interest expense                                                                  88,281                 84,509        85,018
   Other - net                                                                       16,381                 32,556        (6,088)
--------------------------------------------------------------------------------------------------------------------------------
TOTAL COSTS AND EXPENSES                                                          1,468,677              1,360,086     1,325,119
--------------------------------------------------------------------------------------------------------------------------------
Income before taxes and cumulative effect of accounting change                      100,900                 26,300       135,700
Provision for income taxes                                                           28,900                 19,900        53,100
--------------------------------------------------------------------------------------------------------------------------------
Income before cumulative effect of accounting change                                 72,000                  6,400        82,600
Cumulative effect of accounting change                                                   --                     --         9,000
--------------------------------------------------------------------------------------------------------------------------------
NET INCOME                                                                           72,000                  6,400        91,600
Preferred dividend requirements                                                       6,519                  6,610         7,060
--------------------------------------------------------------------------------------------------------------------------------
Net income (loss) available to common shares                                     $   65,481             $     (210)   $   84,540
--------------------------------------------------------------------------------------------------------------------------------
Average number of common shares outstanding:                                                                       
   Assuming no dilution                                                              42,296                 41,995        41,448
   Assuming full dilution                                                            43,178                 41,995        46,695
--------------------------------------------------------------------------------------------------------------------------------
EARNINGS (LOSS) PER COMMON SHARE                                                                                            
--------------------------------------------------------------------------------------------------------------------------------
Assuming no dilution:                                                                                              
   Income (loss) before cumulative effect of accounting change                        $1.55                  $(.01)        $1.82
   Cumulative effect of accounting change                                                --                     --           .22
--------------------------------------------------------------------------------------------------------------------------------
   Net Income (Loss)                                                                  $1.55                  $(.01)        $2.04
--------------------------------------------------------------------------------------------------------------------------------
Assuming full dilution:                                                                                            
   Income (loss) before cumulative effect of accounting change                        $1.52                  $(.01)        $1.77
   Cumulative effect of accounting change                                                --                     --           .19
--------------------------------------------------------------------------------------------------------------------------------
   Net Income (Loss)                                                                  $1.52                  $(.01)        $1.96
--------------------------------------------------------------------------------------------------------------------------------
</TABLE>

See accompanying notes to financial statements.



Federal Paper Board Company, Inc. 1994 Annual Report     Page 26
<PAGE>   14
Federal Paper Board Company, Inc.

CONSOLIDATED STATEMENT OF CASH FLOWS



<TABLE>
<CAPTION>
                                                                                                                                 
---------------------------------------------------------------------------------------------------------------------------------
In thousands
For Fiscal Year                                                                       1994               1993          1992
---------------------------------------------------------------------------------------------------------------------------------
<S>                                                                             <C>                  <C>          <C>
CASH FLOWS FROM OPERATIONS:
  Net income                                                                    $   72,000          $   6,400     $  91,600
  Adjustments to reconcile net income to net cash provided by operations:        
    Cumulative effect of accounting change                                              --                 --        (9,000)
    Depreciation, amortization and cost of timber harvested                        146,446            144,087       146,566
    Deferred income tax provision                                                    8,644             13,076        26,857
    Net loss (gain) on financial instrument transactions                             3,524             31,854        (5,258)
    Net loss on disposal of property, plant and equipment and
      timber                                                                         6,548                401         4,778
    Net proceeds for hedged financial instrument transactions                       10,710              1,307            --
    Other - net                                                                     (7,755)           (11,543)      (10,371)
  Changes in current assets and liabilities, net of effects from acquisitions:
    Accounts and notes receivable                                                  (20,373)            36,271        (4,762)
    Inventories                                                                     (7,131)           (21,651)      (21,488)
    Other current assets                                                           (15,170)            12,464          (794)
    Accounts payable and other current liabilities                                  42,135             19,619         5,718
---------------------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY OPERATIONS                                                    239,578            232,285       223,846
---------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
  Capital expenditures                                                            (139,058)          (161,238)     (149,130)
  Net (payments) proceeds for nonhedged financial instrument
    transactions                                                                   (19,183)            (5,697)        5,258
  Proceeds received on settlement of note receivable                                    --             10,000            --
  Other                                                                             (1,225)              (152)       (5,988)
---------------------------------------------------------------------------------------------------------------------------------
NET CASH USED FOR INVESTING ACTIVITIES                                            (159,466)          (157,087)     (149,860)
---------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
  Cash dividends paid                                                              (48,750)           (48,591)      (48,414)
  Increase in long-term debt                                                        27,518              1,909       209,966
  Payments on long-term debt                                                       (61,883)           (34,348)     (239,896)
  Issuance of equity capital                                                         4,180              3,593         5,845
  Change in short-term bank debt                                                    (1,155)             2,230        (1,724)
---------------------------------------------------------------------------------------------------------------------------------
NET CASH USED FOR FINANCING ACTIVITIES                                             (80,090)           (75,207)      (74,223)
---------------------------------------------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN CASH:                                                            22                 (9)         (237)
  Cash:
    Beginning of year                                                                  271                280           517
    End of year                                                                 $      293          $     271     $     280
---------------------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL CASH FLOW DISCLOSURE:
  Cash paid during the year for:
    Interest (net of amount capitalized)                                        $   76,892          $  84,948     $  78,864
    Income taxes                                                                     9,844              7,171        26,885
---------------------------------------------------------------------------------------------------------------------------------
</TABLE>

See accompanying notes to financial statements.

                Federal Paper Board Company, Inc. 1994 Annual Report     Page 27
<PAGE>   15
Federal Paper Board Company, Inc.

CONSOLIDATED BALANCE SHEET



<TABLE>
<CAPTION>
                                                                                                                                    
------------------------------------------------------------------------------------------------------------------------------------
In thousands
At Year End                                                                                                1994                1993
------------------------------------------------------------------------------------------------------------------------------------
<S>                                                                                                  <C>                 <C>
ASSETS

CURRENT ASSETS:
Cash                                                                                                 $      293          $      271
Accounts and notes receivable, less allowance for doubtful
  accounts of $1,518 in 1994 and $1,284 in 1993                                                          73,856              52,062
Inventories:
  Raw materials                                                                                          74,489              58,720
  Work in process                                                                                        18,365              15,469
  Finished goods                                                                                         90,316              99,329
  Supplies                                                                                               52,533              51,701
------------------------------------------------------------------------------------------------------------------------------------
  Subtotal                                                                                              235,703             225,219
  LIFO reserve                                                                                           (5,156)             (2,819)
------------------------------------------------------------------------------------------------------------------------------------
Total inventories                                                                                       230,547             222,400
Deferred tax asset                                                                                       24,661              15,142
Other current assets                                                                                     27,884              17,250
------------------------------------------------------------------------------------------------------------------------------------
TOTAL CURRENT ASSETS                                                                                    357,241             307,125
------------------------------------------------------------------------------------------------------------------------------------
PROPERTY, PLANT AND EQUIPMENT, AT COST:
Land                                                                                                     18,128              16,227
Buildings, including leasehold improvements                                                             285,957             238,859
Machinery and equipment                                                                               2,434,729           2,259,622
Construction in progress                                                                                 55,902             151,715
------------------------------------------------------------------------------------------------------------------------------------
  Subtotal                                                                                            2,794,716           2,666,423
Accumulated depreciation and amortization                                                              (897,077)           (769,869)
------------------------------------------------------------------------------------------------------------------------------------
PROPERTY, PLANT AND EQUIPMENT - NET                                                                   1,897,639           1,896,554
------------------------------------------------------------------------------------------------------------------------------------
TIMBER AND TIMBERLANDS                                                                                  188,896             189,674
GOODWILL AND OTHER INTANGIBLES                                                                          114,812             118,418
OTHER ASSETS                                                                                             51,061              50,132
------------------------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS                                                                                         $2,609,649          $2,561,903
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>

See accompanying notes to financial statements.



Federal Paper Board Company, Inc. 1994 Annual Report     Page 28
<PAGE>   16
Federal Paper Board Company, Inc.



<TABLE>
<CAPTION>
                                                                                                                                    
------------------------------------------------------------------------------------------------------------------------------------
                                                                                                           1994                1993
------------------------------------------------------------------------------------------------------------------------------------
<S>                                                                                                  <C>                 <C>
LIABILITIES AND SHAREHOLDERS' EQUITY

CURRENT LIABILITIES:
Accounts payable                                                                                     $  100,796          $   90,356
Current portion of long-term debt                                                                        74,544              56,148
Short-term bank debt                                                                                     24,242              25,304
Dividends payable                                                                                        12,788              10,554
Accrued compensation                                                                                     33,874              24,867
Accrued interest                                                                                         19,443              18,885
Other current liabilities                                                                                72,068              48,029
------------------------------------------------------------------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES                                                                               337,755             274,143
------------------------------------------------------------------------------------------------------------------------------------
LONG-TERM DEBT                                                                                          921,227             973,825
OTHER LIABILITIES                                                                                        78,832              78,872
DEFERRED TAX LIABILITY                                                                                  353,643             342,757
SHAREHOLDERS' EQUITY:                                                                                           
Preferred stock - $1.20 cumulative convertible, $1 par value
  (aggregate liquidation value at December 31, 1994 - $1,045);
  authorized 1,900 shares; issued: 1994 - 52 shares;
  1993 - 58 shares                                                                                           52                  58
Preferred stock - Class A
  Second Series, $2.875 cumulative convertible, $1 par value
  (aggregate liquidation value at December 31, 1994 - $107,876);
  authorized 10,000 shares; issued: 1994 - 2,158 shares;
  1993 - 2,274 shares                                                                                     2,158               2,274
Common Stock - $5 par value; authorized 240,000 shares;
  issued: 1994 - 42,619 shares; 1993 - 42,356 shares                                                    213,094             211,779
Other capital                                                                                           250,183             249,800
Retained earnings                                                                                       453,977             432,961
Treasury stock - at cost:
  Common stock - 1994 - 46 shares; 1993 - 209 shares                                                     (1,272)             (4,566)
------------------------------------------------------------------------------------------------------------------------------------
TOTAL SHAREHOLDERS' EQUITY                                                                              918,192             892,306
------------------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY                                                           $2,609,649          $2,561,903
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>


                Federal Paper Board Company, Inc. 1994 Annual Report     Page 29
<PAGE>   17
Federal Paper Board Company, Inc.



CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY

<TABLE>
<CAPTION>
                                                                                                                       
-------------------------------------------------------------------------------------------------------------------------------
                                                   Preferred      Common Stock             Other     Retained  Treasury Stock
In thousands                                          Stocks   Shares      Amount        Capital     Earnings  Shares   Amount
<S>                                                  <C>        <C>     <C>            <C>          <C>         <C>    <C>
-------------------------------------------------------------------------------------------------------------------------------
BALANCE DECEMBER 28,1991                             $ 2,864    41,071  $ 205,357      $ 287,203    $ 432,328     396   $(6,552)
Net income                                                                                             91,600
Dividends declared:                             
  Preferred stocks                                                                                     (7,060)
  Common stock                                                                                        (41,668)
Stock options exercised                                            224      1,116          4,646                  (79)      709
Conversion of preferred stocks (529,089 shares)         (529)      974      4,871         (4,968)
Cumulative foreign translation adjustment                                                (23,339)
Minimum pension liability adjustment                                                      (6,163)                       
-------------------------------------------------------------------------------------------------------------------------------
BALANCE JANUARY 2, 1993                              $ 2,335    42,269  $ 211,344      $ 257,379    $ 475,200     317   $(5,843)
Net income                                                                                              6,400
Dividends declared:                             
  Preferred stocks                                                                                     (6,610)
  Common stock                                                                                        (42,029)               
Stock options exercised                                             72        362          1,954                 (108)    1,277
Conversion of preferred stock (2,908 shares)              (3)       15         73            (70)
Cumulative foreign translation adjustment                                                   (286)
Minimum pension liability adjustment                                                      (9,177)                       
-------------------------------------------------------------------------------------------------------------------------------
BALANCE JANUARY 1, 1994                              $ 2,332    42,356  $ 211,779      $ 249,800    $ 432,961     209   $(4,566)
Net income                                                                                             72,000
Dividends declared:                             
  Preferred stocks                                                                                     (6,519)
  Common stock                                                                                        (44,465)
Stock options exercised                                             23        118            768                 (163)    3,294 
Conversion of preferred stock (122,256 shares)          (122)      240      1,197         (1,075)
Cumulative foreign translation adjustment                                                  6,775
Minimum pension liability adjustment                                                      (6,085)                       
-------------------------------------------------------------------------------------------------------------------------------
BALANCE DECEMBER 31, 1994                            $ 2,210    42,619  $ 213,094      $ 250,183    $ 453,977      46   $(1,272)
-------------------------------------------------------------------------------------------------------------------------------
</TABLE>                                        

See accompanying notes to financial statements.



Federal Paper Board Company, Inc. 1994 Annual Report     Page 30
<PAGE>   18
Federal Paper Board Company, Inc.

NOTES TO FINANCIAL STATEMENTS



NOTE 1  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation

The consolidated financial statements include all subsidiary companies.
Significant intercompany transactions have been eliminated.

Fiscal Year

The Company's fiscal year is comprised of 52 or 53 weeks, ending on the
Saturday nearest December 31st. The fiscal year 1992 includes 53 weeks while
the other years presented include 52 weeks.

Inventories

Inventories are valued at the lower of cost or market. Inventory costs include
all direct manufacturing costs and applied overhead.  Finished goods, work in
process and raw materials for the Bleached Paperboard, Pulp, Wood Products and
Converting Operations are determined on the last-in, first-out (LIFO) basis.
Inventories for the Recycled Paperboard and Paper facilities are determined on
the first-in, first-out (FIFO) basis. Supply inventories are determined on an
average cost basis.

Property, Plant and Equipment

Property, plant and equipment is recorded at cost. Depreciation is computed on
the straight-line method based on the estimated useful lives of related assets
except for the Augusta, GA paperboard mill, where the units-of-production
method is used. Depreciable lives are 20 to 33 years for buildings and 3 to 30
years for machinery and equipment. Cost of timber harvested is computed at unit
cost rates calculated annually based on the estimated volume of recoverable
timber and the related costs.

     In 1992, the Company began a program to evaluate the estimated useful lives
assigned to certain productive assets. As a result of this program, the Company
changed the estimated useful lives used to calculate depreciation for certain
productive assets. These changes were made to properly reflect the expected use
of these assets. The effect on income before taxes was an increase of $1.5
million, $4.1 million and $2.4 million in 1994, 1993 and 1992, respectively.
The effect on income after taxes was an increase of $.9 million, $2.5 million
and $1.4 million or $.02, $.06 and $.03 per fully diluted common share in
1994, 1993 and 1992, respectively.

     Costs of the construction of certain long-term assets include capitalized
interest which is amortized over the estimated useful life of the related
asset. The Company capitalized interest costs of $6.7 million in 1994, $6.1
million in 1993 and $11.3 million in 1992.

Goodwill, Intangibles and Other Assets

Goodwill, the excess of the purchase price over the fair value of the net
assets of acquired companies is amortized over 40 years.  Other identified
intangible assets are amortized, if applicable, on a straight-line basis over
their estimated useful lives which range from 3 to 40 years. Accumulated
amortization of goodwill and other intangibles amounted to $23.6 million and
$20.5 million at year end 1994 and 1993, respectively.

     The Company incurs certain incremental and nonrecurring start-up costs 
during the process of bringing a project into commercial production. Such 
start-up costs on major capital projects are capitalized and amortized on a
straight-line basis over five years.  Unamortized start-up costs, included in
Other Assets, were $12.4 million and $17.1 million at year end 1994 and 1993,
respectively.

     Management periodically evaluates the recoverability of long-term assets,
including goodwill, based upon current and anticipated net income and
undiscounted future cash flows.

Financial Instruments

The Company utilizes hedged and nonhedged interest rate swap agreements and
foreign currency contracts.

     Hedged financial instruments are accounted for based on settlement
accounting. Interest rate swap agreements which hedge the Company's debt
involve the exchange of fixed and floating rate interest payments periodically
over the life of the agreement without the exchange of the underlying principal
amounts. The differential to be paid or received, on a semi-annual basis, is
accrued as interest rates change and is recognized over the life of the
agreement as an adjustment to interest expense. Gains and losses associated
with hedged transactions are deferred and included as a component of the
related commitment, while cash payments or proceeds are included as operating
cash flows. Deferred gains and losses are amortized over the life of the
related agreements.

     Nonhedged financial instruments are recorded at market value and are 
included in Current Liabilities and Other Liabilities. The market value of 
interest rate swap agreements and foreign currency option contracts are 
obtained from dealer quotes. Gains and losses associated with nonhedged 
transactions are recorded as a component of Other-net, while cash payments or 
proceeds associated with these transactions are classified as investing 
activities.

Income Taxes

Income taxes are accounted for under Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes". Under Statement No. 109,
deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. In adopting Statement No. 109, the Company adjusted the carrying amounts
of previous acquisitions accounted for using the purchase method of accounting.

Earnings Per Common Share

Earnings per common share assuming no dilution is based on the weighted average
number of shares and common equivalent shares outstanding during the year.
Outstanding stock options are common equivalent shares but were not included in
the computation since any dilutive effect was not material.

                Federal Paper Board Company, Inc. 1994 Annual Report     Page 31
<PAGE>   19
Federal Paper Board Company, Inc.



     Earnings per common share assuming full dilution is based on the weighted
average number of common shares outstanding during the year, including the 
dilutive effects, if any, of stock options outstanding and the conversion of 
the Company's preferred stocks.

Foreign Currency Translation

Adjustments resulting from the translation of foreign subsidiaries' financial
statements into U.S. dollars are included as cumulative foreign translation
adjustments in shareholders' equity. The net cumulative foreign currency
translation balance included in other capital was a decrease of $11.8 million
and $18.6 million at December 31, 1994 and January 1, 1994, respectively.

Revenue Recognition

The Company generally recognizes revenues when goods are shipped.

Reclassifications and Restatement

Certain amounts in prior year financial statements have been reclassified to
conform with the current year presentation. The accompanying consolidated
financial statements for fiscal year 1993 were previously restated to account
for certain interest rate swap agreements at market value.

NOTE 2  FINANCIAL INSTRUMENTS

Derivative Financial Instruments

The Company utilizes a variety of derivative financial instruments to limit its
exposure to foreign currency fluctuations and changing interest rates but does
not hold or issue such financial instruments for trading purposes.

     The Company has entered into a variety of interest rate swap agreements to
manage the impact of interest rate fluctuations. At December 31, 1994 and
January 1, 1994, the Company was a party to both hedged and nonhedged interest
rate swap agreements. Under the hedged interest rate swap agreements, the
Company exchanges fixed rate payments for variable rate payments periodically
over the life of the agreements. The Company deferred gains and losses related
to various hedged interest rate swap agreements since the underlying debt was
outstanding. At December 31, 1994 and January 1, 1994, the Company had deferred
net losses of $.3 million and $2.0 million, respectively and deferred net gains
of $9.2 million and $.7 million, respectively.

