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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
(Mark One)
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 28, 1997
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission file number: 33-93494
CROWN PAPER CO.
(Exact name of registrant as specified in its charter)
VIRGINIA 54-1752385
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(State of incorporation) (I.R.S. Employer Identification No.)
300 LAKESIDE DRIVE, OAKLAND, CALIFORNIA 94612-3592
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (510) 874-3400
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [ 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 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. [ X ] Not Applicable
All of the outstanding shares of the registrant's capital stock are owned
by Crown Vantage Inc.
As of March 20, 1998, 1 (one) share of Common Stock of the registrant was
outstanding.
The registrant meets the conditions set forth in General Instruction J(1)
(a) and (b) of Form 10-K and is therefore filing this form with the reduced
disclosure format.
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(THIS PAGE INTENTIONALLY LEFT BLANK)
2
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PART 1
ITEM 1. BUSINESS
GENERAL
Crown Paper Co. and subsidiaries (the "Company" or "Crown Paper Co.") is a
wholly-owned subnsidiary of Crown Vantage, Inc. (the "Parent" or "Crown
Vantage"). The Parent became an independent company after the Board of
Directors of James River Corporation of Virginia ("James River"), now known as
Fort James Corporation, approved the spin-off of assets, liabilities and
operations which comprised a substantial part of James River's Communication
Papers Business and the paper-based part of its Food and Consumer Packaging
Business (collectively the "Predecessor Business"). As of the close of business
on August 25, 1995, James River distributed to its common shareholders all of
the outstanding shares of the Parent (the "Distribution"). The Distribution was
made in the form of a tax-free dividend on the basis of one share of the
Parent's common stock for every ten shares of James River common stock. A total
of 8,446,362 shares of the Parent's common stock was issued and began trading on
NASDAQ on August 28, 1995.
James River transferred to the Company certain assets of the Predecessor
Business and the Company assumed certain related liabilities from James River.
In addition, the Company received $250 million in cash through a public offering
of Senior Subordinated Notes and $253 million from initial borrowings under
credit facilities with certain banks (collectively, the "Financing"). The
proceeds from the Financing after payment of expenses and retention of $1.2
million cash ($485 million) were paid to James River together with $100 million
Senior Pay-in-Kind Notes issued by the Parent, as a return of James River's
capital investment. The Distribution, transfer of assets and liabilities,
Financing, and return of capital are collectively referred to as the "Spin-Off."
Also in connection with the Spin-Off, the Company entered into a Contribution
Agreement and certain transition agreements with James River. The Company has
relied on such agreements for certain services, and the supply of a portion of
the products necessary to conduct the Company's manufacturing business,
generally over terms of one to three years from the Spin-Off, at agreed to
prices consistent with market terms.
On March 18, 1998, Crown Vantage entered into an agreement with Fort James
Corporation ("Fort James") related to Crown Vantage's 11.45% Senior
Pay-in-Kind Notes ("PIK Notes") which are held by Fort James. The agreement
provides for the delivery to Crown Vantage and Crown Paper Co. of PIK Notes
totaling $25 million and $8 million, respectively, in exchange for the mutual
release from a variety of claims that have arisen from prior transactions
between Fort James and Crown Vantage. In addition, Crown Vantage was granted
an option to purchase the remaining PIK Notes and accrued interest (the notes
having a face amount totaling $100 million at March 18, 1998) for a fixed
price of $80 million in cash. The option must be exercised by September 30,
1998 and funding of the purchase price must occur on or before October 31,
1998. Pursuant to the agreement, funds would be obtained through an equity
offering, asset sales, or a combination thereof. Both the delivery of the $33
million in PIK Notes and funding of the option are subject to consent by the
Company's bondholders and bank group.
The Company is a major producer of value-added paper products for a diverse
array of end-uses. The Company's two business sectors and corresponding
principal product categories are (i) printing and publishing papers, for
applications such as special interest magazines, books, custom business forms
and corporate communications and promotions (E.G. annual reports and
stationery); and (ii) specialty papers, principally for food and retail
packaging applications and conversion into such items as coffee filters, cups
and plates. In total, the Company operates 10 facilities using 31 diverse paper
machines.
The Company believes that its broad manufacturing capabilities allow it to offer
a wider range of products and basis weights than most of its North American
competitors. The Company focuses its operations on the higher value-added
market niches of the sectors in which it competes. Papers produced for such
niches generally command higher prices and tend to be less cyclical than
commodity grades because they are used for more specialized applications and
because there are fewer substitutes for these products.
The Company has implemented a business strategy that builds on Crown Paper Co.'s
unique strengths and technical expertise and that further differentiates it from
other paper producers. The Company's objectives are to enhance its position as
a leading supplier of value-added paper products to target markets, and to
continue to pursue cost reductions and manufacturing efficiencies to maximize
profitability. The Company's business strategy to accomplish such objectives
is to: i) accelerate the introduction of additional value-added papers into the
Company's mix; ii) obtain market share with innovative new products; iii) add
value through high levels of customer service and product quality; and iv)
reduce costs and improve productivity.
3
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BUSINESS SECTORS AND END USE MARKETS
PRINTING AND PUBLISHING PAPERS
The Company's coated groundwood papers are produced at its fully integrated
(i.e. pulp is manufactured on site) facility in St. Francisville, Louisiana.
These papers are produced and sold for end-use products such as specialty
magazines, catalogs, direct mail, and advertising supplements. The strength of
the coated groundwood market is largely driven by the health of the retail
market and is correlated with advertising expenditures.
Uncoated printing and publishing papers are manufactured at the Company's fully
integrated facilities in Berlin and Gorham, New Hampshire. Customer end-use
products within the uncoated printing and publishing paper category include
stationery, custom business forms, books and manuals, annual reports and other
forms of corporate communications. The Company also produces uncoated printing
and publishing papers at its non-integrated facilities in Adams, Massachusetts;
Ypsilanti, Michigan; and Dalmore and Guardbridge, Scotland. Demand for uncoated
printing and publishing papers is correlated with economic cycles, since these
papers are predominantly used in business related activities and commercial
printing. However, the Company's specialty niches within the uncoated printing
and publishing paper category make the Company less susceptible, though not
immune, to economic cycles.
SPECIALTY PAPERS
Crown Paper Co. manufactures and sells specialty papers for use in food and
retail packaging. The Company's products, which are concentrated in niche
markets for coated and uncoated papers within the specialty packaging industry,
are used by its customers to produce items such as multi-wall bags for pet
foods, food service papers, labels and cereal liners. The Company's specialty
packaging business is principally driven by consumer spending trends and has
historically exhibited less cyclicality to general economic trends as compared
to producers of papers for other end-use products. The Company's specialty
packaging papers operations purchase all of their pulp and are therefore more
susceptible to pulp price fluctuations. Operating results benefit during
periods of decreasing pulp prices and suffer during periods of increasing pulp
prices. The Company's specialty papers are produced at non-integrated
facilities in Port Huron and Parchment, Michigan and Milford, New Jersey.
Crown Paper Co. manufactures specialty converting papers at its fully integrated
facility in St. Francisville, Louisiana. In order to meet customer-specific
requirements, the Company imparts technical qualities to these value-added
papers for conversion by its customers into end-uses such as paper cups and
plates, coffee filters, and bacon board. Converting papers also includes the
Company's toweling operations in Berlin-Gorham, New Hampshire as well as the
Company's cast-coating operations in Richmond, Virginia. The Richmond facility
provides cast-coating capabilities for a premium grade of coated paperboard for
packaging and printing applications.
During the fourth quarter of 1997 the Company closed its Newark, Delaware
facility and is seeking a buyer for this site. Newark produced approximately
2,200 tons of paper during 1997. The Company shifted most of the Newark mill's
production to its other mills. The Company recorded a charge related to the
closure of the mill in the fourth quarter of 1997 of $3.3 million primarily for
closure activities, fixed asset write downs and severance costs.
MARKET PULP SALES AND PURCHASES
The Berlin-Gorham, New Hampshire facility sold approximately 57,000 and 43,000
tons of pulp in 1997 and 1996, respectively. The Company also purchases pulp to
supply non-integrated mills, to obtain species not produced by the Company, and
to minimize transportation costs. In 1997 and 1996, the Company purchased
approximately 252,000 and 261,000 tons of pulp, respectively.
4
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ITEM 2. PROPERTIES
The Company owns and operates three pulp mills, seven paper mills and one
cast-coating facility in the United States and two paper mills in Scotland. The
following table summarizes the location, 1997 volumes and pertinent production
characteristics of each facility. The Company's bank credit facility is
collateralized by substantially all of the Company's assets, including the
facilities listed below.
<TABLE>
<CAPTION>
COATED AND UNCOATED
COATED UNCOATED FREESHEET PAPERS
GROUNDWOOD FREESHEET -----------------------------------------------
PRINTING AND PRINTING AND SPECIALTY SPECIALTY
PUBLISHING PUBLISHING PACKAGING CONVERTING
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<S> <C> <C> <C> <C>
FACILITIES: St. Francisville, LA Berlin and Port Huron, MI St. Francisville, LA
Gorham, NH Parchment, MI Richmond, VA (b)
Guardbridge, Scotland Milford, NJ Berlin and
Dalmore, Scotland Gorham, NH (c)
Adams, MA
Ypsilanti, MI
1997 SALES
VOLUMES: 280,000 tons 239,000 tons (a), (d) 238,000 tons 168,000 tons (c)
PRIMARY No. 4, No. 5 medium to heavy Custom forms papers, Grease resistant paper, Coffee filters, cup and
PRODUCTION: weight grades for magazines text, cover and writing labels, multi-wall bags plate stock and cast-
and catalogs grades, security papers and other packaging and coated board
and specialty specialty applications
applications
SPECIAL Coating, calendering Calendering, watermarks, Coating, waxing, Calendering, cast-
PRODUCTION sheeting, embossing calendering, chemical coating, sheeting
CAPABILITIES: treatment
PAPER 2 paper machines with on- 12 paper machines, 14 paper machines, 3 3 paper machines, 4 cast-
MACHINES machine coating, 4 off-machine assorted sheeters, with on-machine coating coating machines, 4
AND RELATED super calenders rewinders and embossers and hot/soft sheeters
EQUIPMENT: calendering, 3 with on-
machine waxers, 3 off-
machine coaters, 6 off-
machine waxers
</TABLE>
(a) Does not include 57,000 tons of market pulp sold by the Company's
Berlin-Gorham facility in 1997.
(b) The Richmond facility does not produce paper but provides cast-coating
capabilities for the production of coated paperboard.
(c) Includes 34,000 tons of toweling manufactured and sold by the
Company's Berlin-Gorham facility in 1997.
(a) Includes approximately 2,200 tons sold by the Newark, Delaware
facility that was closed during the fourth quarter of 1997.
5
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ITEM 3. LEGAL PROCEEDINGS
In 1994, the Company filed a suit against the City of Berlin, New Hampshire
relating to an approximately $107 million increase from 1992 to 1994 of the
City's assessed value of the Berlin portion of the Berlin-Gorham facility. The
increased assessed value resulted in an annual increase in property taxes of
approximately $2.5 million. The Company is seeking abatement of the tax
increase on the grounds that the City's valuations are excessive, and that New
Hampshire law exempts certain income producing equipment, such as the chemical
recovery unit, from property taxation. In April 1996, the trial court affirmed
most of the City's positions, and the Company appealed that decision to the New
Hampshire Supreme Court. On December 31, 1997, the Supreme Court released an
opinion which, in part, resulted in a remand of various issues back to the trial
court. The trial court has set a rehearing date in April 1998. Due to
uncertainties surrounding the remand of issues to the trial court, it is not
possible to determine the ultimate outcome of the suit. However, based on facts
and circumstances currently known to the Company as well as an analysis of the
Supreme Court opinion, management does not believe that the final outcome will
adversely affect the Company's financial position or results of operations.
The Company has been identified as a potentially responsible party ("PRP")
under the Comprehensive Environmental Response, Compensation and Liability
Act or similar federal and state laws regarding past disposal of wastes at 20
sites in the United States. The Company has previously settled its
remediation obligation at 11 sites. At 8 other sites, the Company is one of
many potentially responsible parties and its alleged contribution to the site
and remediation obligation is not considered significant. At one other site,
remedial investigation is under way and a loss estimate for the potential
remediation effort is not yet possible. However, the Company's accrual for
the remediation investigation effort was $.6 million and $.7 million at
December 28, 1997 and December 29, 1996, respectively. The liabilities can
change substantially due to such factors as the solvency of other potentially
responsible parties, the Company's share of the responsibility, additional
information as to the nature or extent of contamination, methods of
remediation required, and other actions by governmental agencies or private
parties. While it is not feasible to predict the outcome of all
environmental liabilities, based on its most recent review, management is of
the opinion that its share of the costs of investigation and remediation of
the sites of which it is currently aware will not have a material adverse
effect upon the consolidated financial condition of the Company. However,
because of uncertainties associated with remediation activities, regulations,
technologies, and the allocation of costs among various other parties, actual
costs to be incurred at identified sites may vary from estimates. Therefore
management is unable to determine if the ultimate disposition of all known
environmental liabilities will have a material adverse effect on the results
of operations in a given fiscal quarter or year. In addition, as is the case
with most manufacturing companies and many other companies, there can be no
assurance that the Company will not be named as a potentially responsible
party at additional sites in the future or that the costs associated with
such additional sites would not be material.
