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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: 1-13868
CROWN VANTAGE INC.
(Exact name of registrant as specified in its charter)
VIRGINIA 54-1752384
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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: Common Stock, no par
value
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
The aggregate market value of voting stock held by non-affiliates of the
registrant as of March 20, 1998 was approximately $89,480,000.
As of March 20, 1998, 9,673,549 shares of Common Stock of the registrant
were outstanding.
Portions of the registrant's Annual Report to Shareholders for the fiscal
year ended December 28, 1997 are incorporated by reference in Parts I, II and IV
hereof. Portions of the registrant's definitive Proxy Statement for the Annual
Meeting of Shareholders scheduled for May 5, 1998 are incorporated by reference
in Part III hereof.
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2
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PART 1
ITEM 1. BUSINESS
GENERAL
Crown Vantage Inc. and subsidiaries (the "Company" or "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, 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
Company (the "Distribution"). The Distribution was made in the form of a
tax-free dividend on the basis of one share of the Company's common stock for
every ten shares of James River common stock. A total of 8,446,362 shares of
the Company's common stock was issued and began trading on NASDAQ on August 28,
1995.
James River transferred to the Company (including transfers to its wholly-owned
subsidiary Crown Paper Co.) certain assets of the Predecessor Business and the
Company assumed certain related liabilities from James River. In addition,
Crown Paper Co. 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 Company, 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. There is no assurance that the Company
will be successful in raising the required funding in time to exercise the
option. See "Liquidity and Capital Resources" on page 21 and Note 6 to the
financial statements at page 35 of the Company's 1997 ANNUAL REPORT TO
SHAREHOLDERS for more information concerning the PIK Notes.
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 Vantage'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.
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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. Crown Vantage 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 Crown Vantage less
susceptible, though not immune, to economic cycles.
SPECIALTY PAPERS
Crown Vantage 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 Vantage 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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SUPPLY REQUIREMENTS
FIBER. Wood fiber represents the largest single material cost for the Company's
two integrated facilities. In 1997, the Company's integrated mills required a
total of approximately 2,289,000 green tons of wood, of which 1,155,000 green
tons and 1,134,000 green tons were required by the Company's mills in St.
Francisville and Berlin-Gorham, respectively.
St. Francisville's wood supply requirements come primarily from outside sources,
including wood supplied under various arrangements including a "Cutting Plan"
and a long-term supply arrangement with a third party that runs to 2016.
Groundwood papers are made largely from pulp produced by mechanically grinding
wood to extract wood fibers and other by-products. Approximately 5% of St.
Francisville's total 1997 wood requirements, including 8% of its wood fiber
needs for its coated groundwood pulp production requirements, were provided by
the Company's Fitler Managed Forest. Essentially all of the lands associated
with this forest were sold, approximately 24,600 acres. However, the Company
retained ownership and management of the fast-growth plantation cottonwood as
well as silvicultural technology for the short-rotation cottonwoods. The
Company entered into a "Cutting Plan" agreement with the buyer in order to
continue supplying certain of its wood fiber needs.
Wood chips are used in the kraft pulp process (chemical pulp produced by an
alkaline cooking process) and are either chipped by the Company or purchased
directly. In 1997, Berlin-Gorham purchased approximately 99% of its softwood
and softwood chips from area lumber mills under long-term supply agreements,
while nearly all hardwood chips were chipped on site. The Company sold 83,200
acres of woodlands in New Hampshire and Maine in October 1997, which provided
approximately 3% of Berlin-Gorham's fiber needs in 1997. The Company entered
into a long-term wood supply contract with the buyer to supply wood to the
Berlin Mill.
PULP. Pulp represents the largest single material cost for the Company's
non-integrated facilities. In 1997, the Company had purchases of approximately
252,000 tons of several types of pulp. Purchased pulp is used to supply
non-integrated mills, to obtain species not produced by the Company, and to
minimize transportation costs.
COMPETITION
The markets in which the Company competes are highly competitive, with a number
of major companies competing in each market. Competition is primarily based on
price, although product quality, distinctive characteristics and customer
service are often factors that determine a customer's choice of preferred
supplier. Breadth of product line, product innovation, distribution and sales
support are also important competitive factors, as many customers choose to
maintain long-term relationships with suppliers who provide these benefits.
In the paper industry, companies tend to compete with other companies having
paper machines of like capacity and capability. Capacity of paper machines in
the industry varies widely and can range from 10 tons per day to over 1,000 tons
per day. The capacity of the Company's machines ranges from 10 tons per day to
approximately 400 tons per day. The Company generally focuses its machines and
work force on shorter run production and multiple grade changes of high margin,
value-added papers. As a result, the Company believes its broad manufacturing
capabilities are important in enhancing its competitiveness.
The top ten producers of coated groundwood papers accounted for approximately
91% of North American capacity in 1997. Crown Vantage ranked 8th in 1997, with
coated groundwood capacity market share of approximately 5%. The top 15
producers of uncoated printing and publishing papers accounted for 87% of North
American capacity in 1997. The Company ranked 15th in 1997, with an uncoated
printing and publishing papers capacity market share of approximately 2.1%. The
Company ranked 3rd in North American production of a broad market sector called
Packaging and Specialty Papers. Although it does not participate in some
niches of this sector, it held a 7% market share overall.
5
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CUSTOMERS
There were no individual customers to which sales exceeded 10% of the Company's
consolidated 1997 net sales. Sales to the Company's five largest customers in
1997 accounted for approximately 16% of consolidated net sales. The Company's
loss of any single customer would not have a material adverse effect on the
financial condition of the Company.
EMPLOYEES
At fiscal year end 1997, the Company had approximately 3,850 employees of whom
approximately 1/4 were salaried and 3/4 were hourly employees. All of the
hourly employees are represented under various union collective bargaining
contracts. In the U.S., most hourly workers are members of the United
Paperworkers International Union. Collective bargaining agreements covering the
Ypsilanti, Michigan and Richmond, Virginia mills, which cover approximately 5%
of the Company's hourly employees, expire before January 1, 1999. In the United
Kingdom, most hourly personnel are covered by an ongoing national agreement that
addresses worker conditions and safety, with wage increases negotiated annually.
The Company believes that it has a generally positive relationship with its
employees. In the last 10 years, the Company has not had any strikes or
labor-related work stoppages.
RESEARCH AND DEVELOPMENT
The Company has not expended and does not plan to expend significant efforts on
broad-based research and development activities. The Company instead emphasizes
the development of new and improved products primarily by using existing
technology and utilizing product development personnel located at all of its
mills.