     At December 31, 1994 and January 1, 1994, the Company had hedged interest
rate swap agreements outstanding with a notional principal amount of $175
million which converted fixed rate debt with a weighted average interest rate
of 8.66% to variable rates of 7.9% and 7.1%, respectively. The variable rate is
based on the London Inter Bank Offered Rate (LIBOR) plus a predetermined
spread.  The predetermined spread increased from 3.22% to 5.14%. The agreements
terminate on various dates through July 1, 1998. The Company's exposure related
to these interest rate swap agreements is limited to fluctuations in LIBOR,
however LIBOR has been set through January 1, 1996. The estimated fair value of
these agreements at December 31, 1994 and January 1, 1994 was a loss of $19.9
million and $3.2 million, respectively.

     The Company had nonhedged interest rate swap agreements outstanding at
December 31, 1994 and January 1, 1994. One nonhedged interest rate swap
agreement outstanding at December 31, 1994 and January 1, 1994 is based on a
notional amount of $175 million. The terms of the agreement become effective on
July 1, 1995 and terminate on July 1, 1998. In this agreement, the Company will
receive LIBOR and will pay LIBOR in arrears plus 1.72% plus a leveraged coupon
rate based on various interest rate spreads. At December 31, 1994 and January
1, 1994, the estimated fair value of this agreement was a loss of $10.5 million
and $20.6 million, respectively, which has been recorded in the accompanying
Consolidated Financial Statements.

     At January 1, 1994, the Company had two other nonhedged interest rate swap
agreements outstanding which were both terminated during fiscal year 1994
resulting in losses of $10.5 million included in the accompanying Consolidated
Statement of Income. One agreement was based on a notional amount of $25
million in which the Company received a fixed rate of 10% and paid LIBOR plus
4.228% plus a leveraged coupon rate based on various interest rate spreads.
The other agreement was based on a notional amount of $50 million in which the
Company received a fixed rate of 10% and paid LIBOR plus 4.4% plus a leveraged
coupon rate based on various interest rate spreads. The estimated fair value of
these two agreements outstanding at January 1, 1994 was a loss of $3.8 million
and a gain of $.3 million, respectively.

     The Company is exposed to credit loss in the event of nonperformance by the
counterparty to its interest rate swap agreements. The risk of loss to the
Company in the event of nonperformance by the counterparty under these
agreements is not significant. The Company does not anticipate nonperformance
by the counterparty.

     The Company entered into nonhedged foreign currency option contracts. Since
most of the Company's export sales are sold in U.S.  dollars, a rise in the
value of the dollar could have adversely effected sales prices and volumes.
Therefore, strategic hedges were put into place to provide the Company with
currency gains to offset reduced profits resulting from the rising U.S. dollar.
This strategic hedge program was global in nature and was not intended to hedge
firm commitments.

     At December 31, 1994 the Company was not party to any nonhedged foreign
currency option contracts. During fiscal year 1993, the Company sold certain
foreign exchange contracts. The sold nonhedged contracts outstanding at January
1, 1994 were foreign currency call option contracts with a notional amount of
15.0 million British pounds and foreign currency put option contracts with
notional amounts of 15.0 million U.S. dollars, 5.0 million British pounds and
8.5

Federal Paper Board Company, Inc. 1994 Annual Report     Page 32
<PAGE>   20
Federal Paper Board Company, Inc.



million German marks. During fiscal year 1993, the Company also held
certain purchased foreign currency option contracts. The purchased nonhedged
contracts outstanding at January 1, 1994 were foreign currency call option
contracts with notional amounts of 5.0 million U.S. dollars and 5.0 million
British pounds, and foreign currency put option contracts with notional amounts
of 25.0 million U.S. dollars and 5.0 million British pounds. In addition, at
January 1, 1994 the Company had nonhedged forward foreign exchange contracts
outstanding with notional amounts of 5.0 million U.S. dollars. The estimated
fair value of nonhedged foreign currency contracts outstanding at January 1,
1994 was not material.

     In some instances, the Company also enters into foreign currency 
contracts to hedge a specific export sale or purchase to guard against 
currency losses. Since these contracts hedge a firm commitment, gains and 
losses are deferred and included as a component of the related transaction. 
There were no significant hedged foreign currency instruments outstanding at 
December 31, 1994 or January 1, 1994 and the effect on net income was not 
material for these activities in either year.

Fair Value of Other Financial Instruments

The estimated fair value of the Company's other financial instruments which are
not held for trading purposes at December 31, 1994 and January 1, 1994 were as
follows:

<TABLE>
<CAPTION>
                                                                                                          
----------------------------------------------------------------------------------------------------------
                                                      1994                                    1993        
----------------------------------------------------------------------------------------------------------
                                      Carrying           Estimated            Carrying          Estimated
In thousands                            Amount           Fair Value              Amount         Fair Value
----------------------------------------------------------------------------------------------------------
<S>                                  <C>                 <C>                  <C>               <C>       
Accounts and notes receivable        $  73,856            $  73,856           $  52,062           $ 52,062
Note receivable non-current              2,413                2,413               2,418              2,418
Long-term debt                         995,771            1,031,518           1,029,973          1,181,193
----------------------------------------------------------------------------------------------------------
</TABLE>

The estimated fair value amounts have been determined by the Company, using
available market information and appropriate valuation methodologies as of
December 31, 1994 and January 1, 1994. Although management is not aware of any
factors that would significantly affect the estimated fair value amounts, such
amounts have not been comprehensively revalued for purposes of these financial
statements since that date, and current estimates of fair value may differ
significantly from amounts presented herein. The following are the methods used
for each class of financial instruments for which it is practicable to estimate
the value.

Accounts and notes receivable: The carrying amounts of these items are a
reasonable estimate of fair value.

Note receivable non-current: The estimated fair value of the Company's note
receivable is based on market prices for the same or similar instruments with
similar maturities.

Long-term debt: The estimated fair value of the Company's long-term debt is
based on quoted market prices for the same or similar issues or on the current
rates offered to the Company for debt with similar remaining maturities.

NOTE 3  LONG-TERM DEBT

<TABLE>
<CAPTION>
                                                                                          
------------------------------------------------------------------------------------------
In thousands                                                       1994               1993
------------------------------------------------------------------------------------------
<S>                                                          <C>               <C>
Revolving credit agreements, variable
  interest rates                                             $   33,750          $  50,000
Notes:
  9.06% - 10.5% Senior notes, due 1993 - 2009                   450,000            475,000
  4.9% - 6.61% Bank notes, due 1994 - 1996                       45,000             45,000
  Other                                                          55,000             45,000
8.125% - 10% Debentures, due 2002-2012                          375,000            375,000
Industrial revenue bonds, due 2000-2012                          29,941             29,870
Capitalized lease obligations                                     1,680              2,118
Other                                                             5,400              7,985
------------------------------------------------------------------------------------------
Total                                                           995,771          1,029,973
Current portion                                                 (74,544)           (56,148)
------------------------------------------------------------------------------------------
Total long-term debt                                          $ 921,227        $   973,825
------------------------------------------------------------------------------------------
</TABLE>

The aggregate maturities of long-term debt for the five years subsequent to
December 31, 1994 are as follows: 1995 - $74,544; 1996 - $25,775; 1997 -
$33,157; 1998 - $27,631; 1999 - $113,854.

     The Company has a revolving credit agreement with a syndicate of banks. The
agreement provides for borrowings of up to $250 million and expires in 1999.
The agreement requires the payment of a facility fee on the total commitment
and a commitment fee based on the unused portion of the line of credit. This
agreement became effective in the fourth quarter of 1994 and replaced the
Company's $75 million and $225 million revolving credit agreements.

     The revolving credit agreement provides for borrowing at variable interest
rates based on the prime rate or, at the Company's option, on LIBOR or the
average secondary market offering rate for certificates of deposit in New York
City. The rate can be reduced or increased depending on the Company's ratio of
debt to total capitalization and cash flow coverage. The weighted average
interest rate for 1994 and 1993 was 4.9% and 3.9%, respectively. The Company
classified $55 million and $45 million of other notes as long-term debt at
December 31, 1994 and January 1, 1994, respectively. The Company has the intent
and ability under the revolving credit agreement to renew or convert these
obligations through 1999.

     The industrial revenue bonds had a weighted average interest rate of 4.3% 
and 4.8% in 1994 and 1993, respectively. The short-term bank debt outstanding at
December 31, 1994 and January 1,1994 had a weighted average interest rate of
6.3% and 3.5%, respectively.

                Federal Paper Board Company, Inc. 1994 Annual Report     Page 33
<PAGE>   21
Federal Paper Board Company, Inc.



     Certain loan agreements contain various restrictive covenants, including
restrictions on the amount of net earnings available for dividends, the
purchase of Company stock and certain cash flow coverage requirements.
Unrestricted retained earnings under the most restrictive provision amounted to
$135.3 million at December 31, 1994.

NOTE 4  LEASES & OTHER COMMITMENTS

Leases

The Company leases certain buildings, machinery and equipment under various
operating leases. Rental expense for operating leases was $21.5 million, $19.3
million and $20.9 million in 1994, 1993, and 1992, respectively. Minimum lease
payments for operating leases existing as of December 31, 1994 are as follows:
$9.7 million in 1995; $5.9 million in 1996; $3.8 million in 1997; $2.6 million
in 1998; $2.2 million in 1999 and $8.2 million in years after 1999.