In addition to the matters described above, the Company is a party to various
legal proceedings generally incidental to its business and is subject to a
variety of environmental protection statutes and regulations. As is the case
with other companies in similar industries, the Company faces exposure from
actual or potential claims and legal proceedings involving environmental
matters. Although the ultimate disposition of legal proceedings cannot be
predicted with certainty, it is the opinion of the Company's management that
the outcome of any claim that is pending or threatened, either individually
or on a combined basis, will not have a materially adverse effect on the
consolidated financial position of the Company but could materially affect
consolidated results of operations in a given period.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable
6
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Not applicable
ITEM 6. SELECTED FINANCIAL DATA
Omitted in accordance with General Instruction J.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Omitted in accordance with General Instruction J. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations" preceeding the
Consolidated Financial Statement (Item 8).
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The response to this item is submitted as a separate section of the report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES
Information concerning the Company's change in accountants is included in the
Company's current reports on Form 8-K and Form 8-K/A dated June 25, 1995 and
June 28, 1995, respectively, which are incorporated herein by reference.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Omitted in accordance with General Instruction J.
ITEM 11. EXECUTIVE COMPENSATION
Omitted in accordance with General Instruction J.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Omitted in accordance with General Instruction J.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Omitted in accordance with General Instruction J.
7
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PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a)(1) FINANCIAL STATEMENTS. The report of independent auditors as of December
28, 1997 and December 29, 1996 and for the two years then ended and the
following consolidated financial statements of the Company are included in this
Form 10-K at the page numbers indicated below. The report of independent
accountants for the year ended December 31, 1995 is included herein as
Exhibit 23.
<TABLE>
<CAPTION>
Page in
Financial
Statements
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<S> <C>
Report of Independent Auditors .......................................... 5
Consolidated Statements of Operations- Years Ended December 28, 1997,
December 29, 1996 and December 31, 1995 ............................... 6
Consolidated Balance Sheets - December 28, 1997 and December 29, 1996 ... 7
Consolidated Statements of Cash Flows - Years Ended December 28,
1997, December 29, 1996 and December 31, 1995.......................... 8
Consolidated Statement of Changes in Equity- Years Ended December 28,
1997, December 29, 1996, and December 31, 1995 ....................... 9
Notes to Consolidated Financial Statements .............................. 10
</TABLE>
(a)(2) FINANCIAL STATEMENT SCHEDULE.
All schedules are omitted because of the absence of the conditions under which
they are required or because the required information is set forth in the
consolidated financial statements and notes thereto.
8
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(a)(3) EXHIBITS
All exhibits, including those incorporated by reference:
<TABLE>
<CAPTION>
Exhibit
No. Description
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<S> <C>
2.1(1) Form of Contribution Agreement among Crown Paper Co. ("Crown Paper"),
Crown Vantage, Inc. ("Crown Vantage"), James River Corporation of
Virginia ("JRC") and James River Paper Company, Inc. ("James River
Paper")
3.1(1) Articles of Incorporation of Crown Vantage
3.2(4) Articles of Amendment to the Articles of Incorporation dated May 13,
1996 and July 31, 1996
3.3(5) Restated Bylaws of Crown Vantage
3.4(1) Articles of Designation for Preferred Shares, Series A
4.1(1) Form of Rights Agreement between Crown Vantage and Norwest Bank
Minnesota, N.A., as Rights Agent
10.1(1) Form of Tax Sharing Agreement among JRC, James River Paper, Crown
Vantage and Crown Paper
10.2(1) Form of Berlin Product Supply Agreement between James River Paper and
Crown Paper
10.3(1) Form of Pulp Purchase Agreement between James River Paper and Crown
Paper
10.4(1) Form of Pulp Sales Transition Agreement between James River Paper and
Crown Paper
10.5(1) Form of Transition Services Agreement between James River Paper and
Crown Paper
10.6(1) Form of Technical Services Agreement between James River Paper and
Crown Paper
10.7(1) Form of Information Technology Services Agreement between James River
Paper and Crown Paper
10.8(1) Form of Environmental Services Agreement between James River Paper and
Crown Paper
10.9(1) Form of Offices Sharing Agreement between James River Paper and Crown
Paper
10.10(1) Form of Pulp Technology Services Agreement between James River Paper
and Crown Paper
10.11(1) Form of Cottonwood Pedigreed Plant Material Agreement between James
River Paper and Crown Paper
10.12(1) Form of St. Francisville Product Supply Agreement (Consumer Products
Business) between James River Paper and Crown Paper
10.13(1) Form of St. Francisville Product Supply Agreement (Packaging Business)
between James River Paper and Crown Paper
10.14(1) Form of Landfill Agreement between James River Paper and Crown Paper
10.15(1) Form of Allocation Agreement among JRC, James River Paper and Crown
Paper
10.16(1) Form of Packaging Papers Product Supply Agreement between James River
Paper and Crown Paper
10.17(1) Form of Naheola Product Supply Agreement between James River Paper and
Crown Paper
10.18(1) Form of Confidentiality Agreement between JRC and Crown Paper
10.19(1) Form of St. Francisville Wood Chip Supply Agreement between James
River Paper and Crown Paper
10.20(1) Form of St. Francisville Roundwood Supply and Cutting Rights Agreement
between James River Paper and Crown Paper
10.21(1) Form of Northeast Roundwood Supply Agreement between James River Paper
and Crown Paper
10.22(1) Form of Pension Funding Agreement among Crown Paper, Crown Vantage and
James River
10.23(1) Form of Guaranty Support Agreement among Crown Paper, Crown Vantage
and James River
10.24(1) Forms of KVP Parchment Lease and KVP Parchment Services Agreement,
between Crown Paper and James River
10.25(1) Form of Eureka Trademark Agreement
10.26(1) Form of Crown Vantage Stock Option Plan for Outside Directors **
10.27(7) Crown Vantage Inc. Stock Award Plan for Outside Directors (as
amended) **
10.28(7) Second Amendment to the Crown Vantage Inc. Stock Award Plan for
Outside Directors **
10.29(5) Crown Vantage Inc. 1995 Incentive Stock Plan **
10.30(1) Form of Crown Vantage Inc. Stock Plus Employee Stock Ownership Plan
**
10.31(3) Form of Employment Agreement for Ernest S. Leopold dated December 5,
1995 **
10.32(2) Form of Nonstatutory Stock Option with Reload Feature Agreement under
the Registrant's 1995 Omnibus Incentive Stock Plan **
10.33(2) Form of Restricted Stock Award Agreement under the Registrant's 1995
Omnibus Incentive Stock Plan **
10.34(2) Form of Nonstatutory Stock Option Agreement under the Registrant's
1995 Stock Option Plan for Outside Directors **
10.35(2) Form of Restricted Stock Award Agreement under the Registrant's 1995
Stock Award Plan for Outside Directors **
10.36(3) Form of Agreement (Severance) dated December 5, 1995 **
9
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10.37(3) Form of Amendment No. 1 to the Crown Vantage Inc. Stock Plus Employee
Stock Ownership Plan
10.38(1) Indenture between the Bank of New York, as trustee, and the Company,
relating to the Notes
10.39(7) First Supplemental Indenture between the Bank of New York, as trustee,
and the Company, relating to the Notes
10.40(1) Bank Credit Agreement among Morgan Guaranty Trust Company of New York,
as Agent, the Banks named therein, Crown Paper and Crown Vantage
10.41(7) Amendment No. 1 to Credit Agreement
10.42(7) Amendment No. 2 to Credit Agreement
10.43(7) Receivables Purchase Agreement
10.44(7) Purchase and Sale Agreement (relating to Receivables Purchase
Agreement)
10.45(7) Loan Agreement between Business Finance Authority of the State of New
Hampshire and Crown Paper Co.
10.46(7) Refunding Loan Agreement between Business Finance Authority of the
State of New Hampshire and Crown Paper Co.
10.47* Amendment No. 3 to Credit Agreement
10.48* Amendment No. 4 to Credit Agreement
10.49(8) Option and Settlement Agreement Between Fort James Corporation
and Crown Vantage and Crown Paper Co., relating to the PIK Notes
16(6) Letter regarding change in certifying accountant and related
information
23* Report of Coopers & Lybrand L.L.P. on the consolidated financial
statements of the Company as of December 31, 1995 and for the year
then ended.
27* Financial Data Schedule
</TABLE>
____________
(1) Previously filed as exhibits to the Crown Paper Co. Registration Statement
No. 33-93494 on Form S-1 filed with the SEC June 15, 1995 and all
amendments thereto, concerning the offering of the $250,000,000 aggregate
principal amount of Senior Subordinated Notes due 2005 to be issued by
Crown Paper Co.
(2) Previously filed as Exhibits to Crown Vantage Inc. Form 10-Q for the
quarterly period ended September 24, 1995.
(3) Previously filed as Exhibits to Crown Paper Co.'s Annual Report on Form
10-K for the year ended December 31, 1995.
(4) Previously filed as Exhibits to Crown Vantage Inc. Registration Statement
No. 333-09361 on Form S-8 and to Crown Vantage Inc.'s report on Form 10-Q
for the quarter ended June 30, 1996, respectively.
(5) Previously filed as Exhibits to Crown Vantage Inc.'s report on Form 10-Q
for the quarter ended September 29, 1996.
(6) Previously filed in Form 8-K and Form 8-K/A dated June 25, 1996 and
June 28, 1996, respectively.
(7) Previously filed as Exhibits to Crown Paper Co.'s Annual Report on Form
10-K for the year ended December 29, 1996
(8) Previously filed in Form 8-K dated March 25, 1998.
* Included as an exhibit herein.
** Indicates management contract or compensatory plan or arrangement.
(b) REPORTS ON FORM 8-K. No reports on Form 8-K were filed during the quarter
ended December 28, 1997.
(c) EXHIBITS. The response to this portion of Item 14 is submitted as a
separate section of this report.
(d) FINANCIAL STATEMENT SCHEDULES. The response to this portion of Item 14 is
submitted as a separate section of this report.
10
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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.
March 17, 1998 CROWN PAPER CO.
(Registrant)
/s/ R. Neil Stuart /s/ Michael J. Hunter
- ------------------------ -------------------------
R. Neil Stuart, Michael J. Hunter
Senior Vice President, Vice President,
Chief Financial Officer Chief Accounting Officer
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below hereby constitutes and appoints Christopher M. McLain, R. Neil Stuart,
and Michael J. Hunter, and each of them, his or her true and lawful agent, proxy
and attorney-in-fact, with full power of substitution and resubstitution, for
him or her and in his or her name, place and stead, in any and all capacities,
to (i) act on, sign and file with the Securities and Exchange Commission any and
all amendments to this report on Form 10-K together with all schedules and
exhibits thereto, (ii) act on, sign and file such certificates, instruments,
agreements and other documents as may be necessary or appropriate in connection
therewith, and (iii) take any and all actions which may be necessary or
appropriate to be done, as fully for all intents and purposes as he or she might
or could do in person, hereby approving, ratifying and confirming all that such
agent, proxy and attorney-in-fact or any of his or her substitutes may lawfully
do or cause to be done by virtue thereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report
has been signed below by the following persons on behalf of the registrant and
in the capacities indicated on March 17, 1998.
Signature Title
- --------- -----
/s/ George B. James Director
- -----------------------------
George B. James
/s/ Ernest S. Leopold Chairman, Chief Executive Officer
- ----------------------------- and Director
Ernest S. Leopold
/s/ Joseph T. Piemont Director
- -----------------------------
Joseph T. Piemont
/s/ E. Lee Showalter Director
- -----------------------------
E. Lee Showalter
/s/ William D. Walsh Director
- -----------------------------
William D. Walsh
11
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/s/ James S. Watkinson Director
- -----------------------------
James S. Watkinson
/s/ Donna L. Weaver Director
- -----------------------------
Donna L. Weaver
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report
has been signed below by the following persons on behalf of the registrant and
in the capacities indicated on March 17, 1998.
Signature Title
- --------- -----
/s/ R. Neil Stuart Chief Financial Officer
- -----------------------------
R. Neil Stuart
/s/ Michael J. Hunter Chief Accounting Officer
- -----------------------------
Michael J. Hunter
12
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CROWN PAPER CO..
ANNUAL REPORT ON FORM 10-K
ITEM 8 AND ITEM 14 (a)(1)
CONSOLIDATED FINANCIAL STATEMENTS
Year Ended December 28, 1997
13
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ITEM 8 AND 14 (a)(1) FINANCIAL STATEMENTS. The following consolidated financial
statements of Crown Paper Co. and subsidiaries, together with the report of
independent auditors, are included in Items 8 and 14(a)(1).
<TABLE>
<CAPTION>
Page
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<S> <C>
Management's Discussion and Analysis of Financial Condition and Results of Operations ...... 1
Report of Independent Auditors ............................................................. 5
Consolidated Statements of Operations - Years Ended December 28, 1997,
December 29, 1996, and December 31, 1995 .............................................. 6
Consolidated Balance Sheets - December 28, 1997 and December 29, 1996 ...................... 7
Consolidated Statements of Cash Flows - Years Ended December 28, 1997,
December 29, 1996, and December 31, 1995 .............................................. 8
Consolidated Statement of Changes in Equity - Years Ended December 28, 1997,
December 29, 1996, and December 31, 1995 .............................................. 9
Notes to Consolidated Financial Statements ................................................. 10
</TABLE>
14
<PAGE>
Crown Paper Co.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
CORPORATE OVERVIEW
CONSOLIDATED RESULTS OF OPERATIONS --
1997 COMPARED TO 1996
Net Sales: Crown Paper Co.'s (the "Company") net sales decreased
by 3.0% to $897.5 million for the 52-week year ended December 28,
1997 as compared to $925.4 million for the 52-week year ended
December 29, 1996. The decrease in sales is largely due to an
unfavorable price variance of $61.5 million that was partially
offset by a favorable volume variance of $33.6 million for 1997
as compared to 1996. The decrease in sales prices began in early
1996 and prices remained depressed through most of 1997.