ENVIRONMENTAL PROTECTION EFFORTS
Information concerning environmental expenditures, hazardous substance cleanup,
environmental legal proceedings and other environmental matters affecting the
Company is incorporated herein by reference from the text under the caption
"Other Matters" on page 23 of the Company's 1997 ANNUAL REPORT TO SHAREHOLDERS,
and Note 10 of the Notes to the Consolidated Financial Statements included in
the Company's 1997 ANNUAL REPORT TO SHAREHOLDERS.
CAPITAL EXPENDITURES
Information concerning the Company's capital expenditures is incorporated herein
by reference from the text under the captions "Investing Activities" on page 22
of the Company's 1997 ANNUAL REPORT TO SHAREHOLDERS.
TRADEMARKS AND PATENTS
The Company owns or has the right to use certain marks, which are registered
trademarks of the Company or are otherwise subject to protection under
applicable intellectual property laws. Some of its marks have been registered
in such foreign jurisdictions as the U.K., Germany and the Benelux countries.
The Company has registrations for numerous other trademarks routinely used in
the Company's marketing, advertising and promotions. Such registrations may be
kept in force in perpetuity through continued use of the marks and timely
renewal. The Company considers these marks and the accompanying goodwill and
customer recognition valuable and material to its business. The Company has a
number of patents which collectively it believes are also beneficial to the
Company, however the Company believes that the expiration of any patent would
not have a material adverse effect on the Company.
6
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INTERNATIONAL SALES
In 1997, net sales by the Company's foreign subsidiaries totaled $68.5 million,
or 7.6% of total net sales. The Company's domestic sales to foreign customers
were $49.4 million in 1997, approximately 5.0% of total net sales. The majority
of the Company's international sales were to customers in Europe, Canada,
Mexico, Australia and South Africa.
MARKETING AND DISTRIBUTION
The Company's products are sold either on a direct basis or through merchant
distributors to publishers, printers, converters or other end-users. The
Company's sales and marketing staff work with merchants and converters, or
directly with end-users, to identify paper customization and service
opportunities that can help the Company differentiate itself from competitors
and make the Company a preferred source of supply. A strong integration between
manufacturing, product development and sales helps the Company to respond
favorably and quickly to customer inquiries and orders. As a result of this
teamwork, the Company's sales staff has the ability and authority to respond to
many non-standard customer requests immediately.
The Company's finished products are generally marketed on a delivered price
basis and shipped by common carrier. Crown Vantage believes that timely and
economical delivery of finished products is a critical element of a customer's
selection of preferred suppliers and is a significant factor in the Company's
ability to compete. The Company typically ships by rail, truck or intermodal
service, using the most economical mode that meets service specifications. In
many cases, Crown Vantage has contracted with key carriers for guaranteed space,
which benefits the Company's cost structure and its customers through more
dependable delivery. The mills seek to control warehouse costs by limiting
finished goods inventory to generally between 2 and 14 days. The Company leases
a warehouse and distribution center in Southampton, Pennsylvania where text and
cover products from four manufacturing sites are stocked and combined for
shipment by guaranteed pool trucks to stocking merchants and printers throughout
the U.S. and Canada. Because these products are generally ordered in relatively
small quantities, pooling orders from multiple customers in the same geographic
area is cost-effective.
CYCLICAL NATURE OF THE PAPER INDUSTRY
The markets for paper products, including those in which the Company competes,
are highly cyclical, characterized by periods of supply and demand imbalance and
sensitivity to changes in industry capacity. Demand for paper products is
influenced to a significant degree by the overall level of domestic economic
activity, which is beyond the Company's control. A number of structural
factors also serve to accentuate the cyclicality of the paper industry,
including the substantial capital investment and high fixed costs required to
manufacture paper products; the significant exit costs associated with capacity
reductions; and, at times, intensified competition from overseas market
conditions. Because of the high fixed costs associated with paper production,
paper manufacturers need to maintain high levels of capacity utilization
(operating rates) to cover fixed costs and, accordingly, relatively small
changes in operating rates due to changes in domestic demand, capacity, and
levels of imports may significantly affect prices. In addition, operating
results at the Company's non-integrated facilities are more susceptible to pulp
price fluctuations -- benefiting during periods of decreasing pulp prices and
suffering during periods of pulp price increases.
LEVERAGE RESULTING FROM THE SPIN-OFF
As a result of the Spin-Off, the Company has significant debt service
requirements. The degree to which the Company is leveraged could impact its
ability to obtain additional financing for working capital, capital
expenditures, acquisitions and general corporate purposes.
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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 Gorham, NH Port Huron, MI St. Francisville, LA
Guardbridge, Scotland Parchment, MI Richmond, VA (b)
Dalmore, Scotland Milford, NJ Berlin and 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 PRODUCTION Coating, calendering Calendering, watermarks, Coating, waxing, Calendering, cast-
CAPABILITIES: sheeting, embossing calendering, chemical coating, sheeting
treatment
PAPER MACHINES AND 2 paper machines with on- 12 paper machines, 14 paper machines, 3 3 paper machines, 4 cast-
RELATED EQUIPMENT: machine coating, 4 off-machine assorted sheeters, with on-machine coating coating machines, 4
super calenders rewinders and embossers and hot/soft sheeters
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.
(d) Includes approximately 2,200 tons sold by the Newark, Delaware facility
that was closed during the fourth quarter of 1997.
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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
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EXECUTIVE OFFICERS OF CROWN VANTAGE INC.:
<TABLE>
<CAPTION>
Name Age Position
- ---- --- --------
<S> <C> <C>
Ernest S. Leopold 64 Chairman, Chief Executive Officer, Director
Robert A. Olah 49 President and Chief Operating Officer
F. Allen Byrd 46 Senior Vice President, Coated Printing and
Publishing Papers
Katie Cutler 53 Senior Vice President, Corporate
Communications
Frederick T. Dalrymple 65 Senior Vice President, Specialty Papers
Antoinette S. Gabriel 53 Senior Vice President, Chief Administrative
Officer
C. Neil Henderson 59 Senior Vice President, Uncoated Printing and
Publishing Papers
Michael J. Hunter 37 Vice President, Chief Accounting Officer
Christopher M. McLain 54 Senior Vice President and General Counsel,
Secretary
David A. Nelson 40 Senior Vice President, Uncoated Printing and
Publishing Papers
R. Neil Stuart 43 Senior Vice President, Chief Financial
Officer
</TABLE>
Ernest S. Leopold has been Chairman and Chief Executive Officer since creation
of the Company in 1995. In addition to Chairman and Chief Executive Officer,
previously served as President since the creation of the Company in 1995.
Previously served as Executive Vice President, Communications Papers of James
River Corporation.
Robert A. Olah has been President and Chief Operating Officer since December 9,
1997, and Senior Vice President, Specialty Papers since 1996 and previous
thereto served as Senior Vice President, Packaging Papers Group since creation
of the Company in 1995. Previously served as Vice President, General Manager,
James River Corporation Packaging Papers Division.