Environmental

Environmental expenditures that relate to current operations are expensed or
capitalized as appropriate. Expenditures that relate to an existing condition
caused by past operations, and which do not contribute to current or future
revenue generation, are expensed.  These amounts are recorded when
environmental assessments and/or remedial efforts are probable and the cost can
be reasonably estimated. The timing of these accruals generally coincides with
completion of a feasibility study or the Company's commitment to a formal
action plan. Amounts included in the accompanying Consolidated Balance Sheet
for estimated environmental costs, at December 31, 1994 and January 1, 1994,
were $7.0 million and $4.7 million, respectively, which in the opinion of
management are sufficient to cover probable and estimable environmental costs.

NOTE 5  INCOME TAXES

The Company adopted Statement No. 109 as of December 29, 1991 and the
cumulative effect of this change in accounting for income taxes is reported
separately in the Consolidated Statement of Income for fiscal year 1992. As a
result of applying Statement No.  109, pre-tax income for the fiscal year ended
January 2, 1993 was reduced by $6.3 million representing the effects of
adjustments for prior purchase business combinations.

     The components of income before income taxes and cumulative effect of
accounting change and the provision for income taxes included in the
Consolidated Statement of Income consist of the following:


<TABLE>
<CAPTION>
                                                                                                    
----------------------------------------------------------------------------------------------------
In thousands                                                 1994            1993               1992
----------------------------------------------------------------------------------------------------
<S>                                                    <C>               <C>               <C>
INCOME (LOSS) BEFORE TAXES
  AND CUMULATIVE EFFECT OF
  ACCOUNTING CHANGE:
  Domestic                                              $  87,167        $ 28,128          $ 137,059
  Foreign                                                  13,733          (1,828)            (1,359)
----------------------------------------------------------------------------------------------------
Income before taxes and
  cumulative effect of
  accounting change                                     $ 100,900        $ 26,300          $ 135,700
----------------------------------------------------------------------------------------------------
PROVISION FOR INCOME TAXES:
Current tax expense:
  Federal                                               $  19,503        $  6,310          $  26,119
  State                                                       753             514                124
----------------------------------------------------------------------------------------------------
Total current provision                                 $  20,256        $  6,824          $  26,243
----------------------------------------------------------------------------------------------------
Deferred tax expense:
  Federal                                               $   9,097        $ 11,890          $  14,881
  State                                                    (5,153)          1,786             11,976
  Foreign                                                   4,700            (600)                --
----------------------------------------------------------------------------------------------------
Total deferred provision                                $   8,644        $ 13,076          $  26,857
----------------------------------------------------------------------------------------------------
Total provision for income taxes                        $  28,900        $ 19,900          $  53,100
----------------------------------------------------------------------------------------------------
</TABLE>

The provision for income taxes differs from amounts computed by applying the
statutory federal income tax rate of 35% for fiscal years 1994 and 1993 and 34%
for fiscal year 1992 to income before taxes and cumulative effect of accounting
change due to the following:

<TABLE>
<CAPTION>
                                                                                                    
----------------------------------------------------------------------------------------------------
In thousands                                                 1994            1993               1992
----------------------------------------------------------------------------------------------------
<S>                                                       <C>            <C>               <C>
Federal income taxes at
  statutory rate                                          $35,315        $  9,205          $  46,138
State income taxes less federal
  income tax effect                                         3,590           1,517              7,986
Tax rate change                                            (6,000)          9,200                 --
Amortization of intangibles                                   684             696                780
Adjustment of prior years accruals                         (2,900)           (934)            (1,498)
Other - net                                                (1,789)            216               (306)
----------------------------------------------------------------------------------------------------
Provision for income taxes                                $28,900        $ 19,900          $  53,100
Effective tax rate                                          28.6%           75.7%              39.1%
----------------------------------------------------------------------------------------------------
</TABLE>

The tax rate change in fiscal year 1994 represents a change in the Company's
overall effective state tax rate due to withdrawal from several states. Fiscal
year 1993 represents a change in the federal statutory rate from 34% to 35%.

     The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at December
31, 1994, January 1, 1994 and January 2, 1993 were as follows:

Federal Paper Board Company, Inc. 1994 Annual Report     Page 34
<PAGE>   22
Federal Paper Board Company, Inc.



<TABLE>
<CAPTION>
                                                                                                    
----------------------------------------------------------------------------------------------------
In thousands                                                 1994            1993               1992
----------------------------------------------------------------------------------------------------
<S>                                                    <C>             <C>                <C>
Alternative minimum tax credit
  carryforwards                                        $   79,550       $  59,802          $  56,484
Net operating loss carryforwards                           20,406          32,842             11,141
Other                                                      49,906          40,558             25,705
----------------------------------------------------------------------------------------------------
Total deferred tax assets                              $  149,862       $ 133,202          $  93,330
----------------------------------------------------------------------------------------------------
Property, plant, and equipment                         $ (411,712)      $(387,602)         $(344,340)
Capitalized interest                                      (40,085)        (40,661)           (39,471)
Other                                                     (27,047)        (32,554)           (20,909)
----------------------------------------------------------------------------------------------------
Total deferred tax liabilities                         $ (478,844)      $(460,817)         $(404,720)
----------------------------------------------------------------------------------------------------
</TABLE>

The Company has capital loss and net operating loss carryforwards for domestic
income tax purposes which are available to offset future taxable income through
1999 and 2009, respectively. At December 31, 1994, the capital loss and net
operating loss carryforwards were $11.0 million and $31.7 million,
respectively. The Company also has alternative minimum tax credit carryforwards
of approximately $79.6 million at December 31, 1994, which are available to
reduce future federal regular income taxes over an indefinite period.

     In addition, the Company acquired net operating loss carryforwards and an
advance corporation tax for United Kingdom tax purposes, with no expirations,
as a result of an acquisition. Using the exchange rate at December 31, 1994,
the net operating loss carryforwards were approximately $22.8 million and the
advance corporation tax was $1.2 million.

     Deferred taxes are not provided on undistributed earnings of foreign
subsidiaries, which at December 31, 1994 were $18.9 million.  These earnings
have been and will continue to be reinvested. It is not practicable to estimate
the tax liability that might arise if these earnings were remitted.

NOTE 6  EMPLOYEE BENEFIT PLANS

Pension Plans

The Company maintains non-contributory, defined-benefit pension plans covering
substantially all employees. Benefits for salaried employees are based on
salary and years of service, while hourly plans are based on a fixed benefit
rate and years of service. The Company's funding policy is to contribute at
least the minimum amount required by applicable regulations. The assets of the
plans are principally invested in equity and debt securities.

     The net periodic pension cost and actuarial assumptions of the Company's 
plans were as follows:

<TABLE>
<CAPTION>
                                                                                                    
----------------------------------------------------------------------------------------------------
In thousands                                                 1994            1993               1992
----------------------------------------------------------------------------------------------------
<S>                                                     <C>              <C>                <C>
Service cost                                            $   6,948        $  5,690           $  5,618
Interest cost                                              19,336          16,915             16,566
Actual return on assets                                     2,883         (27,904)           (11,289)
Net amortization and deferral                             (13,449)         15,594                (70)
----------------------------------------------------------------------------------------------------
Net periodic pension cost                               $  15,718        $ 10,295           $ 10,825
----------------------------------------------------------------------------------------------------
Discount rate                                                8.5%            7.5%              8.75%
Projected increase in future
  compensation levels                                        5.0%            5.0%               5.0%
Expected long-term return
  on plan assets                                            10.5%           10.5%              10.5%
----------------------------------------------------------------------------------------------------
</TABLE>

The Company has recorded liabilities that are equal to the unfunded accumulated
benefit obligations of its plans in fiscal year 1994 and 1993. This has
resulted in recognition of an intangible asset of $16.0 million and a
net-of-tax reduction to other capital of $30.1 million as of December 31, 1994.
The intangible asset and net-of-tax reduction to other capital as of January 1,
1994 were $14.5 million and $24.1 million, respectively. The following table
sets forth the funded status and the amounts reflected in the Company's
Consolidated Balance Sheet at December 31, 1994 and January 1, 1994:

<TABLE>
<CAPTION>
                                                                                                    
----------------------------------------------------------------------------------------------------
In thousands                                                                 1994               1993
----------------------------------------------------------------------------------------------------
<S>                                                                    <C>               <C>
Actuarial present value of:
  Vested benefit obligation                                            $(192,305)        $ (182,617)
----------------------------------------------------------------------------------------------------
  Accumulated benefit obligation                                        (243,700)          (231,011)
----------------------------------------------------------------------------------------------------
  Projected benefit obligation                                          (252,235)          (241,918)
Plan assets at fair value                                                194,213            190,171
----------------------------------------------------------------------------------------------------
Projected benefit obligation in
  excess of plan assets                                                  (58,022)           (51,747)
----------------------------------------------------------------------------------------------------
Unrecognized net loss                                                     56,072             49,377
Unrecognized prior service costs                                          13,189              9,567
Unrecognized net initial obligation                                        4,198              4,962
Adjustment to meet minimum liability                                     (65,649)           (54,214)
----------------------------------------------------------------------------------------------------
Pension liabilities                                                    $ (50,212)        $  (42,055)
----------------------------------------------------------------------------------------------------
</TABLE>

All of the Company's retirement plans have accumulated benefits in excess of
plan assets.

Other Postretirement Plans

The Company provides certain health care and life insurance benefits to
eligible retired employees. The Company continues to fund benefit costs on a
pay-as-you-go basis, with retirees paying a portion of the costs. Salaried
participants generally become eligible for retiree health care benefits after
reaching age 55 with 15 years of service. Benefits, eligibility and
cost-sharing provisions for hourly employees vary by location. Most hourly
employees are not eligible for retiree health care benefits while others may be
eligible for retiree health care benefits similar to those provided to salaried
employees. Generally, Company provided health care benefits terminate when
covered individuals become eligible for Medicare benefits or reach age 65,
whichever occurs first. Certain retired employees of businesses acquired by the
Company are covered under other health care plans that differ from current
plans in coverage, plan design and retiree contributions.