Operating Income: Operating income of $14.3 million in 1997
decreased $8.4 million from $22.7 million in 1996. The decrease
in operating income is primarily attributable to the decreased
pricing discussed above and is partially offset by the Company's
cost reduction program, gain on sale of timberlands and increased
volumes in 1997.
Gross margin decreased from 8.1% of net sales in 1996 to 6.7% of
net sales in 1997. The gross margin decrease was due to the
decline in net sales price per ton discussed above, and was
partially offset by a 5% decrease in average cost per ton sold
in 1997 as compared to 1996.
Selling and administrative expenses increased $3.7 million to
$55.9 million in 1997 as compared to $52.2 million in 1996. The
increase is due to higher commissions, higher depreciation on
certain computer systems placed in service during 1997, and
expenses associated with the Company's accounts receivable
securitization which were classified as interest expense in the
first six months of 1996.
Interest Expense: Interest expense increased from $49.9 million
in 1996 to $50.3 million in 1997.
Tax Provision: The income tax benefit in 1997 totaled $12.1
million as compared to $10.1 million in 1996. The effective
income tax rates were 35.0% and 37.9% in 1997 and 1996,
respectively.
1
<PAGE>
Crown Paper Co.
- --------------------------------------------------------------------------------
RESULTS OF OPERATIONS BY BUSINESS SECTOR
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------
NET SALES AND TONNAGE BY SECTOR
---------------------------------------------------------------------------------------------------------
FOR THE YEAR ENDED 1997 1996 1995
---------------------------------------------------------------------------------------------------------
(sales in millions, tons in thousands) TONS SALES Tons Sales Tons Sales
<S> <C> <C> <C> <C> <C> <C>
Printing and Publishing Papers:
Coated groundwood 280 $ 198 258 $ 214 284 $ 263
Uncoated 239 233 240 239 243 274
Specialty Papers:
Food and retail packaging 238 298 239 305 249 346
Converting 168 147 168 152 165 157
Pulp and miscellaneous (a) 57 21 43 15 44 37
---------------------------------------------------------------------------------------------------------
Total Company 982 $ 897 948 $ 925 985 $1,077
---------------------------------------------------------------------------------------------------------
</TABLE>
(a) Represents primarily market sales of pulp to third parties.
Excludes approximately 42,000 tons in 1997, 44,000 tons in
1996, and 38,000 tons in 1995, transferred to other Company
facilities.
<TABLE>
<CAPTION>
OPERATING INCOME (LOSS) BY SECTOR (IN MILLIONS)
-------------------------------------------------------------------------------------------
FOR THE YEAR ENDED 1997 1996 1995
-------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Printing and Publishing Papers $ (4) $ 13 $ 79
Specialty Papers:
Food and retail packaging 7 3 (16)
Converting 9 14 23
Pulp and miscellaneous 2 (7) 14
-------------------------------------------------------------------------------------------
Total operating income $ 14 $ 23 $ 100
-------------------------------------------------------------------------------------------
</TABLE>
PRINTING AND PUBLISHING PAPERS
Within this business sector, the Company produces coated
groundwood and uncoated papers.
The Company's coated groundwood papers are produced and sold for
end-use products such as specialty magazines, catalogs, direct
mail, and advertising supplements. The strength of the coated
groundwood market is largely driven by the strength of the retail
market and is correlated with advertising expenditures.
Softening demand led to decreasing prices in early to mid-1996 as
customers drew down their excess inventories. A temporary
oversupply of inventories at the producer level during the latter
part of 1996 continued to depress pricing throughout the
remainder of 1996 and 1997. Net sales of coated groundwood
printing and publishing papers totaled $198.1 million in 1997 as
compared to $213.6 million in 1996, a 7.3% decrease. The
decrease in net sales is due to a 14.4% decrease in coated
groundwood prices on average in 1997 compared to 1996. This was
partially offset by an increase of 21,600 tons sold in 1997 as
compared to 1996. During the fourth quarter of 1997 a mechanical
failure on the No. 2 paper machine at the St. Francisville,
Louisiana, facility caused a loss in production of approximately
3,000 tons.
Customer end-use products within the uncoated printing and
publishing papers category include stationery, custom business
forms, books and manuals, annual reports and other forms of
corporate communications. Demand for the Company's uncoated
printing and publishing products is correlated with economic
cycles, since these papers are predominantly used in
business-related activities and commercial printing. The
Company's specialty niches within the uncoated printing and
publishing papers category make Crown Paper Co. less susceptible,
though not immune, to economic cycles. Net sales of uncoated
printing and publishing papers in 1997 were $233.0 million as
compared to $239.1 million in 1996, a 2.6% decrease. The
decrease in net sales is primarily a result of a 2.2% decrease in
the average selling price per ton in 1997 as compared to 1996.
Tons sold in 1997 were approximately the same as 1996.
Operating loss from the sale of printing and publishing papers
was $4.0 million in 1997, a $16.5 million decrease from operating
income of $12.5 million in 1996. The decline in operating income
is attributable to the decrease in pricing in both the coated and
uncoated printing and publishing papers sectors. The decrease in
operating income was par-
2
<PAGE>
Crown Paper Co.
tially offset by the portion of the gain from the timberlands
sale attributed to this sector ($8.4 million) and increased
volumes of coated groundwood sold in 1997 compared to 1996.
During the fourth quarter of 1997, the Company closed its Newark,
Delaware, facility and is seeking a buyer for this site. The
Newark facility produced approximately 2,200 tons of paper during
1997. The Company shifted most of the Newark mill's production
to its other mills. The Company recorded a charge related to the
closure of the mill in the fourth quarter of 1997 of $3.3 million
primarily for closure activities, fixed asset write downs and
severance costs.
SPECIALTY PAPERS
Within this sector, the Company produces specialty papers for use
in food and retail packaging and converting end uses.
FOOD AND RETAIL PACKAGING PAPERS
The Company manufactures and sells specialty papers for use in
food and retail packaging. The Company's products, which are
concentrated in niche markets for coated and uncoated papers
within the specialty packaging industry, are used by its
customers to produce items such as multi-wall bags for pet foods,
food service papers, labels and cereal liners. The Company's
specialty packaging papers business is principally driven by
consumer spending trends and has historically exhibited less
cyclicality due to general economic trends as compared to
producers of papers for other end-use products. The Company's
specialty packaging papers operations purchase all of their pulp
and are therefore more susceptible to pulp price fluctuations.
Operating results benefit during periods of decreasing pulp
prices and suffer during periods of increasing pulp prices.
During 1997, the Company's food and retail packaging papers
business generated net sales of $297.9 million as compared to net
sales in 1996 of $304.9 million. The 2.3% decrease in net sales
is primarily due to a 1.9% decrease in average selling price per
ton in 1997 compared to 1996. During 1997, certain lower priced
papers were added to the production mix in order to improve
operating results. This is the primary reason for the decline in
average sales price.
During 1997, the Company's food and retail packaging papers
generated operating profits of $6.8 million as compared to $2.8
million in 1996. The improvement in operating results is
primarily attributed to lower average costs and improved mill
efficiency due to the change in product mix discussed above and
other cost saving initiatives during 1997 as compared to 1996.
Industry pulp prices remained approximately the same in 1997 as
compared to 1996. Improvements in operating results were
partially offset by the price decreases discussed above.
CONVERTING PAPERS
The Company manufactures specialty converting papers at its fully
integrated facility in St. Francisville, Louisiana. In order to
meet customer-specific requirements, the Company imparts
technical qualities to these value-added papers for conversion by
its customers into end-uses such as paper cups and plates, coffee
filters, and bacon board. Converting papers also include the
Company's toweling operations in Berlin-Gorham, New Hampshire, as
well as the Company's cast-coating operations in Richmond,
Virginia. The Richmond facility provides cast-coating
capabilities for a premium grade of coated paperboard for
packaging and printing applications.
Net sales of the Company's specialty converting papers totaled
$147.4 million in 1997, a $5.1 million decrease from net sales of
$152.5 million in 1996. The 3.3% decrease in net sales is due to
a $33 decrease in average sales price per ton in 1997 as compared
to 1996. The decrease in average selling price per ton is the
result of lower tons sold from the Company's cast-coating
operations whose papers generally command premium pricing. Tons
sold for the sector in total remained approximately the same in
1997 as compared to 1996. Operating profits were $8.7 million in
1997, a $5.8 million decrease compared to 1996. The decrease is
reflective of the 3.3% decrease in average net selling prices.
PULP AND MISCELLANEOUS
Net sales of pulp and miscellaneous products increased to $21.1
million in 1997 from $15.2 million in 1996. As discussed above,
industry average selling prices of pulp remained approximately
the same during 1997 as compared to 1996. The Company's average
net selling price per ton for pulp increased by 3.0% during 1997
as compared to 1996. The Company reported operating income of
$2.8 million in 1997 versus operating losses of $7.1 million in
1996. The improvement in operating results is primarily due to
the gain of $5.1 million from the sale of timberlands attributed
to this sector and a 14,700 ton increase in tons sold.
3
<PAGE>
Crown Paper Co.
- --------------------------------------------------------------------------------
OTHER MATTERS
YEAR 2000
The Year 2000 issue, common to most business information and
other computer systems, concerns the inability of information
systems, primarily computer software programs, to properly
recognize and process date-sensitive information as the year 2000
approaches and beyond. The Company has modified or replaced most
of its key financial systems, is investigating all other systems
(including process control systems) and is examining the
potential impact to the Company from significant vendors and
outside service providers. The Company believes it will be able
to modify or replace the remainder of its affected systems in
time to minimize any material detrimental effects on results of
operations. While it is not possible at present to predict with
certainty the cost of this work, based on manangement's current
estimates, the Company believes that such costs will range
between $1 million and $2 million over the next year.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board (the
"FASB") issued Statement of Financial Accounting Standards No.
130 ("SFAS No. 130") "Reporting Comprehensive Income" that
establishes standards for the reporting and displaying of
comprehensive income and its components in a full set of general
purpose financial statements. The Company will be required to
adopt the new standard in the first quarter of 1998.
Also in June 1997, the FASB issued Statement of Financial
Accounting Standards No. 131 ("SFAS No.131") "Disclosure about
Segments of an Enterprise and Related Information." This
statement will require segment disclosure based on management's
decision-making criteria. SFAS No. 131 also requires disclosure
about the products and services provided, the countries in which
material assets are held and material revenues are generated, and
significant customers. SFAS No. 131 is effective for the
Company's 1998 fiscal year end.
4
<PAGE>
Crown Paper Co.
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Shareholder of Crown Paper Co.:
We have audited the consolidated balance sheets of Crown Paper
Co. and subsidiaries as of December 28, 1997 and December 29,
1996, and the related consolidated statements of operations, cash
flows, and changes in equity for the years then ended. 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. The consolidated
statements of operations, cash flows, and changes in equity of
Crown Paper Co. and subsidiaries, as described in Note 2, for the
year ended December 31, 1995, were audited by other auditors
whose report dated February 23, 1996, expressed an unqualified
opinion on those statements.
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
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, the 1997 and 1996 financial statements referred
to above present fairly, in all material respects, the
consolidated financial position of Crown Paper Co. and
subsidiaries at December 28, 1997 and December 29, 1996 and the
consolidated results of their operations and their cash flows for
the years then ended in conformity with generally accepted
accounting principles.
ERNST & YOUNG LLP
San Francisco, California
January 30, 1998
5
<PAGE>
Crown Paper Co.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------
52 WEEKS 52 Weeks 53 Weeks
ENDED Ended Ended
DECEMBER 28, December 29, December 31,
(amounts in thousands) 1997 1996 1995
-----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net sales $897,492 $925,376 $1,076,506
Cost of goods sold 837,452 850,419 920,664
-----------------------------------------------------------------------------------------------------
Gross margin 60,040 74,957 155,842
Gain on timberlands sale 13,518
Mill closure charge (3,325)
Selling and administrative expenses (55,889) (52,215) (55,516)
-----------------------------------------------------------------------------------------------------
Operating income 14,344 22,742 100,326
Interest expense (50,321) (49,920) (21,138)
Other income, net 1,314 555 565
-----------------------------------------------------------------------------------------------------
Income (loss) before income taxes (34,663) (26,623) 79,753
Income tax expense (benefit) (12,132) (10,087) 31,702
-----------------------------------------------------------------------------------------------------
Net income (loss) $ (22,531) $(16,536) $ 48,051
-----------------------------------------------------------------------------------------------------
</TABLE>
See notes to consolidated financial statements.
6
<PAGE>
Crown Paper Co.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------
(Dollar amounts in thousands) DECEMBER 28, 1997 December 29, 1996
------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 11,415 $ 1,175
Accounts receivable 40,787 56,004
Inventories 104,117 97,975
Prepaid expenses and other current assets 7,399 15,217
Deferred income taxes 14,480 14,191
------------------------------------------------------------------------------------------
Total current assets 178,198 184,562
Property, plant and equipment, net 621,276 678,154
Other assets 38,090 36,759
Unamortized debt issue costs 14,039 16,023
Intangibles, net 28,977 30,101
------------------------------------------------------------------------------------------
Total Assets $880,580 $945,599
------------------------------------------------------------------------------------------
LIABILITIES AND EQUITY
------------------------------------------------------------------------------------------
Current Liabilities:
Accounts payable $ 54,181 $ 60,612
Accrued liabilities 80,358 80,920
Current portion of long-term debt 1,000 6,761
------------------------------------------------------------------------------------------
Total current liabilities 135,539 148,293
Long-term debt 430,878 447,229
Accrued postretirement benefits other than pensions 102,397 101,273
Other long-term liabilities 12,732 15,373
Deferred income taxes 88,427 102,468
------------------------------------------------------------------------------------------
Total Liabilities 769,973 814,636
------------------------------------------------------------------------------------------
Shareholder's Equity:
Common Stock, no par value;
Authorized - 5,000 shares;
Issued and outstanding -1 share
at December 28, 1997, and
December 29, 1996 132,698 129,058
Minimum pension liability (330) (892)
Cumulative foreign currency translation adjustment 1,338 3,365
Retained deficit (23,099) (568)
------------------------------------------------------------------------------------------
Total Equity 110,607 130,963
------------------------------------------------------------------------------------------
Total Liabilities and Equity $ 880,580 $945,599
------------------------------------------------------------------------------------------
</TABLE>
See notes to consolidated financial statements.