F. Allen Byrd has been Senior Vice President, Coated Printing and Publishing
Papers since 1996 and previous thereto served as Senior Vice President, St.
Francisville Group since creation of the Company in 1995. Previously served as
Vice President, General Manager, James River Corporation Printing Papers Group.
Katie Cutler has been Senior Vice President, Corporate Communications since
creation of the Company in 1995. Previously served as Vice President, External
Affairs, James River Corporation Communication Papers Business.
Frederick T. Dalrymple has been Senior Vice President for Specialty Papers since
January 1998 and previous thereto served as Vice President for mill operations
for Specialty Papers since 1996.
Antoinette S. Gabriel has been Senior Vice President, Chief Administrative
Officer since creation of the Company in 1995. Previously served as Vice
President, Planning and Administration, James River Corporation Communication
Papers Business.
C. Neil Henderson has been Senior Vice President, Uncoated Printing and
Publishing Papers since 1996 and previous thereto served as Senior Vice
President, Curtis Fine Papers Group since creation of the Company in 1995.
Previously served as Chief Executive of James River Fine Papers Group and Chief
Executive of James River Fine Papers, Ltd.
Michael J. Hunter has been Vice President, Chief Accounting Officer since
January 1997. Previously served as Director of Financial Reporting for the
Company since December 1995 and prior thereto was Senior Manager at Ernst &
Young LLP, San Francisco.
Christopher M. McLain has been Senior Vice President and General Counsel,
Secretary since October 1995. Previously an attorney with Sonnenschein Nath &
Rosenthal, San Francisco, and prior thereto was Senior Vice President, General
Counsel and Secretary, Transamerica Corporation, San Francisco.
David A. Nelson has been Senior Vice President, Uncoated Printing and Publishing
Papers since 1996 and previous thereto served as Senior Vice President,
Berlin-Gorham Group since creation of the Company in 1995. Previously served as
Vice President, General Manager, James River Corporation Berlin-Gorham
Operations.
R. Neil Stuart has been Senior Vice President, Chief Financial Officer since May
1996. Previously thereto served as Managing Director at the Toronto-Dominion
Bank, New York.
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The directors of Crown Vantage will hold office until the next annual meeting of
stockholders of Crown Vantage and until their successors are duly elected and
qualified. The executive officers named above will be elected to serve in such
capacities until the next annual meeting of the Board of Directors, or until
their respective successors have been duly elected and have been qualified, or
until their earlier death, resignation, disqualification or removal from office.
There is no family relationship between any of the officers.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company had approximately 8,500 shareholders of record of its Common Stock
as of March 20, 1998. The Company's Common Stock is traded on the NASDAQ
National Market System under the symbol CVAN.
Information concerning dividend restrictions and the high and low sales prices
of the Company's Common Stock is incorporated herein by reference from Note 6
and Note 15, respectively, on pages 35 and 46, respectively, of the Company's
1997 ANNUAL REPORT TO SHAREHOLDERS.
ITEM 6. SELECTED FINANCIAL DATA
Selected financial data is incorporated herein by reference from page 16 of the
Company's 1997 ANNUAL REPORT TO SHAREHOLDERS.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Management's Discussion and Analysis of Financial Condition and Results of
Operations is incorporated herein by reference from pages 17 through 24 of the
Company's 1997 ANNUAL REPORT TO SHAREHOLDERS.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Report of Independent Auditors as of and for the years ended December 28,
1997 and December 29, 1996, and the consolidated financial statements of Crown
Vantage Inc. are incorporated herein by reference from pages 25 through 46 of
the Company's 1997 ANNUAL REPORT TO SHAREHOLDERS. The Report of Independent
Accountants as of December 31, 1995 and for the year ended December 31, 1995 is
included herein as Exhibit 23.1 to this Form 10-K. See Item 14 of this report
for information concerning financial statements and schedule filed with this
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, 1996 and
June 28, 1996, respectively, which are incorporated herein by reference.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information concerning the Company's Board of Directors and compliance with
Section 16(a) of the Securities Exchange Act of 1934 is incorporated herein by
reference from the text under the captions "Election of Directors," "Certain
Information Concerning the Board of Directors and its Committees" and "Section
16(a) Beneficial Ownership Reporting Compliance" included in the Company's Proxy
Statement for the May 5, 1998 Annual Meeting of Shareholders.
Information concerning the Company's Executive Officers appears under the
caption "Executive Officers of Crown Vantage Inc." included in Part I of this
Form 10-K.
11
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION
Information concerning executive compensation is incorporated herein by
reference from the text in the following tables which are included in the
Company's Proxy Statement for the May 5, 1998 Annual Meeting of Shareholders:
Summary Compensation Table, Options/SAR Grants in 1997, Aggregated Option/SAR
Exercises in 1997 and Fiscal Year End Option/SAR Values, Ten-Year Option
Repricings, and Approximate Annual Pension Benefit at Age 65.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information concerning ownership of equity stock of the Company by certain
beneficial owners and management is incorporated herein by reference from the
text under the caption "Principal Shareholders" and "Common Stock Ownership of
Directors and Executive Officers" included in the Company's Proxy Statement for
the May 5, 1998 Annual Meeting of Shareholders.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information concerning certain relationships and related transactions with
officers and directors is incorporated herein by reference from the text under
the caption "Certain Relationships and Related Transactions" included in the
Company's Proxy Statement for the May 5, 1998 Annual Meeting of Shareholders.
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 incorporated
herein by reference from the Company's 1997 ANNUAL REPORT TO SHAREHOLDERS. The
report of independent accountants for the year ended December 31, 1995 is
included herein as Exhibit 23.1
<TABLE>
<CAPTION>
1997 Annual
Report Page
-----------
<S> <C>
Report of Independent Auditors....................................... 25
Consolidated Statements of Operations- Years Ended December 28, 1997,
December 29, 1996 and December 31, 1995............................ 26
Consolidated Balance Sheets - December 28, 1997 and December 29, 1996 27
Consolidated Statements of Cash Flows - Years Ended December 28, 1997,
December 29, 1996 and December 31, 1995 ........................... 28
Consolidated Statement of Changes in Equity- Years Ended December 28,
1997, December 29, 1996, and December 31, 1995 .................... 29
Notes to Consolidated Financial Statements........................... 30
<CAPTION>
PAGE OR
EXHIBIT NUMBER
(a)(2) FINANCIAL STATEMENT SCHEDULE. IN FORM 10-K
------------
<S> <C>
Report of Independent Auditors on Financial Statement Schedule
as of and for the years ended December 28, 1997 and
December 29, 1996............................................... Page 18
Report of Independent Accountants on Financial Statement
Schedule for the period since inception through December 31, 1995. Exhibit 23.1
Schedule I - Condensed Financial Information of Registrant........ Page 19
</TABLE>
All schedules other than that indicated above 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.