  Effective January 3, 1993, the Company adopted Statement of Financial
Accounting Standards No. 106, "Employers' Accounting for Postretirement
Benefits Other than Pensions". Statement No. 106 requires the Company to accrue
the estimated cost of retiree benefit payments during the years the employee
provides services. The Company previously expensed the cost of these benefits
as claims were incurred. The cost of providing such benefits was not material
to the Company's financial position and results of operations.  Statement No.
106 allows recognition of the cumulative effect of


                Federal Paper Board Company, Inc. 1994 Annual Report     Page 35
<PAGE>   23
Federal Paper Board Company, Inc.



the liability in the year of the adoption or the amortization of the obligation
over a period of up to twenty years. The Company elected to amortize this
obligation of $27.2 million over a period of twenty years. As a result of
applying Statement No. 106, pre-tax income for the fiscal year ended January 1,
1994 was reduced by approximately $2.8 million.

     The net periodic postretirement benefit cost of the Company's plans were as
follows:

<TABLE>
<CAPTION>
                                                                                 
---------------------------------------------------------------------------------
In thousands                                                 1994            1993
---------------------------------------------------------------------------------
<S>                                                        <C>            <C>
Service cost of benefits earned                            $  606         $   660
Interest cost on accumulated postretirement
  benefit obligation                                        2,403           2,686
Amortization of transition obligation                       1,247           1,358
---------------------------------------------------------------------------------
Net periodic postretirement benefit cost                   $4,256         $ 4,704
---------------------------------------------------------------------------------
</TABLE>

The following table sets forth the funded status and the amounts reflected in
the Company's Consolidated Balance Sheet at December 31, 1994 and January 1,
1994:

<TABLE>
<CAPTION>
                                                                                 
---------------------------------------------------------------------------------
In thousands                                                 1994            1993
---------------------------------------------------------------------------------
<S>                                                     <C>            <C>
Accumulated postretirement benefit obligation:
  Retirees                                              $(17,930)      $ (19,185)
  Fully eligible plan participants                          (829)         (1,064)
  Other active plan participants                         (13,037)        (13,560)
---------------------------------------------------------------------------------
  Total accumulated postretirement
   benefit obligation                                    (31,796)        (33,809)
  Unrecognized net (gain) loss                            (1,806)            966
  Unrecognized prior service cost                            (38)              -
  Unrecognized transition obligation                      22,800          24,392
---------------------------------------------------------------------------------
  Accrued postretirement benefit cost                   $(10,840)      $  (8,451)
---------------------------------------------------------------------------------
</TABLE>

The discount rates used in determining the accumulated postretirement benefit
obligation was 8.5% in 1994 and 7.5% in 1993. The assumed health care cost
trend rate used in measuring the accumulated postretirement benefit obligation
was 11% and 13% in 1994 and 1993, respectively, decreasing gradually each
successive year until it reaches 6% in 2004, after which it remains constant.

     If the health care cost trend rates were increased by 1%, the accumulated
postretirement benefit obligation as of December 31, 1994 and January 1, 1994
would have increased by 11% for each year. The effect of this change on the
aggregate of the service and interest cost components of net periodic
postretirement benefit cost for fiscal years 1994 and 1993 would be an increase
of 12% for each respective year.

Savings and Stock Ownership Plans

The Company has two savings and stock ownership plans in effect which cover all
domestic salaried and non-union hourly employees.  These plans were established
to enhance the existing retirement plans for all eligible employees.
Participants may contribute up to 15% of their annual compensation on a
deferred or a non-deferred tax basis, or both. The Company match, which is paid
in Company stock and is based on employee contributions of up to 6% of their
annual compensation, was decreased from 50% to 25% during 1993.  During 1994,
the Company match was restored to 50%. The Company match is fully vested after
an employee has completed three years of service while employee contributions
are fully vested when they are contributed.

Postemployment Plans

Effective January 2, 1994, the Company adopted Statement of Financial
Accounting Standards No. 112, "Employers' Accounting for Postemployment
Benefits". Statement No. 112 requires the Company to accrue for postemployment
benefits provided to former or inactive employees, their beneficiaries and
covered dependents after employment but before retirement. The impact of
adopting this Statement was not material to the Company's financial position
and results of operations.

NOTE 7  SHAREHOLDERS' EQUITY

Preferred Stocks

The Company had two preferred stocks outstanding at December 31, 1994 and
January 1, 1994. The $1.20 cumulative convertible preferred stock has a
liquidation value of $20 per share and is convertible at any time into 5.02
shares of common stock. The shares are callable at $20.

     The $2.875 cumulative convertible preferred stock has a liquidation value 
of $50 per share and is convertible at any time into 1.8182 shares of common 
stock subject to adjustment under certain conditions. This preferred stock is 
also redeemable, in whole or in part, at the option of the Company at a price 
of $50.86 per share which declines gradually each year to $50 per share on or
after March 15, 1997.

Common Stock

Shares of common stock were reserved for the following purposes at December 31,
1994:

<TABLE>
<CAPTION>
                                                                 
-----------------------------------------------------------------
                                                             1994
-----------------------------------------------------------------
<S>                                                     <C>
Conversion of $1.20 convertible preferred stock           262,415
Conversion of $2.875 convertible preferred stock        3,922,785
Exercise of outstanding stock options                   3,452,067
Granting of additional stock options                      579,700
-----------------------------------------------------------------
Total common shares reserved                            8,216,967
-----------------------------------------------------------------
</TABLE>

Stock Option Plans

The Company has two stock option plans, both of which were approved by the
shareholders, which authorize the granting of options to officers and certain
key employees to purchase the Company's common stock at a price equal to the
market price on the date of grant.  Options become exercisable in annual
installments of 25% of the amount granted per optionee one year after the date
of grant and expire five years after the date of grant. Employees may exchange
Company stock as payment when exercising their options, and such stock used as
payment becomes treasury stock. Also, the Company may issue stock from treasury
when employees exercise these options.

Federal Paper Board Company, Inc. 1994 Annual Report     Page 36
<PAGE>   24
Federal Paper Board Company, Inc.



     The Company adopted stock option plans in 1989 and 1992 each of which
authorized the granting of 1.5 million shares of common stock.  The combined
activity of both plans is presented below:

<TABLE>
<CAPTION>
                                                                                 
---------------------------------------------------------------------------------
                                                     Shares Under     Price Range
                                                           Option       Per Share
---------------------------------------------------------------------------------
<S>                                                  <C>             <C>
Outstanding December 28,1991                           1,781,204     $15.00-28.50
  Granted                                              1,010,800      25.50-30.25
  Exercised                                             (314,979)     15.00-24.63
  Expired or cancelled                                   (65,625)     15.00-30.25
---------------------------------------------------------------------------------
Outstanding January 2,1993                             2,411,400     $15.00-30.25
  Granted                                              2,007,900      20.88-25.50
  Exercised                                             (184,125)     15.00-20.63
  Expired or cancelled                                (1,522,600)     15.00-30.25
---------------------------------------------------------------------------------
Outstanding January 1, 1994                            2,712,575     $15.00-30.25
  Granted                                              1,117,100      28.13-28.25
  Exercised                                             (188,933)     15.00-24.63
  Expired or cancelled                                  (188,675)     15.00-30.25
---------------------------------------------------------------------------------
OUTSTANDING DECEMBER 31, 1994                          3,452,067     $15.00-30.25
EXERCISABLE DECEMBER 31, 1994                            881,524     $15.00-30.25
---------------------------------------------------------------------------------
</TABLE>

At the Annual Meeting of Shareholders to be held in April 1995, the
shareholders will be asked to approve an amendment to the 1992 stock option
plan to increase the shares issuable to 3.0 million shares from 1.5 million
shares. At December 31, 1994 stock options outstanding include 1.1 million
shares which were granted in December 1994, but are contingent upon shareholder
approval.

NOTE 8  SUPPLEMENTAL FINANCIAL INFORMATION

Accounts and Notes Receivable

In 1991, the Company entered into an agreement which allows for the sale,
without recourse, of a fractional interest in a defined pool of trade accounts
receivable. The maximum allowable amount of receivables to be sold, initially
$75 million, was increased to $88 million in 1993 and $105 million in 1994. The
amount outstanding at any measurement date varies based upon the level of
eligible receivables. Under this agreement, $105 million and $88 million were
sold at December 31, 1994 and January 1, 1994, respectively.  The sale is
reflected as a reduction of accounts receivable in the accompanying
Consolidated Balance Sheet and as operating cash flows in the accompanying
Consolidated Statement of Cash Flows. The costs of this program, which were
$4.1 million in 1994, $2.8 million in 1993 and $3.4 million in 1992 are based
upon the Company's debt ratings and the purchaser's level of investment and
borrowing costs and are charged to selling and administrative expenses in the
accompanying Consolidated Statement of Income.

     During 1993, the Company settled a $20.5 million note receivable it had
received in 1991 when three packaging plants were sold to a group of former
employees. In the settlement of this receivable, the Company received cash and
preferred stock. The preferred stock is included in Other Assets in the
accompanying Consolidated Balance Sheet.

Inventories

The Company used the LIFO method of valuing its inventories for approximately
64% of total inventories at December 31, 1994 and 69% of total inventories at
January 1, 1994.

     A reduction of certain inventory quantities resulted in the liquidation of
certain LIFO inventory layers. As a result of these liquidations, net income
and earnings per common share assuming full dilution for the fiscal years 1994,
1993 and 1992 were $1.0 million or $.02 lower, $1.7 million or $.04 higher and
$.4 million or $.01 higher, respectively.