7
<PAGE>
Crown Paper Co.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------
52 WEEKS 52 Weeks 53 Weeks
ENDED Ended Ended
DECEMBER 28, December 29, December 31,
(amounts in thousands) 1997 1996 1995
----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH PROVIDED BY (USED FOR) OPERATING ACTIVITIES:
Net income (loss) $ (22,531) $ (16,536) $ 48,051
Items not affecting cash:
Depreciation and cost of timber harvested 83,373 79,252 77,821
Amortization of goodwill and other intangibles 1,124 1,125 1,125
Deferred income tax provision (benefit) (14,711) (3,405) 2,009
Gain on sale of timberlands (13,518)
Other, net 6,100 4,461 8
Change in current assets and liabilities:
Accounts receivable (includes $43,000 sold in 1996) 15,217 49,676 (16,523)
Inventories (6,142) 3,344 (5,481)
Other current assets 7,532 (9,948) (6,805)
Accounts payable 1,493 (4,958) 10,744
Other current liabilities (562) 523 9,017
Other, net (3,550) 1,403 6,473
----------------------------------------------------------------------------------------------------
Cash provided by operating activities 53,825 104,937 126,439
----------------------------------------------------------------------------------------------------
CASH PROVIDED BY (USED FOR) INVESTING ACTIVITIES:
Expenditures for property, plant and equipment (59,309) (80,914) (46,930)
Proceeds from sale of property, plant, and equipment 36,740 71 1,561
Other, net 1,735 (232) (195)
----------------------------------------------------------------------------------------------------
Cash used for investing activities (20,834) (81,075) (45,564)
----------------------------------------------------------------------------------------------------
CASH PROVIDED BY (USED FOR) FINANCING ACTIVITIES:
Issuance of Subordinated Notes 242,500
Borrowings from Term Loans 190,592
Repayments of Term Loans (46,712) (52,538) (2,750)
Proceeds from draw down of Revolving Credit 122,000 191,000 89,000
Repayments of Revolving Credit (102,000) (176,000) (79,000)
Proceeds from issuance of Industrial Revenue Bonds,
less underwriting costs 4,701 12,100
Payments of other long-term debt (740) (2,584) (1,026)
James River's capital withdrawal, net (527,291)
----------------------------------------------------------------------------------------------------
Cash used for financing activities (22,751) (28,022) (87,975)
----------------------------------------------------------------------------------------------------
Increase (decrease) in cash and cash equivalents 10,240 (4,160) (7,100)
Cash and cash equivalents, beginning of year 1,175 5,335 12,435
----------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of year $ 11,415 $ 1,175 $ 5,335
----------------------------------------------------------------------------------------------------
</TABLE>
See notes to consolidated financial statements.
8
<PAGE>
Crown Paper Co.
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------
Foreign
Common Stock Minimum Currency Retained James
----------------- Pension Translation Earnings River's
(amounts in thousands, except shares) Shares Amounts Liability Adjustment (Deficit) Investment
----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 25, 1994 $ 585,290
CHANGES IN EQUITY FOR THE PERIOD
ENDED AUGUST 25, 1995:
Net income 32,083
Change in equity component
of minimum pension liability 2,023
Foreign currency translation
adjustment 693
EFFECT OF SPIN-OFF:
Adjustments to pension liabilities,
accrued postretirement benefits
other than pensions and deferred
income taxes 26,989
Capital withdrawal by
James River, net (42,350)
Minimum pension liability $(5,611) 5,611
Reclassification of foreign
currency translation adjustment $ 701 (701)
Net proceeds paid to James River (484,941)
Transfer from James River
investment 1 $124,697 (124,697)
CHANGES IN EQUITY FOR THE PERIOD
AUGUST 25, 1995, THROUGH
DECEMBER 31, 1995:
Net income $ 15,968
Foreign currency translation adjustment (2,049)
ESOP and restricted stock activity, net 840
----------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1995 1 125,537 (5,611) (1,348) 15,968
Net Loss (16,536)
Foreign currency translation adjustment 4,713
ESOP and restricted stock activity, net 3,521
Minimum pension liability adjustment 4,719
----------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 29, 1996 1 129,058 (892) 3,365 (568)
Net Loss (22,531)
Foreign currency translation adjustment (2,027)
ESOP and restricted stock activity, net 3,640
Minimum pension liability adjustment 562
----------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 28, 1997 1 $132,698 $ (330) $ 1,338 $(23,099)
----------------------------------------------------------------------------------------------------------
</TABLE>
See notes to consolidated financial statements.
9
<PAGE>
Crown Paper Co.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1
- --------------------------------------------------------------------------------
ORGANIZATION AND OPERATIONS
Crown Paper Co. and subsidiaries (the "Company" or "Crown Paper
Co.") is a wholly owned subsidiary of Crown Vantage Inc. (the
"Parent" or "Crown Vantage"). Crown Vantage became an
independent company after the Board of Directors of James River
Corporation of Virginia ("James River"), now known as Fort James
Corporation, completed the spin-off of assets, liabilities and
operations that comprised a substantial part of James River's
Communication Papers Business and the paper-based part of its
Food and Consumer Packaging Business (collectively the
"Predecessor Business"). At the close of business on August 25,
1995, James River distributed to its common shareholders all of
the outstanding shares of the Parent (the "Distribution").
James River transferred to the Company certain assets of the
Predecessor Business, and the Company assumed certain related
liabilities from James River. In addition, the Company received
$250 million in cash through a public offering of Senior
Subordinated Notes and $253 million from initial borrowings under
credit facilities with a group of banks (collectively, the
"Financing"). The proceeds from the Financing after payment of
expenses and retention of $1.2 million cash ($485 million) were
paid to James River together with $100 million Senior Pay-in-Kind
Notes issued by the Parent, as a return of James River's capital
investment. The Distribution, transfer of assets and
liabilities, Financing, and return of capital are collectively
referred to as the "Spin-Off."
The Company is a major producer of value-added paper products for
a diverse array of end-uses. The Company's two business sectors
and corresponding principal product categories are (i) printing
and publishing papers, for applications such as special interest
magazines, books, custom business forms and corporate
communications and promotions (e.g. annual reports and
stationery); and (ii) specialty papers, principally for food and
retail packaging applications and conversion into such items as
coffee filters, cups and plates. The Company operates 10
facilities using 31 diverse paper machines with sales primarily
in North America.
At December 28, 1997, the Company employed approximately 3,850
individuals of which approximately 1/4 were salaried and 3/4 were
hourly. All of the Company's domestic hourly employees are
represented under various collectively bargained union contracts.
Hourly personnel at the Company's two mills in Scotland are
covered by an ongoing national agreement that addresses working
conditions, safety, and annual wage increases. Collective
bargaining agreements at the Company's Ypsilanti, Michigan, and
Richmond, Virginia, facilities, which cover approximately 5% of
the Company's hourly employees, expire before January 1999. The
Company plans to renegotiate the above contracts before they
expire.
The Company believes that its broad manufacturing capabilities
allow it to offer a wider range of products and basis weights
than most of its North American competitors. The Company focuses
its operations on the higher value-added market niches of the
sectors in which it competes. Papers produced for such niches
generally command higher prices and tend to be less cyclical than
commodity grades because they are used for more specialized
applications and because there are fewer substitutes for these
products. Like its competitors, the Company is subject to a
number of risks, including the cyclical nature of the industry
and the high degree of competition in the industry. In addition,
the Company is highly leveraged as a result of debt incurred in
connection with the Spin-Off.
NOTE 2
- --------------------------------------------------------------------------------
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION AND PRINCIPLES OF CONSOLIDATION
The consolidated financial statements of the Company include the
accounts of Crown Paper Co., and Crown Paper Co.'s consolidated
subsidiaries. Significant intercompany balances and transactions
have been eliminated.
The accompanying financial statements include the consolidated
results of operations, assets and liabilities of the Company for
the 52 weeks ended December 28, 1997, and December 29, 1996. The
accompanying financial statements also include the consolidated
results of operations of the Company for the 18 weeks ended
December 31, 1995, subsequent to the Spin-Off and the combined
historical results of operations of the Predecessor Business
while a part of James River for the 35 weeks ended August 27,
1995.
The consolidated financial statements for the period prior to the
Spin-Off have been prepared as if the Company had
10
<PAGE>
Crown Paper Co. Note 2 (continued)
operated as an independent stand-alone entity for the period
presented, except the Company generally did not have significant
borrowings prior to the Spin-Off, and there was no allocation of
James River's consolidated borrowings and related interest
expense, except for interest capitalized as a component of
properties. Prior to the Spin-Off, the Company engaged in
various transactions with James River and its affiliates that are
characteristic of a group of companies under common control.
Throughout the period prior to the Spin-Off, the Company
participated in James River's centralized cash management system
and, as such, its cash funding requirements were met by James
River. The Company was charged by James River for direct costs
and expenses associated with its operations which have been
included in cost of goods sold or selling and administrative
expenses, as appropriate. James River's administrative costs
have been allocated to the Company for the period prior to the
Spin-Off based on net sales and are included in selling and
administrative expense. Selling and administrative expenses
allocated to the Company were $5.5 million in 1995.
The Company's fiscal year includes the 52 or 53 weeks ending on
the last Sunday in December. The years ended December 28, 1997,
December 29, 1996, and December 31, 1995, included 52, 52, and 53
weeks, respectively.
CASH AND CASH EQUIVALENTS
The Company invests excess cash in marketable securities with
original maturities of three months or less. These investments
are classified as cash equivalents in the accompanying
consolidated financial statements.
INVENTORIES
Inventories are stated at the lower of cost or market and include
the cost of materials, labor and manufacturing overhead. The
last-in, first-out cost flow assumption is used for valuing
substantially all domestic inventories other than stores and
supplies. Other inventories, including all inventories held by
foreign operations, are valued using the first-in, first-out
method.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment is stated at cost, less accumulated
depreciation, including related delivery and installation costs
and interest incurred on significant capital projects during
their construction periods. Expenditures for improvements that
increase asset values or extend useful lives are capitalized.
Maintenance and repair costs are expensed as incurred. For
financial reporting purposes, depreciation is computed using the
straight-line method over the estimated useful lives of the
respective assets, which range from 20 to 45 years for buildings
and 5 to 20 years for machinery and equipment. For income tax
purposes, depreciation is calculated using accelerated methods.
The Company capitalizes interest on projects when the
construction period is considerable and requires significant
expenditures. Capitalized interest is amortized over the life of
the related assets. Interest capitalized in 1996 was $1.1
million. Capitalized interest in 1997 and 1995 was not
significant.
The Company assesses the recoverability of its investments in
long-lived assets to be held and used in operations whenever
events or circumstances indicate that their carrying amounts may
be impaired. Such assessment requires that the future cash flows
expected to result from the use of the assets be estimated and an
impairment loss recognized when future cash flows are less than
the carrying value of such assets. Estimating future cash flows
requires the Company to estimate future production volumes and
costs, future sales volumes, demand for the Company's product mix
and prices which reflect the use of its long-lived assets and
market conditions. Although the Company believes it has a
reasonable basis for its estimates, it is reasonably possible
that the Company's actual performance could differ from such
estimates, which could result in an unanticipated material
impairment loss on its long-lived assets.
UNAMORTIZED DEBT ISSUE COSTS
Debt issue costs are deferred and are being charged to interest
expense over the life of the underlying indebtedness.
GOODWILL
The excess of the purchase price over the fair value of
identifiable net assets of acquired companies is allocated to
goodwill and amortized over 40 years. Goodwill (which is
included in intangibles) totaled $40.1 million at December 28,
1997, and December 29, 1996, and is presented net of accumulated
amortization of $12.2 million at December 28, 1997, and $11.3
million at December 29, 1996. The recoverability of goodwill has
been evaluated to determine whether current events or
circumstances warrant adjustments to the carrying value. As of
December 28, 1997, and December 29, 1996, management believes
that no significant impairment of goodwill was indicated.
LANDFILL CLOSURE AND POST-CLOSURE COSTS
The Company accrues for landfill closure and post-closure costs
over the periods that benefit from the use of the landfills.
Management regularly reviews the adequacy of cost estimates and
adjusts the accrued amounts as necessary.
11
<PAGE>
Crown Paper Co. Note 2 (continued)
ENVIRONMENTAL REMEDIATION COSTS
Accruals for estimated losses from environmental remediation
obligations are recognized when such losses are probable and
reasonably estimable, generally no later than completion of the
remedial investigation and feasibility study. Costs associated
with conducting such studies as well as other costs incidental to
evaluation of the site and potential liability (if any) are
accrued when such costs become probable and reasonably estimable.
All accruals are adjusted as subsequent information develops or
circumstances change. Costs of future expenditures for
environmental remediation obligations are not discounted to their
present value. The accruals do not include possible future
insurance recoveries.
INCOME TAXES
Income tax expense for the eight months ended August 27, 1995
reflected in the accompanying consolidated financial statements
represents the Company's share of James River's income tax
provision which is intended to approximate the income tax expense
that would have been recognized had the Company filed a separate
income tax return. Because the Company was historically included
in the James River consolidated income tax return, the 1997 and
1996 net operating loss cannot be carried back to the period
prior to the Spin-Off. In addition, investment and other tax
credit carryforwards included in the calculation of the Company's
income tax provision for 1995 cannot be utilized on a separate
company basis.