(a)(3) EXHIBITS
12
<PAGE>
All exhibits, including those incorporated by reference:
<TABLE>
<CAPTION>
Exhibit
No. Description
- ------- -----------
<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(5) Articles of Amendment to the Articles of Incorporation dated May 13,
1996 and July 31, 1996
3.3(6) 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(8) Crown Vantage Inc. Stock Award Plan for Outside Directors (as
amended) **
10.28(8) Second Amendment to the Crown Vantage Inc. Stock Award Plan for
Outside Directors **
10.29(6) Crown Vantage Inc. 1995 Incentive Stock Plan **
10.30(1) Form of Crown Vantage Inc. Stock Plus Employee Stock Ownership Plan
**
10.31(4) 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 **
13
<PAGE>
10.35(2) Form of Restricted Stock Award Agreement under the Registrant's 1995
Stock Award Plan for Outside Directors **
10.36(4) Form of Agreement (Severance) dated December 5, 1995 **
10.37(4) Form of Amendment No. 1 to the Crown Vantage Inc. Stock Plus Employee
Stock Ownership Plan
10.38(3) Indenture between the Bank of New York, as trustee, and the Company,
relating to the Notes
10.39(8) First Supplemental Indenture between the Bank of New York, as trustee,
and the Company, relating to the Notes
10.40(3) Bank Credit Agreement among Morgan Guaranty Trust Company of New York,
as Agent, the Banks named therein, Crown Paper and Crown Vantage
10.41(8) Amendment No. 1 to Credit Agreement
10.42(8) Amendment No. 2 to Credit Agreement
10.43(3) Note Purchase Agreement Between JRC and Crown Vantage, relating to the
PIK Notes
10.44(8) Receivables Purchase Agreement
10.45(8) Purchase and Sale Agreement (relating to Receivables Purchase
Agreement)
10.46(8) Loan Agreement between Business Finance Authority of the State of New
Hampshire and Crown Paper Co.
10.47(8) Refunding Loan Agreement between Business Finance Authority of the
State of New Hampshire and Crown Paper Co.
10.48* Amendment No. 3 to Credit Agreement
10.49* Amendment No. 4 to Credit Agreement
10.50(9) Option and Settlement Agreement Between Fort James Corporation and
Crown Vantage, relating to the PIK Notes
11* Statement Re: Computation of Per Share Earnings
13.1* Portions of the 1997 Annual Report to Shareholders, which are
specifically incorporated by reference herein
16(7) Letter regarding change in certifying accountant and related
information
21.1(8) Subsidiaries
23.1* Report of Coopers & Lybrand L.L.P. on the consolidated financial
statements and financial statement schedule of the Company for the
year ended December 31, 1995.
23.2* Consent of Coopers & Lybrand L.L.P. to the incorporation by reference
of their report dated February 23, 1996 into the Registration
Statements on Form S-8, File Nos. 33-96788, 33-96854, 33-96856,
333-09361, and 333-4420
23.3* Consent of Ernst & Young LLP to the incorporation by reference of
their report dated January 30, 1998 into the Registration Statements
on Form S-8, File Nos. 33-96788, 33-96854, 33-96856, 333-09361, and
333-4420
27* Financial Data Schedule
</TABLE>
- -------------------------
(1) Previously filed as Exhibits to Crown Vantage Inc. Registration Statement
No. 33-95736 on Form S-1 filed with the Securities and Exchange Commission
("SEC") on August 14, 1995 and all amendments thereto, concerning the
distribution of Common Stock of Crown Vantage Inc.
(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 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.
(4) Previously filed as Exhibits to Crown Vantage Inc.'s Annual Report on Form
10-K for the year ended December 31, 1995.
(5) 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.
(6) Previously filed as Exhibits to Crown Vantage Inc.'s report on Form 10-Q
for the quarter ended September 29, 1996.
(7) Previously filed in Form 8-K and Form 8-K/A dated June 25, 1996 and
June 28, 1996, respectively.
(8) Previously filed as Exhibits to Crown Vantage Inc.'s Annual Report on Form
10-K for the year ended December 29, 1996
(9) 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.
14
<PAGE>
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 VANTAGE INC.
(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
15
<PAGE>
/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
16
<PAGE>
CROWN VANTAGE INC.
FINANCIAL STATEMENT SCHEDULE I
CONDENSED FINANCIAL STATEMENTS OF REGISTRANT
17
<PAGE>
REPORT OF INDEPENDENT AUDITORS
We have audited the consolidated financial statements of Crown Vantage Inc. and
subsidiaries as of December 28, 1997 and December 29, 1996, and for the years
then ended, and have issued our report thereon dated January 30, 1998. Our
report on the consolidated financial statements of Crown Vantage Inc. has been
incorporated by reference in this Form 10-K from page 25 of the 1997 Annual
Report to Shareholders of Crown Vantage Inc. In connection with our audits of
such financial statements, we have also audited the related financial statement
schedule listed in Item 14(a) of this Form 10-K. This schedule is the
responsibility of the Company's management. Our responsibility is to express an
opinion on this schedule based on our audits. The schedule of Crown Vantage
Inc. for the period since inception through December 31, 1995 was audited by
other auditors whose report dated February 23, 1996 expressed an unqualified
opinion on that schedule.
In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
presents fairly, in all material respects, the information set forth therein.
ERNST & YOUNG LLP
San Francisco, California
January 30, 1998
18
<PAGE>
CROWN VANTAGE INC.
CONDENSED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Year Ended Year Ended Since Inception through
(amounts in thousands) December 28, 1997 December 29, 1996 December 31, 1995
----------------- ----------------- -----------------
<S> <C> <C> <C>
Interest expense $(14,907) $(13,381) $ (4,616)
-------- -------- --------
Loss before income taxes and equity in
undistributed loss of subsidiaries (14,907) (13,381) (4,616)
Income tax benefit 5,218 5,113 1,835
Equity in undistributed loss of subsidiaries (22,531) (16,536) 15,968
-------- -------- --------
Net loss $(32,220) $(24,804) $ 13,187
-------- -------- --------
-------- -------- --------
</TABLE>
See notes to condensed financial statements.
19
<PAGE>
CROWN VANTAGE INC.