Other-Net

The components of Other - net included in the Consolidated Statement of Income
were (income) or expense as presented below:

<TABLE>
<CAPTION>
                                                                                                    
----------------------------------------------------------------------------------------------------
In thousands                                                 1994            1993               1992
----------------------------------------------------------------------------------------------------
<S>                                                      <C>            <C>                 <C>
Net loss on disposal of property,
  plant and equipment and timber                         $  6,548       $     401            $ 4,778
Interest income                                              (381)         (1,141)            (2,455)
Financial Instruments:
  Foreign currency options                                 18,225           7,220             (2,738)
  Interest rate swaps                                      (2,701)         24,634             (2,520)
  Release from obligation                                 (12,000)             --                 --
Other                                                       6,690           1,442             (3,153)
----------------------------------------------------------------------------------------------------
Total                                                    $ 16,381       $  32,556            $(6,088)
----------------------------------------------------------------------------------------------------
</TABLE>

In fiscal year 1994, the Company was released from its obligation on two
foreign currency forward contracts as part of a settlement with an outside
party.

NOTE 9  INDUSTRY SEGMENT INFORMATION

Information about the Company's operations in different industry segments for
fiscal years 1994, 1993, and 1992 is included on pages 24 and 25 of this Annual
Report.

NOTE 10  FINANCIAL RESULTS BY QUARTER (UNAUDITED)

Selected quarterly financial information for the fiscal years 1994 and 1993 is
included on page 39 of this Annual Report.

                Federal Paper Board Company, Inc. 1994 Annual Report     Page 37
<PAGE>   25
Federal Paper Board Company, Inc.




INDEPENDENT AUDITORS' REPORT

To the Shareholders and Board of Directors
of Federal Paper Board Company, Inc.:

We have audited the accompanying consolidated balance sheets of Federal Paper
Board Company, Inc. and its subsidiary companies as of December 31, 1994 and
January 1, 1994, and the related consolidated statements of income,
shareholders' equity and cash flows for each of the three fiscal years in the
period ended December 31, 1994. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.

     We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and the significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.

     In our opinion, such consolidated financial statements present fairly, in 
all material respects, the financial position of Federal Paper Board Company, 
Inc. and its subsidiary companies at December 31, 1994 and January 1, 1994, 
and the results of their operations and their cash flows for each of the three 
fiscal years in the period ended December 31, 1994 in conformity with generally
accepted accounting principles.

     As discussed in Notes 5 and 6 to the financial statements, the Company
changed its method of accounting for income taxes, effective December 29, 1991,
and its method of accounting for postretirement benefits other than pensions,
effective January 3, 1993.

/s/ DELOITTE & TOUCHE LLP
-------------------------
Parsippany, New Jersey
February 3, 1995



REPORT OF MANAGEMENT

The management of Federal Paper Board Company, Inc. is responsible for the
integrity and fair presentation of the financial statements and other
information contained in this Annual Report. The statements were prepared in
accordance with generally accepted accounting principles and reflect
management's informed judgements and estimates.

     The Company maintains a system of internal control designed to provide
reasonable assurance that assets are safeguarded, transactions are executed and
recorded in accordance with management's authorizations and financial records
are maintained to permit the preparation of reliable financial statements. The
system of internal control is reviewed by the Company's internal audit staff to
confirm that it is adequate and operating effectively.

     As indicated in the independent auditors' report, Deloitte & Touche LLP
performs an independent audit of the consolidated financial statements for the
purpose of forming an opinion as to whether the financial statements are
presented fairly, in all material respects, in conformity with generally
accepted accounting principles. The independent auditors are appointed annually
by the Board of Directors and their appointment is ratified by the
shareholders.

     The Audit Committee of the Board of Directors, composed of four outside
directors, meets periodically with management, internal auditors and
independent auditors to review matters relating to the adequacy of corporate
financial reporting, accounting systems and controls, and the internal and
independent audit functions.

/s/ QUENTIN J. KENNEDY                        /s/ ROGER L. SANDERS, II
-------------------------                     ------------------------
Quentin J. Kennedy                            Roger L. Sanders, II
Executive Vice President,                     Controller
Secretary and Treasurer


Federal Paper Board Company, Inc. 1994 Annual Report     Page 38
<PAGE>   26
Federal Paper Board Company, Inc.

FINANCIAL RESULTS BY QUARTER (unaudited)

<TABLE>
<CAPTION>
                                                                                                                                   
--------------------------------------------------------------------------------------------------------------------------------
In thousands except per share amounts              
Quarter (A)                                                 1st            2nd              3rd             4th        Year (B)
--------------------------------------------------------------------------------------------------------------------------------
<S>                                                    <C>         <C>                 <C>             <C>          <C>
1994                                               
Net Sales                                              $319,454       $347,976         $373,871        $528,276     $1,569,577
Gross Profit                                             40,046         54,653           67,342         117,708        279,749
Net Income (Loss) (C)                                    (3,300)        12,000           15,200          48,100         72,000
--------------------------------------------------------------------------------------------------------------------------------
Earnings (Loss) Per Common Share:                  
Assuming No Dilution                                      $(.11)          $.25             $.32           $1.09          $1.55
Assuming Full Dilution (E)                                 (.11)           .25              .32            1.02           1.52
--------------------------------------------------------------------------------------------------------------------------------
Dividends Declared per Share:                      
     Common Stock                                          $.25           $.25             $.25            $.30          $1.05 
     $1.20 Cumulative Convertible Preferred Stock           .30            .30              .30             .30           1.20
     $2.875 Cumulative Convertible Preferred Stock          .72            .72              .72             .72           2.88
--------------------------------------------------------------------------------------------------------------------------------
Price Range of Common Stock (F)                    
     High                                                $27.25         $24.00           $31.25          $31.50         $31.50
     Low                                                  21.75          20.50            22.63           25.88          20.50
--------------------------------------------------------------------------------------------------------------------------------
1993                                               
Net Sales                                              $319,844       $329,579         $324,025        $412,938     $1,386,386
Gross Profit                                             50,331         51,728           41,841          59,614        203,514 
Net Income (Loss) (D)                                     9,100         (5,200)          (7,200)          9,700          6,400
--------------------------------------------------------------------------------------------------------------------------------
Earnings (Loss) Per Common Share:                  
Assuming No Dilution                                       $.18          $(.16)           $(.21)           $.18          $(.01)
Assuming Full Dilution (E)                                  .18           (.16)            (.21)            .18           (.01)
--------------------------------------------------------------------------------------------------------------------------------
Dividends Declared per Share:                      
     Common Stock                                          $.25           $.25             $.25            $.25          $1.00
     $1.20 Cumulative Convertible Preferred Stock           .30            .30              .30             .30           1.20
     $2.875 Cumulative Convertible Preferred Stock          .72            .72              .72             .72           2.88
--------------------------------------------------------------------------------------------------------------------------------
Price Range of Common Stock (F)                    
     High                                                $27.63         $25.63           $23.50          $23.38         $27.63
     Low                                                  23.13          21.88            21.63           19.50          19.50
--------------------------------------------------------------------------------------------------------------------------------
</TABLE>

(A)  All quarters are comprised of 12 week periods except the fourth quarter
     which is comprised of 16 weeks.  

(B)  May not total due to individual quarterly calculations.

(C)  The first quarter of 1994 includes an after-tax charge of $6.4 million or
     $.15 per fully diluted common share for financial instrument transactions.
     The second quarter of 1994 includes an after-tax charge of $3.1 million or
     $.07 per fully diluted common share for financial instrument transactions
     and a favorable adjustment of $3.2 million or $.07 per fully diluted
     common share associated with the settlement of prior year tax audits. The
     third quarter of 1994 includes an after-tax charge of $2.3 million or $.05
     per fully diluted common share for financial instrument transactions. The 
     fourth quarter of 1994 includes after-tax gains of $10.0 million or $.21 
     per fully diluted common share associated with financial instrument 
     transactions including the release from certain financial instrument 
     obligations and $6.0 million for the cumulative recalculation of the 
     deferred tax liability due to a change in the Company's overall effective
     state tax rate.

(D)  The second quarter of 1993 includes an after-tax charge of $15.3 million
     or $.37 per fully diluted common share for financial instrument
     transactions. The third quarter of 1993 includes a charge of $9.2 million
     for the cumulative recalculation of the deferred tax liability reflecting
     the increase in the federal statutory tax rate.

(E)  Earnings per common share assuming full dilution is based on the weighted
     average number of common shares outstanding during the year, including the
     dilutive effects of stock options and conversion of the Company's
     preferred stocks.

(F)  The Company's common stock is traded on the New York Stock Exchange. Data
     for the Company's $1.20 convertible preferred stock and Class A
     convertible preferred stock, also traded on the New York Stock Exchange,
     is not presented since they are preferred stock issues. At December 31,
     1994 there were 5,400 holders of common stock and 902 holders of
     convertible preferred stocks.


                Federal Paper Board Company, Inc. 1994 Annual Report     Page 39
<PAGE>   27
Federal Paper Board Company, Inc.