No provision is made for U.S. federal income taxes on $6.6
million of undistributed earnings of the Company's foreign
subsidiaries as such earnings are considered indefinitely
reinvested.
FOREIGN CURRENCY TRANSLATION
The accounts of foreign subsidiaries of the Company are measured
using local currency as the functional currency. Assets and
liabilities are translated into U.S. dollars at period-end
exchange rates, and revenue and expense accounts are translated
at average monthly exchange rates. Net exchange gains or losses
resulting from such translation are excluded from net earnings
and accumulated as a separate component of Shareholder's Equity.
Gains and losses from foreign currency transactions are included
in cost of sales.
JAMES RIVER'S INVESTMENT
James River's investment, as shown in the accompanying
consolidated statement of changes in equity, reflects the
historical activity between the Company and James River and the
Company's cumulative results of operations. Transactions with
James River are reflected as though they were settled immediately
as an addition to or reduction of James River's investment.
SELECTED SALES INFORMATION
During each of the three years in the period ended December 28,
1997, export sales to foreign markets from the Company's domestic
operations represented less than 10% of the Company's net sales.
Net sales from the Company's two Scottish facilities were 7.6%,
7.4%, and 6.6% of net sales for the three years in the period
ended December 28, 1997. No single customer accounted for more
than 10% of net sales in any year. Net sales to James River were
approximately 6.8%, 7.0% and 8.6% of total net sales in 1997,
1996 and 1995, respectively.
INTEREST EXPENSE
Interest expense included in the accompanying consolidated
statements of operations for the period prior to the Spin-Off
does not reflect any interest expense on additional debt that was
incurred by the Company upon completion of the Spin-Off.
USE OF ESTIMATES
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make assumptions that affect the amounts reported in the
financial statements and accompanying notes. Actual results
could differ from those estimates.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board (the
"FASB") issued Statement of Financial Accounting Standards No.
130 ("SFAS No. 130") "Reporting Comprehensive Income," which
establishes standards for the reporting and displaying of
comprehensive income and its components in a full set of general
purpose financial statements. The Company will be required to
adopt the new standard in the first quarter of 1998.
Also in June 1997, the FASB issued Statement of Financial
Accounting Standards No. 131 ("SFAS No.131") "Disclosure about
Segments of an Enterprise and Related Information." This
statement will require segment disclosure based on management's
decision making criteria. SFAS No. 131 also requires disclosure
about the products and services provided, the countries in which
material assets are held and material revenues are generated, and
significant customers. SFAS No. 131 is effective for the
Company's 1998 fiscal year end.
RECLASSIFICATIONS
Certain 1996 and 1995 amounts have been reclassified to conform
with the 1997 presentation.
12
<PAGE>
Crown Paper Co. NOTE 3
- --------------------------------------------------------------------------------
SALE OF ACCOUNTS RECEIVABLE
During 1996, the Company entered into a five-year agreement with
certain banks which provides for the sale of undivided interests
(up to $60 million) in a revolving pool of trade accounts
receivable. During 1996, the Company sold a total of $43 million
of undivided interests. Proceeds from the sales, which are
reported as operating cash flows in the consolidated statement of
cash flows, were used to prepay $43 million of long-term debt.
As collections reduce accounts receivable included in the pool,
the Company sells undivided interests in new receivables in order
to bring the amount sold up to $43 million.
The proceeds from sales are less than the face amount of the
undivided interests in accounts receivable sold and such discount
($2.8 million and $1.6 million in 1997 and 1996, respectively) is
included in selling and administrative expenses in the
consolidated statement of operations.
NOTE 4
- --------------------------------------------------------------------------------
CONCENTRATIONS OF CREDIT RISK
Credit risk represents the accounting loss that would be
recognized at the reporting date if customers failed completely
to perform as contracted.
Concentrations of credit risk that arise from financial
instruments exist for groups of customers when they have similar
economic characteristics that would cause their ability to meet
contractual obligations to be similarly affected by changes in
economic or other conditions. The Company does not have a
significant exposure to any individual customer.
Accounts receivable at the Company's facilities in Scotland
totaled $18.3 million and $19.9 million at December 28, 1997, and
December 29, 1996, respectively. There were no other significant
concentrations of foreign credit risk at December 28, 1997, or
December 29, 1996.
13
<PAGE>
Crown Paper Co. NOTE 5
- --------------------------------------------------------------------------------
SUPPLEMENTAL BALANCE SHEET INFORMATION
<TABLE>
<CAPTION>
-----------------------------------------------------------------
INVENTORIES
(amounts in thousands) 1997 1996
-----------------------------------------------------------------
-----------------------------------------------------------------
<S> <C> <C>
Raw materials $ 27,911 $ 26,283
Work-in-process 7,038 7,490
Finished goods 45,936 42,168
Stores and supplies 35,569 34,640
-----------------------------------------------------------------
116,454 110,581
Last-in, first-out reserve (12,337) (12,606)
-----------------------------------------------------------------
Total inventories $ 104,117 $ 97,975
-----------------------------------------------------------------
-----------------------------------------------------------------
Valued at lower of cost or market:
Last-in, first-out $ 56,402 $ 52,625
First-in, first-out 47,715 45,350
-----------------------------------------------------------------
Total inventories $ 104,117 $ 97,975
-----------------------------------------------------------------
-----------------------------------------------------------------
<CAPTION>
PROPERTY, PLANT AND EQUIPMENT
(amounts in thousands) 1997 1996
-----------------------------------------------------------------
-----------------------------------------------------------------
<S> <C> <C>
Land and improvements $ 39,955 $ 39,496
Buildings 143,399 141,363
Machinery and equipment 1,043,162 1,012,690
Construction in progress 16,100 18,380
-----------------------------------------------------------------
1,242,616 1,211,929
Accumulated depreciation (627,891) (561,965)
-----------------------------------------------------------------
614,725 649,964
Timber and timberlands, net 6,551 28,190
-----------------------------------------------------------------
Net property, plant and equipment $ 621,276 $ 678,154
-----------------------------------------------------------------
-----------------------------------------------------------------
<CAPTION>
ACCRUED LIABILITIES
(amounts in thousands) 1997 1996
-----------------------------------------------------------------
-----------------------------------------------------------------
<S> <C> <C>
Compensated absences $ 11,835 $ 11,652
Employee insurance benefits 15,267 16,363
Accrued post retirement benefits
other than pensions, current portion 3,004 5,518
Accrued interest 12,203 12,258
Taxes payable, other than income taxes 10,083 7,190
Other accrued liabilities 27,966 27,939
-----------------------------------------------------------------
Total accrued liabilities $ 80,358 $ 80,920
-----------------------------------------------------------------
-----------------------------------------------------------------
</TABLE>
14
<PAGE>
Crown Paper Co. NOTE 6
- --------------------------------------------------------------------------------
LONG-TERM DEBT
<TABLE>
<CAPTION>
Consolidated long-term debt consists of the following:
(amounts in thousands) 1997 1996
----------------------------------------------------------------------------------------------
<S> <C> <C>
Bank Credit Facility:
Revolving credit, average interest rate 8.57% in 1997
and 9.49% in 1996, due 2002 $ 45,000 $ 25,000
Term Loan A, average interest rate 8.42% in 1997
and 1996 0 45,712
Term Loan B, average interest rate 9.14% in 1997
and 8.94% in 1996, due 2003 98,000 99,000
----------------------------------------------------------------------------------------------
143,000 169,712
11% Senior Subordinated Notes, due 2005 250,000 250,000
Industrial Revenue Bonds, average interest rate 7.91% in
1997 and 7.65% in 1996, payable to 2026 38,878 34,278
----------------------------------------------------------------------------------------------
431,878 453,990
Less current portion 1,000 6,761
----------------------------------------------------------------------------------------------
$430,878 $447,229
----------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------
</TABLE>
Maturities of long-term debt for the next five years are: 1998
and 1999 - $1.0 million; 2000 - $1.3 million; 2001 - $.8 million;
and 2002 - $47.0 million. Cash paid for interest in 1997, 1996,
and 1995 totaled $46.0 million, $45.8 million, and $7.9 million,
respectively.
Under the Bank Credit Facility (the "Facility") the revolving
credit available is in the aggregate amount of $150 million with
a $75 million sublimit for letters of credit (of which $40.4
million has been issued at December 28, 1997) and can be used for
general corporate purposes, working capital needs, and permitted
investments. At December 28, 1997, $45 million of the revolving
credit was outstanding and $64.6 million of the aggregate line
was available if needed. Borrowings under the Facility are
subject to varying rates of interest that are indexed (at the
Company's option) to a base rate (the higher of the Prime Rate or
Federal Funds Rate) or the London Interbank Offered Rate.
Principal and interest amounts on the Term Loans are due in
quarterly installments. In addition to those scheduled
repayments, Crown Paper Co. is obligated to make prepayments
equal to 75% of Excess Cash Flow (as defined in the underlying
agreement). The Company did not generate Excess Cash Flow in
1997 or 1996. The Company is also required to make prepayments
(in varying percentages of net proceeds) upon the occurrence of
certain events which include, but are not limited to, proceeds
received from any new debt or equity issuances, asset sales, and
sales of accounts receivable. During 1997, the Company sold
approximately 108,000 acres of timber-producing properties for
approximately $36 million. Proceeds from the sale of the
Company's timber properties were used to prepay Term Loan A.
Also during 1997, the Company repaid the remaining $3.2 million
balance of Term Loan A. During 1996, the Company prepaid $43
million on Term Loan A using proceeds obtained through the sale
of certain accounts receivable.
In connection with the Facility, as amended, Crown Paper Co. is
required to maintain minimum quarterly cash flow to total debt
ratios as follows: first, second, third, and fourth quarters of
1998 are .18 to 1, .16 to 1, .17 to 1, and .18 to 1,
respectively. Crown Paper Co. must maintain minimum interest
coverage ratios for the first through third quarters of 1998 at
1.75 to 1 and at 1.9 to 1 for the fourth quarter of 1998. Crown
Paper Co. is also subject to minimum tanglible net worth
requirements. In addition, both the Parent and Crown Paper Co.
are subject to certain limitations on indebtedness, liens,
mergers and acquisitions, asset sales, investments, joint
ventures, capital expenditures and prepayments or acquisitions of
certain indebtedness. The Facility also restricts Crown Paper
Co. from paying cash dividends to the Parent. Generally,
dividends are limited to (a) amounts necessary to pay certain
personnel and administrative expenses (not to exceed $800,000 per
year), (b) current taxes payable attributable to Crown Paper Co.,
and (c) Crown Paper Co.'s share of Equity Proceeds (as defined in
the
15
<PAGE>
Crown Paper Co. Note 6 (continued)
underlying agreement). The Facility contains customary events of
default, including certain changes of control. The obligations
under the Facility are collateralized by substantially all of the
assets of Crown Paper Co.
The Senior Subordinated Notes (the "Notes") are unsecured and
interest is payable semi-annually in March and September. The
Notes are redeemable at the option of Crown Paper Co. on or after
September 1, 2000 at a redemption price of 105.5%, which declines
to par after September 1, 2003, and thereafter. In addition,
Crown Paper Co. may redeem up to $85 million of aggregate
principal of the Notes prior to September 1998 at a cash
redemption price of 110% from the proceeds of one or more public
offerings. In the event of a Change of Control (as defined in
the underlying agreement) the holders of the Notes have the right
to require Crown Paper Co. to purchase the Notes in cash at 101%.
The Notes contain covenants, limitations and restrictions which
in general are not more restrictive than those contained in the
Facility.
In August 1997, the Company completed a $2.5 million refinancing
of certain industrial revenue bonds issued by the Michigan
Strategic Fund. Also in August 1997, the Company finalized an
agreement with the Michigan Strategic Fund whereby a total of
$4.9 million of bonds were sold to finance certain sewage and
solid waste disposal facilities to be used by the Company.
In 1996, the Company completed an $18 million refinancing of
certain industrial revenue bonds issued by the Business Finance
Authority of the State of New Hampshire.
Also in 1996, the Company finalized an agreement with the
Business and Finance Authority of the State of New Hampshire
whereby a total of $12.3 million of bonds were sold to finance
certain sewage and solid waste disposal facilites to be used by
the Company. The proceeds from the sale of these bonds are to be
used to finance eligible project costs, of which $3.4 million and
$3.2 million are included in cash and cash equivalents at
December 28, 1997, and December 29, 1996, respectively.
At December 28, 1997, and December 29, 1996, estimated fair
values of the Company's long-term debt instruments were $441.0
million and $450.5 million, respectively. The fair values of the
Company's long-term debt instruments are based on quoted market
prices, estimated based on quoted market prices for similar
issues or estimated by discounting expected cash flows at the
rates currently offered to the Company for debt having similar
characteristics.