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
(dollar amounts in thousands) December 28, 1997 December 29, 1996
- ---------------------------- ----------------- -----------------
<S> <C> <C>
ASSETS
Deferred income taxes $ 6,327 $ 1,107
Investment in subsidiaries 110,607 130,963
-------- --------
Total Assets $116,934 $132,070
-------- --------
-------- --------
LIABILITIES AND EQUITY
Current Liabilities:
Accrued liabilities $ 4,718 $ 4,255
-------- --------
Total current liabilities 4,718 4,255
-------- --------
Long-term debt 113,185 98,742
-------- --------
Total Liabilities 117,903 102,997
-------- --------
Shareholders' Equity:
Preferred Stock, no par value;
Authorized - 500,000 shares;
Issued and outstanding - None
Common Stock, no par value;
Authorized - 50,000,000 shares;
Issued and outstanding - 9,668,313 and
9,107,535 shares at December 28, 1997
and December 29, 1996, respectively 45,831 44,578
Unearned ESOP shares and other (4,301) (7,253)
Cumulative foreign currency translation
adjustment 1,338 3,365
Retained deficit (43,837) (11,617)
-------- --------
(969) 29,073
-------- --------
Total Liabilities and Equity $116,934 $132,070
-------- --------
-------- --------
</TABLE>
See notes to condensed financial statements.
20
<PAGE>
Notes to Condensed Financial Statements
Note 1 -- Basis of Presentation
Crown Vantage Inc. ("Crown Vantage" or the "Parent Company") was incorporated in
Virginia in March 1995. Crown Vantage's only significant asset is all of the
outstanding shares of Crown Paper Co. and subsidiaries ("Crown Paper"). The
Parent Company's investment in subsidiaries is stated at cost plus (minus)
equity in undistributed income (loss) of its subsidiaries since the Spin-Off.
Net income (loss) of the Parent Company reflects its income and expense as well
as the earnings (losses) of Crown Paper.
Note 2 -- Long-Term Debt
In connection with the Spin-Off, the Parent Company issued to James River 11.45%
Senior Pay-in-Kind Notes (the "PIK Notes") which are due in 2007. Interest is
due semi-annually in March and September and may be paid in cash or in
additional PIK Notes until September 2003. Thereafter interest must be paid in
cash. The PIK Notes are redeemable at the option of the Company on or after
September 2000 at a redemption price of 105.725% declining to par in 2003 and
thereafter. In addition, the Company may redeem up to 33-1/3% of the
outstanding principal amount prior to September 1998 from the proceeds of one or
more public offerings at a redemption price of 110.45% of the principal amount
(100% of the principal amount if held by James River). In the event of a Change
of Control (as defined in the underlying agreement) the holders of the PIK Notes
have the right to require the Company to purchase the PIK Notes in cash at 101%.
The PIK Notes have been recorded at a discount to reflect an approximate market
rate of interest of 13% at the Spin-Off.
Note 3 -- Cash Flow Information
In connection with the establishment of Crown Vantage Inc.'s Employee Stock
Ownership Plan (the "ESOP"), the Parent Company in 1995 initially sold 444,000
shares of Common Stock to the ESOP for $10 million that was funded through a
loan from Crown Paper Co. to the ESOP. The loan was completely repaid in 1997.
On May 2, 1997 an additional 500,000 shares of Common Stock were sold to the
ESOP for $3 million. Prior to the sale, Crown Paper borrowed the $3 million
under its Bank Credit Facility and lent that sum to the ESOP. Upon receipt of
the funds from the ESOP, the Parent contributed the $3 million to Crown Paper,
which used the funds to reduce borrowings on its Bank Credit Facility. The
purchase price was at the average of the high and low prices for the previous 10
days trading period. The loan bears interest at 11% and is due May 1, 2004.
Other than the cash flows described above, there were no other cash flows of the
Parent.
Note 4 -- Dividends
During 1997, 1996, and 1995, Crown Paper Co. neither paid nor declared dividends
to the Parent.
21
<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 11
STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS
<TABLE>
<CAPTION>
Year Ended December 28, 1997 Year Ended December 29, 1996
---------------------------- ----------------------------
(in thousands, except per share loss) Basic Diluted Basic Diluted
- ------------------------------------ ----- ------- ----- -------
<S> <C> <C> <C> <C>
Average shares outstanding 8,931 8,931 8,596 8,596
Effect of dilutive stock options - due to
the Company's net loss, assumed conversion
of stock is anti-dilutive. 0 0 0 0
-------- -------- -------- --------
Totals 8,931 8,931 8,596 8,596
-------- -------- -------- --------
-------- -------- -------- --------
Net loss $(32,220) $(32,220) $(24,804) $(24,804)
-------- -------- -------- --------
-------- -------- -------- --------
Basic loss per share $ (3.61) $ (3.61) $ (2.89) $ (2.89)
-------- -------- -------- --------
-------- -------- -------- --------
</TABLE>
Note: Prior period shares outstanding used to compute loss per share have been
restated to conform with Statement of Financial Accounting Standards No. 128
("Earnings Per Share"). The restatement did not materially impact loss per
share as previously reported. Earnings Per Share for the year ended December 31,
1995 is not available as the Company was not a separate entity with its own
capital structure for the full year in 1995.
22
<PAGE>
Crown Vantage Inc.
SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------
Year Ended December
- -----------------------------------------------------------------------------------------------------------------------
(dollar amounts in millions) 1997 1996 1995 (a) 1994 (a) 1993 (a)
- -----------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
RESULTS OF OPERATIONS
Net sales $ 897 $ 925 $1,077 $ 875 $ 823
Gross margin 60 75 156 43 36
Selling and administrative expenses 56 52 56 57 49
Operating income (loss) 14 23 100 (14) (13)
Interest expense 65 63 26 2 2
Net income (loss) (32) (25) 45 (10) (12)(b)
Basic loss per share (c) (3.61) (2.89)
BALANCE SHEET DATA
Cash and cash equivalents $ 11 $ 1 $ 5 $ 12 $ 9
Working capital 43 36 87 98 78
Property, plant and equipment, net 621 678 668 699 722
Total assets 881 946 985 987 986
Total long-term debt
(including current maturities) 545 553 567 26 26
OTHER FINANCIAL DATA
EBITDA (d) $ 100 $ 104 $ 180 $ 63 $ 63
Capital expenditures 59 81 47 53 110
SELECTED OPERATING DATA
Employee head count 3,850 3,995 4,162 4,324 4,536
Tons sold (thousands of tons) 982 948 985 990 924
Pulp purchases (thousands of tons) 252 261 289 309 333
Pulp sold (thousands of tons) 57 43 44 57 45
- -----------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Includes the actual consolidated results of operations and other financial
and operating data of the Company for the four months ended December 31,
1995 as well as the historical combined results of certain operations of
James River Corporation of Virginia (now known as "Fort James Corporation")
which comprised a substantial part of its Communication Papers Business and
the paper-based part of its Food and Consumer Packaging Business for the
eight months ended August 27, 1995 and the two years ended December 25,
1994.
(b) Includes the effect of the 1993 U.S. corporate tax rate increase on
deferred taxes which increased the net loss by $2.5 million.