SELECTED FINANCIAL DATA

<TABLE>
<CAPTION>
                                                                                                                             
-----------------------------------------------------------------------------------------------------------------------
In millions except per share amounts                     
For Fiscal Year (A)                                                 1994        1993       1992       1991         1990
-----------------------------------------------------------------------------------------------------------------------
<S>                                                            <C>         <C>        <C>        <C>           <C>
OPERATING RESULTS                                        
Net Sales                                                       $1,569.6    $1,386.4   $1,460.8   $1,435.0      $1,374.1
Income before Taxes and Cumulative                       
  Effect of Accounting Change                                      100.9        26.3      135.7      144.2         202.2
Income before Cumulative Effect                          
  of Accounting Change                                              72.0         6.4       82.6       82.4         118.2
Cumulative Effect of Accounting Change                                --          --        9.0         --            --
------------------------------------------------------------------------------------------------------------------------
Net Income                                                          72.0         6.4       91.6       82.4         118.2
------------------------------------------------------------------------------------------------------------------------
Earnings (Loss) per Common Share:                        
Assuming No Dilution:                                    
  Income (Loss) before Cumulative Effect                 
    of Accounting Change                                            1.55        (.01)      1.82       1.83          2.74
  Cumulative Effect of Accounting Change                              --          --        .22         --            --
------------------------------------------------------------------------------------------------------------------------
  Net Income (Loss)                                                 1.55        (.01)      2.04       1.83          2.74
------------------------------------------------------------------------------------------------------------------------
Assuming Full Dilution:                                  
  Income (Loss) before Cumulative Effect                 
    of Accounting Change                                            1.52        (.01)      1.77       1.77          2.58
  Cumulative Effect of Accounting Change                              --          --        .19         --            --
------------------------------------------------------------------------------------------------------------------------
  Net Income (Loss)                                                 1.52        (.01)      1.96       1.77          2.58
------------------------------------------------------------------------------------------------------------------------
FINANCIAL RATIOS                                         
Total Debt as a Percentage of Total Capitalization                  52.6%       54.2%      53.5%      54.8%         56.1%
Return on Shareholders' Equity                                       8.0%        0.7%       9.8%       9.1%         13.9%
------------------------------------------------------------------------------------------------------------------------
FINANCIAL POSITION                                       
Property, Plant and Equipment - Net                             $1,897.6    $1,896.6   $1,878.4   $1,828.8      $1,756.5
Timber and Timberlands                                             188.9       189.7      191.8      188.0         183.2
Total Assets                                                     2,609.6     2,561.9    2,573.5    2,492.7       2,447.8
Long-Term Debt                                                     921.2       973.8    1,029.9    1,076.9       1,092.4
Deferred Tax Liability                                             353.6       342.8      322.4      237.5         208.0
Shareholders' Equity                                               918.2       892.3      940.4      921.2         882.9
------------------------------------------------------------------------------------------------------------------------
ADDITIONAL DATA                                          
Capital Expenditures                                            $  139.1    $  161.2   $  149.1   $  227.4      $  509.3 
Depreciation, Amortization and Cost of Timber Harvested            146.4       144.1      146.6      122.7          88.4
Dividends Declared per Common Share                                 1.05        1.00       1.00       1.00          1.00
Book Value per Share - Assuming No Dilution                        19.01       18.45      19.68      19.17         18.46
Book Value per Share - Assuming Full Dilution                      19.37       19.11      20.11      19.79         19.26
------------------------------------------------------------------------------------------------------------------------
Common Shares Outstanding at Year-End (in thousands)              42,573      42,147     41,952     40,675        40,164
------------------------------------------------------------------------------------------------------------------------
</TABLE>                                                 

(A)  1992 includes 53 weeks all other years presented include 52 weeks.

Total Debt as a Percentage of Total Capitalization - Total debt divided by the
sum of shareholders' equity and total debt.  
Return on Shareholders' Equity - Net income divided by the average of 
shareholders' equity at the beginning and the end of the year.  
Book Value per Common Share - Assuming No Dilution - Shareholders' equity 
available to common shares divided by outstanding shares of common stock.  
Book Value per Common Share - Assuming Full Dilution - Shareholders' equity 
divided by outstanding shares of common stock and common stock equivalents.

Federal Paper Board Company, Inc. 1994 Annual Report     Page 40
<PAGE>   28
                                                                    EXHIBIT 13
                                                                    (Continued)

                                 Edgar Appendix

                        Federal Paper Board Company, Inc.

                         Graphic an Image Material Index

1.       Illustration 1 on page six of this Annual Report depicts an employee of
         the Company making a statement about 1994 operations. This employee is
         quoted as saying, "In 1994, Riegelwood operations turned adversity into
         advantage: Low pulp prices led to cost-cutting efforts that improved
         productivity without sacrificing quality, safety or customer service.
         Key milestones included a $190 million modernization, achieving the
         British Standards Institutes elite "ISO" registration, and record daily
         production." John Cowand, Jr. Manager of Manufacturing Services -
         Riegelwood, NC.
2.       The Paperboard Chart 1 on page six of this Annual Report shows
         paperboard accounting for 41% of sales in 1994.
3.       Photo 1 on page seven of this Annual Report shows an employee standing
         on the pulp dryer at the Riegelwood, NC mill. The caption under the
         picture reads as follows: The Riegelwood mill produced 327,000 tons of
         bleached paperboard and 540,000 tons of market pulp...for a total mill
         production of 867,000 tons in 1994.
4.       Illustration 2 on page eight of this Annual Report depicts an employee
         of the Company making a statement about 1994 operations. This employee
         is quoted as saying, " Customers have begun to recognize our quality
         leadership, which we achieved while setting new production records. Our
         new manufacturing and quality assurance technology not only results in
         superior bleached board with a better printing surface, it also cuts
         fiber loss, an economic and environmental plus." Curtis Sears,
         Paper Mill Superintendent - Augusta, GA.
5.       The Pulp Chart 2 on page eight of this Annual Report shows pulp
         accounting for 12% of sales in 1994.
6.       Photo 2 on page nine of this Annual Report shows an employee standing
         near a paperboard machine at the Augusta, GA mill. The caption under
         the picture reads as follows: With the completion of its latest
         expansion, the Augusta, GA bleached paperboard mill will have the
         capacity to produce 600,000 tons of prime paperboard annually.
7.       Illustration 3 on page ten of this Annual Report depicts an employee of
         the Company making a statement about 1994 operations. This employee is
         quoted as saying, "The improved UK economy strengthened our markets
         close to home. Productivity gains set new production records. We also
         updated our warehouse and distribution system, and achieved 20 percent
         overall improvement in labor efficiency while building customer
         satisfaction." Rhoda Littlejohn, Marketing Executive - Inverurie,
         Scotland.
8.       The Paper Chart 3 on page ten of this Annual Report shows paper
         accounting for 9% of sales in 1994.
9.       Photo 3 on page eleven of this Annual Report shows an employee standing
         between rolls of paper at the Inverurie, Scotland mill. The caption
         under the picture reads as follows: The Federal-Tait mill in Inverurie,
         Scotland produces uncoated free-sheet paper for various markets in the
         United Kingdom and the European continent. It has the capacity to
         produce 220,000 tons of paper annually. The Sprague, CT recycled
         paperboard mill has the capacity to produce 200,000 tons of recycled
         paperboard annually.
10.      Illustration 4 on page twelve of this Annual Report depicts an employee
         of the Company making a statement about 1994 operations. This employee
         is quoted as saying, " Our $10 million investment in state-of-the-art
         production equipment boosted yields and enhanced product quality while
         making us one of the low-cost producers in the solid wood industry.
         Customer satisfaction reached an all-time high." Janice Larkins, Office
         Manager - Wood Products.
11.      The Wood Products Chart 4 on page twelve of this Annual Report shows
         wood products accounting for 16% of sales in 1994.
12.      Photo 4 on page thirteen of this Annual Report shows an employee
         standing near dimensional lumber at one of the Company's lumber plants.
         The caption under the picture reads as follows: Federal owns and
         operates five lumber plants in the U.S. These state-of-the-art plants
         produced 618,245,000 board feet of lumber in 1994.
13.      Illustration 5 on page fourteen of this Annual Report depicts an
         employee of the Company making a statement about 1994 operations. This
         employee is quoted as saying, " Our new 500,000 sq. ft. distribution
         facility in Shelbyville, IL. will reduce operating costs while
         improving customer service. Investments in new tooling for larger cups,
         and in technology to ensure quality and reliability are direct
         responses to market needs." Thomas F. Grady, Jr., Vice President, Sales
         - Imperial Bondware Corp.

<PAGE>   29
                                                                    EXHIBIT 13
                                                                    (Continued)

14.      The Converting Operations Chart 5 on page fourteen of this Annual
         Report shows converting operations accounting for 22% of sales in 1994.
         
15.      Photo 5 on page fifteen of this Annual Report shows an employee
         standing near printed rolls of paperboard at one of the Company's cup
         plants. The caption under the picture reads as follows: Imperial
         Bondware is an industry leader in the production of paper cups and tubs
         for the foodservice and theatre industries. 1994 production equaled
         8,750,000 thousand cups.

16.      Illustration 6 on page sixteen of this Annual Report depicts an
         employee of the Company making a statement about 1994 operations. This
         employee is quoted as saying, " In a difficult year, we finished ahead
         of 1993 by meeting customer needs. We broadened our product range,
         while we cut costs, boosted morale and improved quality. Following a
         rigorous audit, our Durham plant's largest customer quality-certified
         us - a status of which we are justly proud." John E. Abodeely, Vice
         President & General Manager - Packaging Operations.