16
<PAGE>
Crown Paper Co. NOTE 7
- --------------------------------------------------------------------------------
INCOME TAXES
<TABLE>
<CAPTION>
THE COMPONENTS OF INCOME (LOSS) BEFORE INCOME TAXES WERE AS FOLLOWS:
---------------------------------------------------------------------------------------------------
(amounts in thousands) 1997 1996 1995
---------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Domestic $(40,441) $ (32,457) $73,773
Foreign 5,778 5,834 5,980
---------------------------------------------------------------------------------------------------
Income (loss) before income taxes $(34,663) $ (26,623) $79,753
---------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------
<CAPTION>
INCOME TAX EXPENSE (BENEFIT) CONSISTED OF THE FOLLOWING:
---------------------------------------------------------------------------------------------------
(amounts in thousands) 1997 1996 1995
---------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Current:
Federal $ (693) $ (8,032) $24,581
State 1,775 (644) 4,483
Foreign 1,497 1,994 629
---------------------------------------------------------------------------------------------------
Total current income tax expense (benefit) 2,579 (6,682) 29,693
---------------------------------------------------------------------------------------------------
Deferred:
Federal (13,353) (3,353) (120)
State (1,685) (374) (22)
Foreign 327 322 2,151
---------------------------------------------------------------------------------------------------
Total deferred income tax provision (benefit) (14,711) (3,405) 2,009
---------------------------------------------------------------------------------------------------
Income tax expense (benefit) $(12,132) $(10,087) $31,702
---------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------
</TABLE>
Principal reasons for the difference between the federal
statutory income tax rate on the income (loss) before income
taxes, and the Company's effective income tax rate were as
follows:
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------
Percent of Pretax Income (Loss)
---------------------------------------------------------------------------------------------------
1997 1996 1995
---------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Federal statutory income tax rate (35.0)% (35.0)% 35.0%
State income taxes, net of federal income tax effect (3.7) (3.8) 4.0
Amortization of goodwill 1.0 1.3 0.5
Other items, net 2.7 (.4) 0.3
---------------------------------------------------------------------------------------------------
Effective income tax rates (35.0)% (37.9)% 39.8%
---------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------
</TABLE>
The income tax effects of temporary differences that gave rise to
the net deferred tax liabilities as of December 28, 1997 and
December 29, 1996, were as follows:
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------
(amounts in thousands) 1997 1996
---------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------
<S> <C> <C>
Excess of book over tax basis of property, plant and equipment $129,073 $132,452
Pension benefits, net 13,943 12,767
Other items 4,881 4,069
---------------------------------------------------------------------------------------------------
Total deferred tax liabilities 147,897 149,288
---------------------------------------------------------------------------------------------------
Postretirement benefits other than pensions (40,874) (41,519)
Accrued liabilities (17,399) (16,092)
Net operating loss carryforward (14,787) (1,818)
Other items (890) (1,582)
---------------------------------------------------------------------------------------------------
Total deferred tax assets (73,950) (61,011)
---------------------------------------------------------------------------------------------------
Net deferred tax liability $ 73,947 $ 88,277
---------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------
</TABLE>
17
<PAGE>
Crown Paper Co. Note 7 (continued)
The Company has recorded $12.4 million and $1.8 million in
deferred tax benefits for the 1997 and 1996 net operating losses,
respectively. The Company has federal and state net operating
loss carryforwards of approximately $31.9 million for 1997 and
$7.8 million for 1996 that expire in the year 2012 and 2011,
respectively. The Company made estimated tax payments in 1997
and 1996 of $.7 million and $1.6 million, respectively, of
which $1.2 million from 1996 was recovered in 1997. Cash
payments for income taxes paid by the Company subsequent to the
Spin-Off through December 31, 1995, totaled $11.2 million.
The components of income tax expense were allocated between
the members of the consolidated group on a seperate return
basis that is consistent with the terms of the tax sharing
agreement that exists between members of the affiliated group
of companies that comprise Crown Vantage, Inc. and
subsidiaries.
In connection with the Spin-Off, James River, the Parent, and the
Company entered into a tax sharing agreement, pursuant to which
James River generally is responsible for all federal and state
income and franchise taxes for taxable periods ending on or prior
to August 27, 1995. The Parent is responsible for all federal
and state income and franchise taxes of the Crown Vantage group
for taxable periods beginning after August 27, 1995. The Parent
generally is responsible for all unpaid taxes on its foreign
subsidiaries, state and local taxes, other than income and
franchise taxes, such as property, sales, use and payroll taxes
related to the Crown Vantage group for all periods, including
periods prior to August 27, 1995. James River will pay taxes
related solely to the Spin-Off and the transactions contemplated
thereby, provided that the Spin-Off and the transactions
contemplated thereby are treated in accordance with the Internal
Revenue Service Ruling ("IRS Ruling") relating to the tax-free
treatment of the Spin-Off. Any taxes imposed by virtue of the
Spin-Off and the transactions resulting thereby not being treated
in accordance with the IRS Ruling shall be borne by the party
solely causing the Spin-Off or the transactions resulting thereby
not to be so treated. If neither party is solely at fault, any
such taxes and liabilities would be shared, with the Company to
be responsible for 20% and James River to be responsible for 80%
of any such amounts.
NOTE 8
- --------------------------------------------------------------------------------
PENSION PLANS
In connection with the Spin-Off, the Company and James River
entered into an agreement with the Pension Benefit Guaranty
Corporation (the "PBGC") whereby the Company's U.S. pension plans
transferred to the Company and corresponding accumulated
participant benefits were frozen (the "Frozen Plans"). New
pension plans (the "New Plans") that have terms substantially
similar to the Frozen Plans were then established by the Company.
James River has also entered into an agreement with the PBGC
which provides that, if the PBGC institutes proceedings to
terminate a Frozen Plan, James River may either assume
sponsorship of the plan or will be responsible for all liability
arising from the termination of the plan as if it were the plan
sponsor. James River's contingent obligation with respect to the
Frozen Plans will generally end when there are no unfunded
benefit obligations for the Frozen Plans. James River and the
Company have entered into an agreement (the "Pension Funding
Agreement") that establishes minimum funding requirements by the
Company for the Frozen Plans that are at least equal to minimum
funding requirements pursuant to Section 412 of the Internal
Revenue Code.
Benefits under the majority of plans for hourly employees are
primarily based on stated benefits per year of credited service.
Benefits for salaried employees are primarily related to
compensation and years of credited service. Contributions to the
New Plans are made in amounts sufficient to meet the minimum
funding requirements of applicable laws and regulations plus
additional amounts, if any, as management, in consultation with
its actuaries, deems to be appropriate. Contributions to
multiemployer plans are generally based on negotiated labor
contracts. Plan assets consist principally of equity securities
and corporate and government obligations.
The present value of benefit obligations, related components of
pension costs and plan assets were derived from actuarial
calculations. Components of pension cost for 1995 were derived
from actuarial calculations of these components within the James
River plans.
18
<PAGE>
Crown Paper Co. Note 8 (continued)
The components of the Company's net pension cost, which includes
the Company's pension plan in Scotland, were as follows:
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------
(amounts in thousands) 1997 1996 1995
------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Service cost $ 5,310 $ 5,344 $ 4,405
Interest accrued on projected benefit obligation 19,305 19,055 20,665
Net investment income on plan assets (69,794) (27,088) (46,374)
Net amortization and deferral 45,827 6,196 26,081
Contributions to multiemployer pension plans 53 52 61
------------------------------------------------------------------------------------------------------------------
Net pension cost $ 701 $ 3,559 $ 4,838
------------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------
</TABLE>
Net amortization includes amortization of the net transition
assets, net experience gains and losses, and prior service costs
over 15 to 20 years.
The actuarial assumptions used in determining net pension costs
and related pension obligations were as follows:
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------
1997 1996 1995
------------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Discount Rate 7.5% 8.0% 7.5%
Assumed rate of increase in compensation levels 4.0% 4.0% 5.0%
Expected long-term rate of return on plan assets 10.0% 10.0% 10.0%
------------------------------------------------------------------------------------------------------------------
</TABLE>
The following table sets forth the funded status of the Company's
U.S. and Scottish pension plans at December 28, 1997, and
December 29, 1996:
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------
(amounts in thousands) 1997 1996
------------------------------------------------------------------------------------------------------------------
ASSETS ACCUMULATED ASSETS ACCUMULATED
EXCEED BENEFITS EXCEED BENEFITS
ACCUMULATED EXCEED ACCUMULATED EXCEED
BENEFITS ASSETS BENEFITS ASSETS
------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Actuarial present value of:
Vested benefits $234,870 $16,602 $214,534 $ 15,136
Nonvested benefits 14,048 1,194 13,801 1,060
------------------------------------------------------------------------------------------------------------------
Accumulated benefit obligation 248,918 17,796 228,335 16,196
Effect of projected future salary increases 14,105 229 4,810 3
------------------------------------------------------------------------------------------------------------------
Projected benefit obligation 263,023 18,025 233,145 16,199
Plan assets at fair value 320,669 16,455 268,258 13,855
------------------------------------------------------------------------------------------------------------------
Plan assets in excess of (less than)
projected benefit obligation 57,646 (1,570) 35,113 (2,344)
Unrecognized net (gain) loss (25,049) 198 (11,344) 1,470
Unrecognized prior service cost 9,082 2,193 8,568 2,353
Unrecognized net transition (asset) liability (3,413) 65 (359) 101
Minimum pension liability (2,184) (3,924)
------------------------------------------------------------------------------------------------------------------
Net pension asset (liability) $38,266 $(1,298) $ 31,978 $ (2,344)
------------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------
</TABLE>
19
<PAGE>
Crown Paper Co. Note 8 (continued)
Other assets include net noncurrent pension assets of $38.0
million and $33.6 million as of December 28, 1997, and December
29, 1996, respectively, exclusive of the additional minimum
pension liabilities. As of December 28, 1997, and December 29,
1996, the additional minimum pension liabilities of $2.2 million
and $3.9 million, respectively, were offset by intangible assets
of $1.7 million and $2.4 million, respectively. The additional
minimum pension liabilities at December 28, 1997, and December
29, 1996 were offset by charges to shareholders' equity of $.3
million, net of deferred taxes of $.2 million, and $.9 million,
net of deferred taxes of $.6 million, respectively.
NOTE 9
- --------------------------------------------------------------------------------
POSTRETIREMENT BENEFITS OTHER THAN PENSIONS
Salaried employees hired before January 1, 1993, generally become
eligible for retiree medical benefits after reaching age 55 with
15 years of service or after reaching age 65. Under the salaried
plan, post-age 65 eligible retirees are reimbursed for a portion
of the cost of premiums of Medicare supplement insurance
policies, based upon vested years of service. Post-age 65
salaried retirees are also reimbursed for certain prescription
drug costs, less deductibles. Pre-age 65 eligible retirees are
paid a stated percentage of covered medical expenses, less
deductibles. Salaried employees hired after January 1, 1993, are
not eligible for retiree medical benefits. Benefits, eligibility
and cost-sharing provisions for hourly employees vary by location
and collective bargaining unit. All of the Company's retiree
medical plans are unfunded.
For the period subsequent to the Spin-Off, the consolidated
financial statements include net periodic postretirement benefit
costs that were actuarily determined by the Company. The
consolidated financial statements include net periodic
postretirement benefit costs allocated from the James River plans
for the period up to and including the date of the Spin-Off. The
components of the Company's net periodic postretirement benefit
costs were as follows:
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------
(amounts in thousands) 1997 1996 1995
---------------------------------------------------------------------------------------
<S> <C> <C> <C>
Service cost $1,090 $1,582 $ 1,511
Interest cost on accumulated postretirement
benefit obligation 5,033 5,919 7,094
Net amortization (3,886) (1,965) (1,949)
---------------------------------------------------------------------------------------
Net periodic postretirement benefit cost $2,237 $5,536 $ 6,656
---------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------
</TABLE>
Net amortization includes amortization of prior service costs and
gains and net experience gains and losses over 15 years. The
discount rate used in determining the accumulated postretirement
benefit obligation ("APBO") was 7.5% and 8.0% as of December 28,
1997, and December 29, 1996, respectively. At December 28, 1997,
and December 29, 1996, unrecognized net gain, APBO and
postretirement benefit costs for active employees assigned to,
and the retirees associated with, the Company were actuarily
determined by the Company. Changes in actuarial assumptions for
1997 resulted in reductions to the net periodic postretirement
benefit cost and accumulated postretirement benefit obligation of
$2.5 million and $11.9 million, respectively, as of December 28,
1997.
20
<PAGE>
Crown Paper Co. Note 9 (continued)
Summary information on the Company's plans is as follows:
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------
(amounts in thousands) 1997 1996
---------------------------------------------------------------------------------------
<S> <C> <C>
Accumulated postretirement benefit obligation:
Retirees $30,270 $ 43,392
Fully eligible active participants 20,246 11,000
Other active participants 20,007 24,931
---------------------------------------------------------------------------------------
Total accumulated postretirement benefit obligation 70,523 79,323
Unrecognized net gain 22,777 13,418
Unrecognized prior service gain 12,101 14,050
---------------------------------------------------------------------------------------
Accrued postretirement benefit obligation $105,401 $106,791
---------------------------------------------------------------------------------------
</TABLE>
As of December 28, 1997, and December 29, 1996, the Company
included $3.0 million and $5.5 million, respectively, of accrued
postretirement benefit costs in accrued liabilities, representing
the estimated current portion of this liability.
The assumed health care cost trend rate used in measuring the
accumulated postretirement benefit obligation was 7.0% in 1997,
declining by 0.5% per year through 2002 to an ultimate rate of
4.5%. If the health care cost trend rate assumptions were
increased by 1%, the accumulated postretirement benefit
obligation as of December 28, 1997, would have increased by $7.9
million. The effect of this change on the sum of the service
cost and interest cost components of net periodic postretirement
benefit cost for 1997 would have been an increase of $.7 million.
NOTE 10
- --------------------------------------------------------------------------------
COMMITMENTS AND CONTINGENT LIABILITIES
LEASES
As of December 28, 1997, future minimum rental payments under
noncancelable operating leases were as follows:
<TABLE>
<CAPTION>
-----------------------------------------------------------------
Minimum
(amounts in thousands) Rentals
-----------------------------------------------------------------
<S> <C>
1998 $ 6,565
1999 5,348
2000 5,283
2001 5,004
2002 4,333
Later years 13,772
-----------------------------------------------------------------
Total future minimum rentals $40,305
-----------------------------------------------------------------
</TABLE>
Rent expense totaled $6.6 million in 1997, $6.7 million in 1996
and $8.8 million in 1995.