(c) Basic loss per share is restated to conform with Statement of Financial
Accounting Standards No. 128 "Earnings Per Share." Basic earnings per share
prior to 1996 are not presented since the Company was not a separate entity
with its own capital structure prior to the Spin-Off on August 25, 1995.
(d) EBITDA represents income (loss) before income taxes, interest expense and
depreciation and amortization. 1997 EBITDA includes a $13.5 million gain on
sale of timberlands and a $3.3 million charge due to the closure of the
Newark, Delaware facility in 1997. 1994 EBITDA includes $6.0 million in
severance and other items. EBITDA is not presented herein as an alternative
measure of operating income or cash flow from operations (both as
determined in accordance with generally accepted accounting principles) but
rather to provide additional information related to the Company's ability
to service debt.
16
<PAGE>
Crown Vantage Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
CORPORATE OVERVIEW
THE "SPIN-OFF"
Crown Vantage Inc. (the "Company" or "Crown Vantage") became an independent
company upon the spin-off by James River Corporation of Virginia ("James
River"), now known as Fort James Corporation, of certain assets and related
liabilities from its Communication Papers Business, and the paper-based part of
its Food and Consumer Packaging businesses (see "Liquidity and Capital
Resources"). On August 25, 1995, James River distributed to its shareholders all
the outstanding stock of Crown Vantage (the "Spin-Off").
BUSINESS SECTORS
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 and 31 paper machines and is partially
integrated. The Company purchases pulp in order to supply non-integrated mills,
to obtain species not produced by the Company, and to minimize transportation
costs.
The Company's two largest facilities are integrated operations located in St.
Francisville, Louisiana, and Berlin and Gorham, New Hampshire. St. Francisville
produces coated groundwood papers for magazines and catalogs and uncoated
specialty converting papers. Berlin-Gorham primarily produces uncoated printing
and publishing papers as well as market pulp. The Company also produces uncoated
printing and publishing papers at its non-integrated facilities in Adams,
Massachusetts; Ypsilanti, Michigan; and Dalmore and Guardbridge, Scotland. The
Company's food and retail packaging papers are produced primarily at
non-integrated facilities in Port Huron and Parchment, Michigan, and Milford,
New Jersey. In addition to its primary paper-making operations, the Company
operates a cast-coating facility in Richmond, Virginia.
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.
CONSOLIDATED RESULTS OF OPERATIONS --
1997 COMPARED TO 1996
Net Sales: The Company's 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.
[CHART]
Net Sales Price
Per Ton
1997 - $914
1996 - $977
1995 - $1,097
[CHART]
Tons Sold
Per Employee
1997 - 255
1996 - 237
1995 - 237
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 (see
"Liquidity and Capital Resources"), 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.
[CHART]
Costs of Goods Sold
Per Ton
1997 - $853
1996 - $897
1995 - $935
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 $63.3 million in 1996 to $65.2
million in 1997. The increase in interest expense is primarily due to the higher
interest accretion on the Pay-in-Kind Notes during 1997 as compared to 1996.
Tax Provision: The income tax benefit in 1997 totaled $17.4 million as compared
to $15.2 million in 1996. The effective income tax rates were 35.0% and 38.0% in
1997 and 1996, respectively.
17
<PAGE>
Crown Vantage Inc.
Loss Per Share: The basic loss per share in 1997 and 1996 was $3.61 and $2.89,
respectively. During the fourth quarter of 1997 the Company adopted Statement of
Financial Accounting Standards No. 128 ("SFAS No. 128") "Earnings per Share."
The restatement of prior period losses per share and shares outstanding to
conform with SFAS No. 128 was not material. Diluted losses per share are not
presented as these amounts are the same as basic losses per share. Since the
Company was not a separate entity with its own capital structure for the full
year in 1995, earnings (loss) per share data for the entire 1995 fiscal year are
not available.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
RESULTS OF OPERATIONS BY BUSINESS SECTOR
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
NET SALES AND TONNAGE BY SECTOR
- --------------------------------------------------------------------------------------------------------------
FOR THE YEAR ENDED 1997 1996 1995
- --------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
(sales in millions, tons in thousands) TONS SALES TONS SALES TONS SALES
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.
[CHART]
Net Sales price per Ton Sold
Coated Printing and Publishing
Papers
1997 - $709
1996 - $828
1995 - $925
[CHART]
Net Sales price per Ton Sold
Uncoated Printing and Publishing
Papers
1997 - $975
1996 - $997
1995 - $1,128
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
18
<PAGE>
Crown Vantage Inc.
Crown Vantage 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 partially 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
Crown Vantage 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.
[CHART]
Net Sales Price
Per Ton Sold
Packaging Papers
1997 - $1,252
1996 - $1,276
1995 - $1,391
During 1997, Crown Vantage'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
Crown Vantage 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, disposable medical gowns, 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.
[CHART]
Net Sales Price
Per Ton Sold
Converting Papers
1997 - $873
1996 - $906
1995 - $954
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.
19
<PAGE>
Crown Vantage Inc.
- --------------------------------------------------------------------------------
RESULTS OF OPERATIONS - 1996 COMPARED TO 1995
Net Sales: The Company's net sales decreased by 14.0% to $925.4 million for the
52 week year ended December 29, 1996 as compared to $1.1 billion for the 53 week
year ended December 31, 1995. The decrease in sales is largely due to a 10.6%
decrease in average selling prices per ton in 1996 compared to 1995. The
decrease in sales prices began in early 1996, primarily as a result of excessive
inventories at the producer and customer levels, which depressed paper prices.
In addition, market pulp prices began to decline during the early months of 1996
which further contributed toward decreasing paper prices throughout 1996. Also
contributing to the sales decrease, net tons sold in 1996 were 947,600, a 3.8%
decrease from the 985,100 tons sold in 1995.
Operating Income: Operating income of $22.7 million in 1996 decreased $77.6
million from $100.3 million in 1995. The significant decrease in operating
income is primarily attributable to the decreased pricing discussed above,
partially offset by the Company's cost-reduction program. Gross margin decreased
from 14.5% of net sales in 1995 to 8.1% of net sales in 1996. The decrease in
net sales price per ton discussed above, partially offset by a 3.9% decrease in
average cost per ton sold in 1996 as compared to 1995, caused the reduction in
gross margin.
Selling and administrative expenses decreased $3.3 million to $52.2 million in
1996 as compared to $55.5 million in 1995. Selling and administrative expenses
in 1996 include $1.6 million attributable to the Company's sales of undivided
interests in certain accounts receivable (see Liquidity and Capital Resources).
Selling and administrative expenses in 1995 include $3.7 million of incentive
compensation that was not incurred in 1996 due to operating losses.
Interest Expense: Interest expense increased from $25.8 million in 1995 to $63.3
million in 1996. The significant increase is a result of the financings incurred
in connection with the Spin-Off.