<PAGE>   1

                                                                     EXHIBIT 21

                        FEDERAL PAPER BOARD COMPANY, INC.
                           Subsidiaries of the Company

The following are the subsidiary companies of the Company as of February 25,
1995, all of which are 100% owned:

<TABLE>
<CAPTION>
                                                        Jurisdiction of Incorporation
                                                                or Organization
                                                        -----------------------------
<S>                                                     <C>
Continental Bleached Leasing Corp.                                Delaware
Federal Air, Inc.                                                 Delaware
Federal Paper Board Distribution Centers, Inc.                    Delaware
Federal Paper Board Export, Inc.                                  Virgin Islands
Federal Paper Board (India), Inc.                                 Delaware
Federal Paper Board Marketing, Inc.                               Delaware
Federal International Japan, Inc.                                 Delaware
Federal International, Inc.                                       Delaware
Fedwill Realty, Inc.                                              Delaware
FPB Leasing Corporation                                           Delaware
FPB Property Holdings, Inc.                                       Delaware
FPB Realty, Inc.                                                  Delaware
Henton Realty, Inc.                                               Delaware
Imperial Bondware Corp.                                           Ohio
Thomas Tait & Sons, Ltd.                                          United Kingdom
Toga Realty, Inc.                                                 Delaware
</TABLE>

                                       

<PAGE>   1

                                                                    EXHIBIT 23

INDEPENDENT AUDITORS' CONSENT




We consent to the incorporation by reference in Registration Statements of
Federal Paper Board Company, Inc. and its subsidiary companies on Form S-3
(Registration Nos. 33-48063, 33-39748 and Post-Effective Amendment No. 1 to
Registration Statement No. 33-39748) and Form S-8 (Registration Nos. 33-64258,
33-64256, 33-48654, 33-34440 and Post-Effective Amendment No. 7 to Registration
Statement No. 2-56623) of our reports dated February 3, 1995 (which express an
unqualified opinion and include an explanatory paragraph relating to changes in
the method of accounting for income taxes and in the method of accounting for
postretirement benefits other than pensions) appearing in and incorporated by
reference in the Annual Report on Form 10-K of Federal Paper Board Company, Inc.
for the fiscal year ended December 31, 1994.




/s/ DELOITTE & TOUCHE  LLP
--------------------------
    Deloitte & Touche LLP
    Parsippany, New Jersey
    March 27, 1995


                                       

<PAGE>   1

                                                                     EXHIBIT 24

                        FEDERAL PAPER BOARD COMPANY, INC.
                                POWER OF ATTORNEY
                                    FORM 10-K





KNOW ALL MEN BY THESE PRESENTS, that the person whose signature appears below
constitutes and appoints QUENTIN J. KENNEDY AND JOHN T. FLYNN, JR., his true and
lawful attorneys-in-fact, with full power to act without the other and with full
power of substitution and resubstitution, to sign in the name of such person the
Annual Report of FEDERAL PAPER BOARD COMPANY, INC., on Form 10-K for the fiscal
year ended December 31, 1994, and to file the same, with all exhibits and other
documents thereto and other documents therewith, with the Securities and
Exchange Commission.




Dated: March 10, 1995
                                             /s/ ROBERT D. BALDWIN
                                             ---------------------
                                                 Robert D. Baldwin

<PAGE>   2

                                                                    EXHIBIT 24
                                                                    (Continued)

                        FEDERAL PAPER BOARD COMPANY, INC.
                                POWER OF ATTORNEY
                                    FORM 10-K




KNOW ALL MEN BY THESE PRESENTS, that the person whose signature appears below
constitutes and appoints QUENTIN J. KENNEDY AND JOHN T. FLYNN, JR., his true and
lawful attorneys-in-fact, with full power to act without the other and with full
power of substitution and resubstitution, to sign in the name of such person the
Annual Report of FEDERAL PAPER BOARD COMPANY, INC., on Form 10-K for the fiscal
year ended December 31, 1994, and to file the same, with all exhibits and other
documents thereto and other documents therewith, with the Securities and
Exchange Commission.




Dated: March 15, 1995

                                             /s/ THOMAS L. CASSIDY
                                             ---------------------
                                                 Thomas L. Cassidy

<PAGE>   3

                                                                     EXHIBIT 24
                                                                     (Continued)

                        FEDERAL PAPER BOARD COMPANY, INC.
                                POWER OF ATTORNEY
                                    FORM 10-K




KNOW ALL MEN BY THESE PRESENTS, that the person whose signature appears below
constitutes and appoints QUENTIN J. KENNEDY AND JOHN T. FLYNN, JR., his true and
lawful attorneys-in-fact, with full power to act without the other and with full
power of substitution and resubstitution, to sign in the name of such person the
Annual Report of FEDERAL PAPER BOARD COMPANY, INC., on Form 10-K for the fiscal
year ended December 31, 1994, and to file the same, with all exhibits and other
documents thereto and other documents therewith, with the Securities and
Exchange Commission.




Dated: March 14, 1995

                                             /s/ W. RAN CLERIHUE
                                             ------------------
                                                 W. Ran Clerihue

<PAGE>   4

                                                                    EXHIBIT 24
                                                                    (Continued)

                        FEDERAL PAPER BOARD COMPANY, INC.
                                POWER OF ATTORNEY
                                    FORM 10-K




KNOW ALL MEN BY THESE PRESENTS, that the person whose signature appears below
constitutes and appoints QUENTIN J. KENNEDY AND JOHN T. FLYNN, JR., his true and
lawful attorneys-in-fact, with full power to act without the other and with full
power of substitution and resubstitution, to sign in the name of such person the
Annual Report of FEDERAL PAPER BOARD COMPANY, INC., on Form 10-K for the fiscal
year ended December 31, 1994, and to file the same, with all exhibits and other
documents thereto and other documents therewith, with the Securities and
Exchange Commission.




Dated: March 17, 1995

                                             /s/ JAMES T. FLYNN
                                             ------------------
                                                 James T. Flynn

<PAGE>   5

                                                                    EXHIBIT 24
                                                                    (Continued)

                        FEDERAL PAPER BOARD COMPANY, INC.
                                POWER OF ATTORNEY
                                    FORM 10-K




KNOW ALL MEN BY THESE PRESENTS, that the person whose signature appears below
constitutes and appoints QUENTIN J. KENNEDY AND JOHN T. FLYNN, JR., his true and
lawful attorneys-in-fact, with full power to act without the other and with full
power of substitution and resubstitution, to sign in the name of such person the
Annual Report of FEDERAL PAPER BOARD COMPANY, INC., on Form 10-K for the fiscal
year ended December 31, 1994, and to file the same, with all exhibits and other
documents thereto and other documents therewith, with the Securities and
Exchange Commission.




Dated: March 10, 1995

                                             /s/ W. MARK MASSEY, JR.
                                             -----------------------
                                                 W. Mark Massey, Jr.

<PAGE>   6

                                                                    EXHIBIT 24
                                                                    (Continued)

                        FEDERAL PAPER BOARD COMPANY, INC.
                                POWER OF ATTORNEY
                                    FORM 10-K




KNOW ALL MEN BY THESE PRESENTS, that the person whose signature appears below
constitutes and appoints QUENTIN J. KENNEDY AND JOHN T. FLYNN, JR., his true and
lawful attorneys-in-fact, with full power to act without the other and with full
power of substitution and resubstitution, to sign in the name of such person the
Annual Report of FEDERAL PAPER BOARD COMPANY, INC., on Form 10-K for the fiscal
year ended December 31, 1994, and to file the same, with all exhibits and other
documents thereto and other documents therewith, with the Securities and
Exchange Commission.




Dated: March 14, 1995

                                             /s/ EDMUND J. KELLY
                                             -------------------
                                                 Edmund J. Kelly

<PAGE>   7

                                                                    EXHIBIT 24
                                                                    (Continued)

                        FEDERAL PAPER BOARD COMPANY, INC.
                                POWER OF ATTORNEY
                                    FORM 10-K




KNOW ALL MEN BY THESE PRESENTS, that the person whose signature appears below
constitutes and appoints QUENTIN J. KENNEDY AND JOHN T. FLYNN, JR., his true and
lawful attorneys-in-fact, with full power to act without the other and with full
power of substitution and resubstitution, to sign in the name of such person the
Annual Report of FEDERAL PAPER BOARD COMPANY, INC., on Form 10-K for the fiscal
year ended December 31, 1994, and to file the same, with all exhibits and other
documents thereto and other documents therewith, with the Securities and
Exchange Commission.




Dated: March 17, 1995

                                        /s/ JOHN L. KELSEY
                                        ------------------
                                            John L. Kelsey


<TABLE> <S> <C>

<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S 1994 ANNUAL REPORT TO SHAREHOLDERS.
</LEGEND>
<MULTIPLIER> 1,000
       
<S>                             <C>
<PERIOD-TYPE>                   YEAR
<FISCAL-YEAR-END>                          DEC-31-1994
<PERIOD-START>                             JAN-02-1994
<PERIOD-END>                               DEC-31-1994
<CASH>                                             293
<SECURITIES>                                         0
<RECEIVABLES>                                   75,374
<ALLOWANCES>                                     1,518
<INVENTORY>                                    230,547
<CURRENT-ASSETS>                               357,241
<PP&E>                                       2,794,716
<DEPRECIATION>                                 897,077
<TOTAL-ASSETS>                               2,609,649
<CURRENT-LIABILITIES>                          337,755
<BONDS>                                        921,227
<COMMON>                                       213,094
                                0
                                      2,210
<OTHER-SE>                                     702,888
<TOTAL-LIABILITY-AND-EQUITY>                 2,609,649
<SALES>                                      1,569,577
<TOTAL-REVENUES>                             1,569,577
<CGS>                                        1,143,382
<TOTAL-COSTS>                                1,364,015
<OTHER-EXPENSES>                                16,381
<LOSS-PROVISION>                                     0
<INTEREST-EXPENSE>                              88,281
<INCOME-PRETAX>                                100,900
<INCOME-TAX>                                    28,900
<INCOME-CONTINUING>                             72,000
<DISCONTINUED>                                       0
<EXTRAORDINARY>                                      0
<CHANGES>                                            0
<NET-INCOME>                                    72,000
<EPS-PRIMARY>                                        0
<EPS-DILUTED>                                     1.52
        

</TABLE>


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