LITIGATION AND ENVIRONMENTAL MATTERS
The Company is a party to various legal proceedings generally
incidental to its business and is subject to a variety of
environmental protection statutes and regulations. As is the
case with other companies in similar industries, the Company
faces exposure from actual or potential claims and legal
proceedings involving environmental matters. Although the
ultimate disposition of legal proceedings cannot be predicted
with certainty, it is the present opinion of the Company's
management that the outcome of any claim which is pending or
threatened, either individually or on a combined basis, will not
have a materially adverse effect on the consolidated financial
condition of the Company but could materially affect consolidated
results of operations in a given year. The Company has accrued
estimated landfill site restoration, post-closure and monitoring
costs totalling $12.0 million and $11.1 million at December 28,
1997 and December 29, 1996, respectively.
21
<PAGE>
Crown Paper Co. Note 10 (continued)
The Company has been identified as a potentially responsible
party ("PRP"), along with others, under the Comprehensive
Environmental Response, Compensation and Liability Act or similar
federal and state laws regarding the past disposal of wastes at
20 sites in the United States. The company has previously settled
its remediation obligations at 11 of these sites. At 8 other
sites, the Company is one of many PRPs and its alleged
contribution to the site and remediation obligation is not
considered significant. At one other site, remedial
investigation is under way and a loss estimate for the potential
remediation effort costs is not yet possible.However, the
Company's accrual for the remedial investigation effort was $.6
million and $.7 million at December 28, 1997, and December 29,
1996, respectively. The liabilities can change substantially due
to such factors as the solvency of other potentially responsible
parties, the Company's share of responsibility, additional
information as to the nature or extent of contamination, methods
of remediation required, and other actions by governmental
agencies or private parties. While it is not feasible to predict
the outcome of all environmental liabilities, based on our most
recent review, management estimates that the Company's share of
the costs of investigation and remediation of the known sites
will not have a material adverse effect upon the consolidated
financial condition of the Company.
Due to uncertainties associated with remediation activities,
regulations, technologies, and the allocation of costs among
various other parties, actual costs to be incurred at identified
sites may vary from the estimates. Therefore, management is
unable to determine if the ultimate disposition of all known
environmental liabilities will have a material adverse effect on
the Company's consolidated results of operations in a given year.
In addition, as is the case with most manufacturing and many
other entities, there can be no assurance that the Company will
not be named as a PRP at additional sites in the future or that
the costs associated with such additional sites would not be
material.
In November 1997, the Environmental Protection Agency signed
final rules affecting pulp and paper industry discharges of
wastewater and gaseous emissions ("Cluster Rules"). These
Cluster Rules require changes in the pulping, bleaching and/or
wastewater treatment processes presently used in some U.S. pulp
and paper mills, including some of the Company's mills. Based on
management's understanding of the rules, the Company estimates
that approximately $40 million of capital expenditures may be
required to comply with the rules with compliance dates, with
respect to the changes, beginning in 1998 and extending over the
next three to eight years. There are risks and uncertainties
associated with the Company's estimate that could cause the total
capital expenditures to be materially different, including
changes in technology, interpretation of the rules that is
substantially different from those of the related agencies, or
other items.
22
<PAGE>
Crown Paper Co. NOTE 11
- --------------------------------------------------------------------------------
EMPLOYEE STOCK OWNERSHIP PLAN
The Parent sponsors an Employee Stock Ownership Plan ("ESOP")
which is available to substantially all employees of the Company.
Participants may elect to contribute up to 10% of their
compensation as pretax contributions under Internal Revenue Code
Section 401(k). The Company will make matching contributions (up
to a maximum of 6%) which vary based upon each participant's
contribution as a percent of their compensation.
The ESOP was initially funded by a $10 million loan from Crown
Paper Co. and the proceeds were used to purchase 444,000 shares
of the Parent's Common Stock. The loan was completely repaid in
1997. On May 2, 1997, an additional 500,000 shares of Common
Stock of the Parent were purchased at the average of the high and
low prices for the previous 10 days trading period. This purchase
was funded by a loan of $3 million to the ESOP from Crown Paper
Co. bearing interest at 11% and is due May 1, 2004. The
Company's annual contributions to the ESOP in the form of
matching contributions will be at least equal to the amount
needed by the ESOP to make the principal and interest payments on
the loan, less dividends received by the ESOP on unreleased
shares.
The ESOP shares are pledged as collateral for its debt. As the
debt is repaid, shares are released from collateral and allocated
to employees who make 401(k) contributions that year, based on
the proportion of debt service paid in the year.
Compensation expense for the 401(k) match and the ESOP was $2.7
million in 1997 and $2.5 million in 1996. The ESOP shares as of
December 28, 1997, and December 29, 1996, were as follows:
<TABLE>
<CAPTION>
-----------------------------------------------------------------
Number of Shares
1997 1996
-----------------------------------------------------------------
<S> <C> <C>
Allocated shares 516,000 188,000
Shares released for
allocation 101,000 82,000
Unearned shares 327,000 174,000
-----------------------------------------------------------------
Total ESOP shares 944,000 444,000
-----------------------------------------------------------------
-----------------------------------------------------------------
Fair value of unearned shares
at end of year $2,534,000 $1,368,000
-----------------------------------------------------------------
-----------------------------------------------------------------
</TABLE>
NOTE 12
- --------------------------------------------------------------------------------
TIMBERLANDS SALE AND MILL CLOSURE CHARGE
During the fourth quarter of 1997, the Company sold approximately
108,000 acres of timber producing properties for approximately
$36 million and recognized a gain of $13.5 million. These
properties have accounted for less than 5% of the wood fiber
required by the Company's pulp mills at Berlin and St.
Francisville. As part of the transaction in the Northeastern
United States, the Company entered into a long-term wood supply
contract with the buyer to supply wood for the Berlin mill. The
Company has retained ownership of certain standing timber in the
Southeastern United States and entered into a cutting plan
contract with the buyer in order to continue supplying wood fiber
to the St. Francisville mill. Proceeds from the sale of the
Company's timberlands were used to prepay Term Loan A.
During the fourth quarter of 1997, the Company closed its Newark,
Delaware, facility and is seeking a buyer for this site. The
Newark facility produced approximately 2,200 tons of paper during
1997. The Company shifted most of the Newark mill's production
to other mills. The Company recorded a charge related to the
closure of the mill in the fourth quarter of 1997 totalling $3.3
million.
23
<PAGE>
Crown Paper Co. NOTE 13
- --------------------------------------------------------------------------------
QUARTERLY FINANCIAL SUMMARY (UNAUDITED)
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------
(amounts in thousands) First Second Third Fourth
Quarter Quarter Quarter Quarter Year
-----------------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1997
Net sales $228,641 $224,932 $226,808 $217,111 $897,492
Gross margin 17,164 10,752 20,598 11,526 60,040
Net loss (7,364) (8,524) (4,189) (2,454) (22,531)
-----------------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------------
1996
Net sales $252,853 $230,564 $221,064 $220,895 $925,376
Gross margin 32,894 23,049 11,332 7,682 74,957
Net income (loss) 5,007 (1,015) (7,529) (12,999) (16,536)
-----------------------------------------------------------------------------------------------------------------
</TABLE>
24
<PAGE>
[EXECUTION COPY]
AMENDMENT NO. 3 TO CREDIT AGREEMENT
AMENDMENT dated as of October 22, 1997 among CROWN PAPER CO. (the
"Borrower"), CROWN VANTAGE INC., the BANKS listed on the signature pages hereof
(the "Banks") and MORGAN GUARANTY TRUST COMPANY OF NEW YORK, as Administrative
Agent and as Collateral Agent.
W I T N E S S E T H :
WHEREAS, the parties hereto have heretofore entered into a Credit
Agreement dated as of August 15, 1995 (as amended, the "Agreement"); and
WHEREAS, the Borrower has entered into an agreement to sell up to
24,646 acres in the aggregate of timber properties located in Mississippi and
Louisiana (the "Mississippi Asset Sale"); and
WHEREAS, the Borrower has entered into an agreement to sell up to
83,000 acres in the aggregate of timber properties located in New Hampshire and
Maine (the "New Hampshire Asset Sale" and, together with the Mississippi Asset
Sale, the "Timber Asset Sales"); and
WHEREAS, in connection with the Timber Asset Sales the parties hereto
desire to amend the Agreement as more fully set forth below;
NOW, THEREFORE, the parties hereto agree as follows:
SECTION 1. DEFINITIONS; REFERENCES. Unless otherwise specifically
defined herein, each term used herein which is defined in the Agreement shall
have the meaning assigned to such term in the Agreement. Each reference to
"hereof", "hereunder", "herein" and "hereby" and each other similar reference
and each reference to "this Agreement" and each other similar reference
contained in the Agreement shall from and after the date hereof refer to the
Agreement as amended hereby.
SECTION 2. ADDITION TO ASSET SALES BASKET. The parenthetical set
forth in clause (ii) of Section 5.7(b) of the Agreement is amended to read in
its entirety as
<PAGE>
follows: "(other than (x) the sale by the Borrower of its mill and related
operations located in Milford, New Jersey, (y) the exchange of timber
properties for other timber properties and (z) the sale by the Borrower of up
to 24,646 acres in the aggregate of timber properties located in Mississippi
and Louisiana and up to 83,000 acres in the aggregate of timber properties
located in New Hampshire and Maine, so long as each such sale described in
this clause (z) is consummated on or prior to December 31, 1997 and the Net
Cash Proceeds with respect thereto are applied by the Borrower to prepay the
Loans in accordance with Section 2.8(b))".
SECTION 3. RELEASE OF LIENS AND RELATED CONSENTS. (a) Upon receipt by
the Banks of the Net Cash Proceeds of not less than $11,000,000 from the
Mississippi Asset Sale, the Lien created under the Security Documents on the
assets sold pursuant to such Mississippi Asset Sale (but not any Proceeds
thereof) shall be released.
(b) Upon receipt by the Banks of the Net Cash Proceeds of not less
than $22,000,000 from the New Hampshire Asset Sale, the Lien created under the
Security Documents on the assets sold pursuant to such New Hampshire Asset Sale
(but not any Proceeds thereof) shall be released.
(c) The Banks hereby consent to (i) the consummation by the Borrower
of the Timber Asset Sales substantially on the terms disclosed by the Borrower
to the Banks prior to the date hereof, (ii) the release of the Liens created
under the Security Documents on the assets being sold pursuant to the
Mississippi Asset Sale (but not on any Proceeds thereof) and the New Hampshire
Asset Sale (but not on any Proceeds thereof) effected by clauses (a) and (b) of
this Section and (iii) the execution and delivery by the Collateral Agent to the
Borrower of any documents evidencing such releases.
SECTION 4. BORROWER REPRESENTATIONS. The Borrower represents and
warrants to the Banks that (i) upon receipt thereof, the consideration received
by the Borrower from each Timber Asset Sale shall not be less than the fair
market value of the assets being disposed pursuant thereto and (ii) such
consideration, in each case, shall consist solely of cash payable at closing.
SECTION 5. GOVERNING LAW. This Amendment shall be governed by and
construed in accordance with the laws of the State of New York.
SECTION 6. COUNTERPARTS; EFFECTIVENESS. This Amendment may be signed
in any number of counterparts, each of which shall be an original, with the same
effect as if the signatures thereto and hereto were upon the same instrument.
This Amendment shall become effective when the Administrative Agent shall have
received duly executed counterparts hereof signed by the Borrower and the
Required Banks (or, in the case of any party as to which an executed counterpart
shall not have been received,
2
<PAGE>
the Administrative Agent shall have received telegraphic, telex or other
written confirmation from such party of execution of a counterpart hereof by
such party).
3
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to
be duly executed as of the date first above written.
CROWN PAPER CO.
By /s/ Christopher McLain
--------------------------------
Name: Christopher McLain
Title: Senior Vice President
CROWN VANTAGE INC.
By /s/ Christopher McLain
--------------------------------
Name: Christopher McLain
Title: Senior Vice President
4
<PAGE>
MORGAN GUARANTY TRUST COMPANY OF NEW YORK
By /s/ John H. Chaplin
--------------------------------
Name: John H. Chaplin
Title: Associate
THE BANK OF NEW YORK
By /s/ Jonathan Rollins
--------------------------------
Name: Jonathan Rollins
Title: Assistant Vice President
CERES FINANCE LTD.
By /s/ John H. Cullinane
--------------------------------
Name: John H. Cullinane
Title: Director
THE CHASE MANHATTAN BANK, as
successor by merger to THE CHASE
MANHATTAN BANK, N.A.
By /s/ Ronald Potter
--------------------------------
Name: Ronald Potter
Title: Managing Director
5
<PAGE>
CREDITANSTALT CORPORATE FINANCE, INC.
By /s/ Jack R. Bertges
--------------------------------
Name: Jack R. Bertges
Title: Senior Vice President
By /s/ James F. McCann
--------------------------------
Name: James F. McCann
Title: Vice President
CHRISTIANIA BANK OG KREDITKASSE
By /s/ Carl-Peter Svendsen
--------------------------------
Name: Carl-Peter Svendsen
Title: First Vice President
By /s/ Kristi Holton
--------------------------------
Name: Kristi Holton
Title: First Vice President
DRESDNER BANK AG, NEW YORK BRANCH AND
GRAND CAYMAN BRANCH
By /s/ John W. Sweeney
--------------------------------
Name: John W. Sweeney
Title: Assistant Vice President
By /s/ Christopher E. Sarisky
--------------------------------
Name: Christopher E. Sarisky
Title: Assistant Treasurer
6
<PAGE>
FIRST SOURCE FINANCIAL LLP, by
FIRST SOURCE FINANCIAL, INC.,
its Agent/Manager
By /s/ James W. Wilson
--------------------------------
Name: James W. Wilson
Title: Senior Vice President
KZH HOLDING CORPORATION III
By /s/ Virginia R. Conway
--------------------------------
Name: Virginia R. Conway
Title: Authorized Agent
THE LONG-TERM CREDIT BANK OF JAPAN, LTD.