Tax Provision: The income tax benefit in 1996 totaled $15.2 million as compared
to income tax expense of $29.9 million in 1995. The effective income tax rates
were 38.0% and 39.8% in 1996 and 1995, respectively.
Earnings (Loss) Per Share: The basic loss per share in 1996 was $2.89. Since the
Company was not a separate entity with its own capital structure for the full
year in 1995, earnings (loss) per share data for the entire 1995 fiscal year are
not available.
PRINTING AND PUBLISHING PAPERS
Net sales of coated groundwood printing and publishing papers totaled $213.6
million in 1996 as compared to $263.2 million in 1995, an 18.9% decrease. The
decrease in net sales is due to a 10.5% decrease in coated groundwood prices on
average in 1996 compared to 1995. Also contributing to the decrease in net sales
was a 26,500 ton decrease in tons sold in 1996 as compared to 1995.
Net sales of uncoated printing and publishing papers in 1996 were $239.1 million
as compared to $273.7 million in 1995, a 12.6% decrease. The decrease in net
sales is primarily a result of an 11.7% decrease in the average selling price
per ton in 1996 as compared to 1995. Tons sold in 1996 were 239,900, a 1.1%
decrease from 1995.
Operating income from the sale of printing and publishing papers was $12.5
million in 1996, a $66.0 million decrease from operating income of $78.5 million
in 1995. The significant decline in operating income is attributable to the
decrease in pricing in both the coated and uncoated printing and publishing
papers sectors as well as the 29,100 ton decrease in printing and publishing
papers sold in 1996 compared to 1995.
FOOD AND RETAIL PACKAGING PAPERS
During 1996, Crown Vantage's food and retail packaging papers business generated
net sales of $304.9 million as compared to net sales in 1995 of $345.7 million.
The 11.8% decrease in net sales is the combined result of an 8.2% decrease in
average selling price per ton in 1996 compared to 1995 and a 9,700 ton (3.9%)
decrease in tons sold in 1996 versus 1995. A decline in pulp prices negatively
affected prices for the Company's packaging papers, resulting in the 8.2%
decrease in average selling price per ton discussed above.
However, the Company's packaging papers business is non-integrated and operating
results benefit from pulp price decreases. During 1996, the Company's food and
retail packaging papers generated operating profits of $2.8 million as compared
to operating losses of $15.6 million in 1995. The improvement in operating
results is primarily attributable to reduced pulp costs. Improvements in
operating results were, however, offset by price decreases as discussed above.
CONVERTING PAPERS
Net sales of the Company's specialty converting papers totaled $152.5 million in
1996, a $4.7 million decrease from net sales of $157.2 million in 1995. The 3.0%
decrease is due to a $48 decrease in average sales price per ton in 1996 as
compared to 1995. Demand for the Company's specialty converting papers was
strong in 1996, with total tons sold increasing by 3,500 over 1995. Operating
profits were $14.5 million in 1996, a 36.6% decrease compared to 1995. The
decrease is reflective of the 5.1% decrease in average net selling prices.
20
<PAGE>
Crown Vantage Inc.
PULP AND MISCELLANEOUS
Net sales of pulp and miscellaneous products declined from $36.7 million in 1995
to $15.2 million in 1996. As discussed above, industry average selling prices of
pulp decreased significantly during the early months of 1996 and remained at low
levels throughout the year. The Company's average net selling price per ton
decreased by 43.5% during 1996 as compared to 1995. The Company recognized
operating losses of $7.1 million in 1996 versus operating income of $14.5
million in 1995. The significant decline in operating results is due primarily
to the decrease in average net selling price per ton.
- --------------------------------------------------------------------------------
LIQUIDITY AND CAPITAL RESOURCES
GENERAL
Prior to the Spin-Off, the Company participated in James River's centralized
cash management system. As a result, the Company's cash funding requirements
prior to the Spin-Off (if any) were met through James River.
[CHART]
Total Debt
(Dollar amounts in
millions)
1997 - $545.1
1996 - $552.7
1995 - $567.2
In connection with the Spin-Off, Crown Paper Co. entered into a credit facility
with a group of banks (the "Bank Credit Facility") which provided $200 million
in term loan financing and a $150 million revolving line of credit. Term Loans A
and B totaled $100 million each at issuance with final principal payments due in
2002 and 2003, respectively. The revolving credit is due in 2002 and is
available 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.
During 1997, Term Loans A and B had average interest rates of 8.42% and 9.14%,
respectively, and the revolving line of credit had an average interest rate of
8.57% as compared to average interest rates in 1996 of 8.42%, 8.94%, and 9.49%,
respectively. The Bank Credit Facility is collateralized by substantially all of
the assets of Crown Paper Co. Also in connection with the Spin-Off, Crown Paper
Co. issued $250 million of 11% Senior Subordinated Notes through a public debt
offering (the "Notes") which are unsecured and are due in 2005.
As a return of its capital investment in Crown Vantage, the net proceeds from
Term Loans A and B, the initial borrowing on the revolving line of credit, and
the Notes were paid to James River. Also as a return of part of James River's
capital investment in Crown Vantage, the Company issued to James River
immediately prior to the Spin-Off $100 million of Senior Pay-in-Kind Notes (the
"PIK Notes") which are due in 2007. Interest on the PIK Notes (which accrues at
11.45%) is due semi-annually. The interest may be paid in cash or in additional
PIK Notes until September 2003, and thereafter interest must be paid in cash.
Since the PIK Notes were issued, interest payments have been made through the
issuance of additional PIK Notes. The PIK Notes were initially recorded at a
$15 million discount to reflect an approximate market rate of interest at the
Spin-Off date of 13%.
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 forests 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 October 1997, the Company repaid the remaining $3.2
million balance of Term Loan A bringing the balance to $0.
During 1996, the Company entered into a five-year agreement with certain banks
that 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 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 the 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.
21
<PAGE>
Crown Vantage Inc.
OPERATING ACTIVITIES
Net cash provided by operating activities was $53.8 million in 1997 as compared
to $104.9 million in 1996 and $132.3 million in 1995.
[CHART]
Operating Cash Flow
(Dollar amounts in
millions)
1997 - $53.8
1996 - $104.9
1995 - $132.3
Cash provided by operating activities in 1996 includes the $43 million in
proceeds received as a result of the Company's sales of certain accounts
receivable discussed above. The decline in operating cash flows in 1997 as
compared to 1996, excluding the effect of the $43 million sales of receivables,
is primarily a result of the $32.2 million net loss incurred in 1997 versus a
net loss of $24.8 million in 1996.