By /s/ T. Morgan Edwards II
--------------------------------
Name: T. Morgan Edwards II
Title: Deputy General Manager
MARINE MIDLAND BANK
By /s/ M.F. Brown
--------------------------------
Name: M.F. Brown
Title: Authorized Signatory
7
<PAGE>
MERRILL LYNCH PRIME RATE PORTFOLIO
By: Merrill Lynch Asset Management, LP,
as Investment Advisor
By /s/ Gilles Marchand, CFA
--------------------------------
Name: Gilles Marchand, CFA
Title: Authorized Signatory
MERRILL LYNCH SENIOR FLOATING RATE
FUND, INC.
By /s/ Gilles Marchand, CFA
--------------------------------
Name: Gilles Marchand, CFA
Title: Authorized Signatory
MORGAN STANLEY SENIOR FUNDING, INC.
By /s/ Christopher A. Pucillo
--------------------------------
Name: Christopher A. Pucillo
Title: Vice President
NATEXIS BANQUE
By /s/ Kevin Dooley
--------------------------------
Name: Kevin Dooley
Title: Vice President
8
<PAGE>
NATIONSBANK, N.A.
By /s/ Michael Short
--------------------------------
Name: Michael Short
Title: Officer
THE NORTHWESTERN MUTUAL LIFE INSURANCE
COMPANY
By /s/ Richard A. Strait
--------------------------------
Name: Richard A. Strait
Title: Vice President
PNC BANK NATIONAL ASSOCIATION
By /s/ David J. Egan
--------------------------------
Name: David J. Egan
Title: Senior Vice President
PRIME INCOME TRUST
By
--------------------------------
Name:
Title:
9
<PAGE>
PAMCO CAYMAN
By: Protective Asset Management Company,
as Collateral Manager
By /s/ James Dondero, CFA, CPA
--------------------------------
Name: James Dondero, CFA, CPA
Title: President
SOUTHERN PACIFIC THRIFT AND LOAN
By /s/ Charles D. Martorano
--------------------------------
Name: Charles D. Martorano
Title: Senior Vice President
STRATA FUNDING LTD.
By /s/ John H. Cullinane
--------------------------------
Name: John H. Cullinane
Title: Director
10
<PAGE>
TORONTO DOMINION (TEXAS), INC.
By /s/ Neva Nesbitt
--------------------------------
Name: Neva Nesbitt
Title: Vice President
VAN KAMPEN AMERICAN CAPITAL
PRIME RATE INCOME TRUST
By /s/ Kathleen A. Zairn
--------------------------------
Name: Kathleen A. Zairn
Title: Vice President
ML CBO IV (CAYMAN) LTD.
By: Protective Asset Management Company
By /s/ James Dondero, CFA, CPA
--------------------------------
Name: James Dondero, CFA, CPA
Title: President
11
<PAGE>
MORGAN GUARANTY TRUST
COMPANY, as Administrative
Agent and Collateral Agent
By /s/ Christopher A. Bondy
--------------------------------
Name: Christopher A. Bondy
Title: Vice President
12
<PAGE>
AMENDMENT NO. 4 TO CREDIT AGREEMENT
AMENDMENT dated as of March 13, 1998 among CROWN PAPER CO., CROWN
VANTAGE INC., the BANKS listed on the signature pages hereof (the "Banks") and
MORGAN GUARANTY TRUST COMPANY OF NEW YORK, as Administrative Agent (the
"Administrative Agent").
W I T N E S S E T H :
WHEREAS, the parties hereto have heretofore entered into a Credit
Agreement dated as of August 15, 1995 as amended (the "Agreement"); and
WHEREAS, the parties hereto desire to amend the Agreement as more
fully set forth below;
NOW, THEREFORE, the parties hereto agree as follows:
SECTION 1. DEFINITIONS; REFERENCES. Unless otherwise specifically
defined herein, each term used herein which is defined in the Agreement shall
have the meaning assigned to such term in the Agreement. Each reference to
"hereof", "hereunder", "herein" and "hereby" and each other similar reference
and each reference to "this Agreement" and each other similar reference
contained in the Agreement shall from and after the date hereof refer to the
Agreement as amended hereby.
SECTION 2. DECREASE IN THE CASH FLOW RATIO. Section 5.12 of the
Agreement is amended to read in its entirety as follows:
SECTION 5.12. CASH FLOW RATIO. As of the last day of each fiscal
quarter of the Borrower set forth below, the Cash Flow Ratio at such day will
not be less than the ratio set forth below opposite such fiscal quarter:
<TABLE>
<CAPTION>
Fiscal Quarter Ratio
-------------- -----
<S> <C>
First quarter of
1998 fiscal year 0.18:1
<PAGE>
Second quarter of
1998 fiscal year 0.16:1
Third quarter of
1998 fiscal year 0.17:1
Fourth quarter of
1998 fiscal year 0.18:1
Thereafter 0.20:1
</TABLE>
SECTION 3. DECREASE IN THE INTEREST COVERAGE RATIO. Section 5.13 of
the Agreement is amended to read in its entirety as follows:
SECTION 5.13. INTEREST COVERAGE RATIO. As of the last day of each
fiscal quarter of the Borrower set forth below, the Interest Coverage Ratio at
such day will not be less than the ratio set forth below opposite such fiscal
quarter:
<TABLE>
<CAPTION>
Fiscal Quarter Ratio
-------------- -----
<S> <C>
First quarter of
1998 fiscal year 1.75:1
Second quarter of
1998 fiscal year 1.75:1
Third quarter of
1998 fiscal year 1.75:1
Fourth quarter of
1998 fiscal year 1.90:1
Thereafter 2.50:1
</TABLE>
SECTION 4. DECREASE IN THE MINIMUM CONSOLIDATED TANGIBLE NET WORTH.
The table set forth in Section 5.14 of the Agreement is amended to read in its
entirety as follows:
<TABLE>
<CAPTION>
Period Minimum Amount
------ --------------
<S> <C>
2
<PAGE>
From and including
March 13, 1998 to but
excluding last day of second
quarter of
1998 fiscal year $60,000,000
From and including last
day of second quarter of
1998 fiscal year to but
excluding last day of first
quarter of 1999 fiscal year $50,000,000
From and including last
day of first quarter of
1999 fiscal year to but
excluding last day of
1999 fiscal year $75,000,000
Thereafter $100,000,000
</TABLE>
SECTION 5. GOVERNING LAW. This Amendment shall be governed by and
construed in accordance with the laws of the State of New York.
SECTION 6. COUNTERPARTS; EFFECTIVENESS. This Amendment may be signed
in any number of counterparts, each of which shall be an original, with the same
effect as if the signatures thereto and hereto were upon the same instrument.
This Amendment shall become effective as of the date hereof when the
Administrative Agent shall have received (x) duly executed counterparts hereof
signed by the Borrower and the Required Banks (or, in the case of any party as
to which an executed counterpart shall not have been received, the
Administrative Agent shall have received telegraphic, telex or other written
confirmation from such party of execution of a counterpart hereof by such party)
and (y) for the account of each Bank, an amendment fee in such amount as shall
have been previously agreed upon between the Borrower and the Banks.
3
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to
be duly executed as of the date first above written.
CROWN PAPER CO.
By /s/ R. Neil Stuart
--------------------------------
Name: R. Neil Stuart
Title: Senior Vice President and
Chief Financial Officer
CROWN VANTAGE INC.
By /s/ R. Neil Stuart
--------------------------------
Name: R. Neil Stuart
Title: Senior Vice President and
Chief Financial Officer
4
<PAGE>
MORGAN GUARANTY TRUST COMPANY OF
NEW YORK
By /s/ Stephen J. Hannan
--------------------------------
Name: Stephen J. Hannan
Title: Vice President
THE BANK OF NEW YORK
By /s/ Jonathon Rollins
--------------------------------
Name: Jonathon Rollins
Title: Assistant Vice President
CERES FINANCE LTD.
By /s/ John H. Cullinane
--------------------------------
Name: John H. Cullinane
Title: Director
THE CHASE MANHATTAN BANK, as
successor by merger to THE CHASE
MANHATTAN BANK, N.A.
By /s/ Leonard Weiner
--------------------------------
Name: Leonard Weiner
Title: Managing Director
5
<PAGE>
CREDITANSTALT CORPORATE FINANCE, INC.
By /s/ Jack R. Bertges
--------------------------------
Name: Jack R. Bertges
Title: Senior Vice President
By /s/ James F. McCann
--------------------------------
Name: James F. McCann
Title: Vice President
CHRISTIANIA BANK OG KREDITKASSE
By /s/ Carl-Peter Svendsen
--------------------------------
Name: Carl-Peter Svendsen
Title: First Vice President
By /s/ Peter M. Dodge
--------------------------------
Name: Peter M. Dodge
Title: First Vice President
DRESDNER BANK AG, NEW YORK BRANCH AND
GRAND CAYMAN BRANCH
By /s/ John W. Sweeney
--------------------------------
Name: John W. Sweeney
Title: Assistant Vice President
By /s/ Christopher E. Sarisky
--------------------------------
Name: Christopher E. Sarisky
Title: Assistant Treasurer
6
<PAGE>
FIRST SOURCE FINANCIAL LLP, by
FIRST SOURCE FINANCIAL, INC.,
its Agent/Manager
By /s/ James W. Wilson
--------------------------------
Name: James W. Wilson
Title: Senior Vice President
KZH HOLDING CORPORATION III
By /s/ Virginia Conway
--------------------------------
Name: Virginia Conway
Title: Authorized Agent
THE LONG-TERM CREDIT BANK OF JAPAN, LTD.
By /s/ T. Morgan Edward II
--------------------------------
Name: T. Morgan Edward II
Title: Deputy General Manager
MARINE MIDLAND BANK
By /s/ M.F. Brown
--------------------------------
Name: M.F. Brown
Title: Authorized Signatory
7
<PAGE>
MERRILL LYNCH PRIME RATE PORTFOLIO
By: Merrill Lynch Asset Management, LP,
as Investment Advisor
By /s/ Giles Marchand
--------------------------------
Name: Giles Marchand
Title: Vice President
MERRILL LYNCH SENIOR FLOATING RATE
FUND, INC.
By /s/ Giles Marchand
--------------------------------
Name: Giles Marchand
Title: Vice President
MORGAN STANLEY SENIOR FUNDING, INC.
By /s/ Geraldine A. Cocozziello
--------------------------------
Name: Geraldine A. Cocozziello
Title: Vice President
NATEXIS BANQUE
By /s/ G. Kevin Dooley
--------------------------------
Name: G. Kevin Dooley
Title: Vice President
8
<PAGE>
NATIONSBANK, N.A.
By /s/ Michael Short
--------------------------------
Name: Michael Short
Title: Senior Vice President
THE NORTHWESTERN MUTUAL LIFE INSURANCE
COMPANY
By /s/ Richard A. Strait
--------------------------------
Name: Richard A. Strait
Title: Its Authorized Representative
PNC BANK NATIONAL ASSOCIATION
By /s/ Philip K. Liebscher
--------------------------------
Name: Philip K. Liebscher
Title: Vice President
PRIME INCOME TRUST
By /s/ Shiela Finnerty
--------------------------------
Name: Shiela Finnerty
Title: Assistant Vice President
9
<PAGE>
PAMCO CAYMAN
By: Protective Asset Management Company,
as Collateral Manager
By /s/ James Dondero, CFA, CPA
--------------------------------
Name: James Dondero, CFA, CPA
Title: President
KEYPORT LIFE INSURANCE COMPANY
By:Chancellor LGT Senior Secured
Management, Inc., as Portfolio Advisor
By /s/ Anne McCarthy
--------------------------------
Name: Anne McCarthy
Title: Vice President
SOUTHERN PACIFIC THRIFT AND LOAN
By /s/ Chris Kelleher
--------------------------------
Name: Chris Kelleher
Title: Vice President
STRATA FUNDING LTD.
By /s/ John H. Cullinane
--------------------------------
Name: John H. Cullinane
Title: Director
10
<PAGE>
TORONTO DOMINION (TEXAS), INC.
By /s/ Neva Nesbitt
--------------------------------
Name: Neva Nesbitt
Title: Vice President
VAN KAMPEN AMERICAN CAPITAL
PRIME RATE INCOME TRUST
By /s/ Jeffrey W. Maillet
--------------------------------
Name: Jeffrey W. Maillet
Title: Senior Vice President &
Director
ML CBO IV (CAYMAN) LTD.
By: Protective Asset Management Company
By /s/ James Dondero, CFA, CPA
--------------------------------
Name: James Dondero, CFA, CPA
Title: President
11
<PAGE>
MORGAN GUARANTY TRUST
COMPANY, as Administrative
Agent and Collateral Agent
By /s/ Stephen J. Hannan
--------------------------------
Name: Stephen J. Hannan
Title: Vice President
12
<PAGE>
EXHIBIT 23
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholder of Crown Paper Co.:
We have audited the consolidated statements of operations, cash flows, and
changes in equity for the year ended December 31, 1995 of Crown Paper Co. and
subsidiaries, as described in Note 2, listed in the index on page 8 of this
Form 10-K. These financial statements are the responsibility of the
management of Crown Paper Co. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audit 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 significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated results of operations and cash flows of
Crown Paper Co. and subsidiaries for the year ended December 31, 1995, in
conformity with generally accepted accounting principles.
COOPERS & LYBRAND L.L.P.
Oakland, California
February 23, 1996
15
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-28-1997
<PERIOD-START> DEC-30-1996
<PERIOD-END> DEC-28-1997
<CASH> 11,415
<SECURITIES> 0
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0
0
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</TABLE>