INVESTING ACTIVITIES
Net cash used in investing activities totaled $20.8 million, $81.1 million, and
$45.6 million in 1997, 1996 and 1995, respectively. In 1997, the Company
realized $36 million in proceeds from the sale of the timberlands discussed
above. The Company's business is capital intensive. Pulp and paper mills
generally consist of an extensive network of buildings, machinery, and
equipment, which require continual upgrades, replacement, modernization and
improvement. Capital expenditures in 1997 totaled $59.3 million relating
primarily to capital maintenance projects and $7.9 million in 1997 payments for
amounts accrued in 1996, primarily for the 1996 rebuild of the Number 1 paper
machine at the Company's St. Francisville mill. Capital expenditures in 1996 and
1995 were $80.9 million and $46.9 million, respectively, which related primarily
to capital maintenance projects, and $32.9 million in 1996 for the rebuild of
the Number 1 paper machine at the St.Francisville mill. Planned capital
expenditures for 1998 are approximately $68 million.
[CHART]
Capital Spending
(Dollar amounts in
millions)
1997 - $59.3
1996 - $80.9
1995 - $46.9
FINANCING ACTIVITIES
Net cash used in financing activities was $22.8 million in 1997. Proceeds from
the sale of the Company's timberlands discussed above were used to prepay Term
Loan A. Also during 1997, the Company made scheduled repayments on Term Loan A
of $5.0 million and prepayments of $4.7 million bringing the outstanding balance
to $0. Scheduled repayments on Term Loan B totaled $1.0 million in 1997. In
August 1997, the Company refinanced $2.5 million of certain industrial revenue
bonds that are due in 2012 and carry a 6.25% interest rate. Also in August 1997,
the Company sold $4.9 million of industrial revenue bonds that are due in 2021
and carry a 6.5% interest rate.
Net cash used in financing activities was $28.0 million in 1996. During 1996,
the Company prepaid $43 million on Term Loan A using proceeds from the sale of
certain accounts receivable. The Company made additional prepayments totaling
$3.4 million on Term Loan A as well as scheduled payments on Term Loans A and B
of $5.4 million and $750,000, respectively. Also in 1996, the Company finalized
an agreement with the Business Finance Authority of the State of New Hampshire
whereby bonds were sold, resulting in net proceeds of $12.1 million, to finance
certain sewage and solid waste disposal facilities to be used by the Company at
its Berlin-Gorham facility.
The 1995 financing activities generally reflect certain transactions resulting
from the Spin-Off. As discussed above (see General), the Company and its
wholly-owned subsidiary, Crown Paper Co., entered into a series of financing
transactions in connection with the Spin-Off from James River. Proceeds received
from initial borrowings under the bank credit facilities and issuance of the
Notes were paid to James River as a return of its investment in the Company.
Issuance of the PIK Notes to James River (which did not result in a source or
use of cash) was also a return of James River's investment in the Company.
22
<PAGE>
Crown Vantage Inc.
- --------------------------------------------------------------------------------
OTHER MATTERS
ENVIRONMENTAL EXPENDITURES
Pulp and paper products companies are subject to regulation by various federal,
state, local, and foreign agencies concerning the discharge of materials into
the environment. These laws and regulations require pulp and paper companies to
operate within the standards established by these agencies, which generally
require substantial capital investments. Like its competitors, the Company has
incurred and will continue to incur significant capital expenditures and
operating costs to comply with stringent environmental standards. During 1997
and 1996, the Company spent approximately $18.6 million and $21.6 million,
respectively, to control and monitor the discharge of pollutants into air,
water, and land. In 1997, approximately $2.6 million of these expenditures were
capitalized and $16.0 were expensed. In 1996, approximately $6.3 million of
these expenditures were capitalized and $15.3 were expensed.
In November 1997, the Environmental Protection Agency signed final rules that
contain regulations 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. Compliance dates, with respect to the changes, begin in 1998 and
extend 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 the Company's
interpretation, or other items.
ENVIRONMENTAL LEGAL PROCEEDINGS
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 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 the Company's 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.
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 detrimental effects on results of operations. While it is not
possible at present to predict with certainty the cost of this work based on
management's current estimates, the Company believes that such costs will range
between $1 million and $2 million over the next year.
23
<PAGE>
Crown Vantage Inc.
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.
24
<PAGE>
Crown Vantage Inc.
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Shareholders of Crown Vantage Inc.:
We have audited the consolidated balance sheets of Crown Vantage Inc. 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 Vantage Inc. 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
Vantage Inc. 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
25
<PAGE>
Crown Vantage Inc.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------
52 WEEKS 52 WEEKS 53 WEEKS
ENDED ENDED ENDED
DECEMBER 28, DECEMBER 29, DECEMBER 31,
(amounts in thousands, except per share amounts) 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 (65,228) (63,301) (25,755)
Other income, net 1,314 555 565
- ------------------------------------------------------------------------------------------------
Income (loss) before income taxes (49,570) (40,004) 75,136
Income tax expense (benefit) (17,350) (15,200) 29,866
- ------------------------------------------------------------------------------------------------
Net income (loss) $(32,220) $(24,804) $ 45,270
- ------------------------------------------------------------------------------------------------
Basic loss per share $ (3.61) $ (2.89)
- ------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------
</TABLE>
See notes to consolidated financial statements.
26
<PAGE>
Crown Vantage Inc.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------
(DOLLAR AMOUNTS IN THOUSANDS) DECEMBER 28, 1997 DECEMBER 29, 1996
- ----------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------
ASSETS
<S> <C> <C>
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 7,393 15,214
Deferred income taxes 14,480 14,191
- ----------------------------------------------------------------------------------------
Total current assets 178,192 184,559
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 $ 880,574 $ 945,596
- ----------------------------------------------------------------------------------------
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 544,063 545,971
Accrued postretirement benefits other than pensions 102,397 101,273
Other long-term liabilities 17,444 19,626
Deferred income taxes 82,100 101,360
- ----------------------------------------------------------------------------------------
Total Liabilities 881,543 916,523
- ----------------------------------------------------------------------------------------
Shareholders' Equity:
Preferred Stock, no par value;
Authorized - 500,000 shares;
Issued and outstanding - None
Common Stock, no par value;
Authorized - 50,000,000 shares;
Issued and outstanding - 9,668,313 shares and
9,107,535 shares at December 28, 1997, and
December 29, 1996, respectively 45,831 44,578
Unearned ESOP shares and other (4,301) (7,253)
Cumulative foreign currency translation adjustment 1,338 3,365
Retained deficit (43,837) (11,617)
- ----------------------------------------------------------------------------------------
Total Equity (969) 29,073
- ----------------------------------------------------------------------------------------
Total Liabilities and Equity $ 880,574 $ 945,596
- ----------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------
</TABLE>
See notes to consolidated financial statements.
27
<PAGE>
Crown Vantage Inc.
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
- ----------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------
CASH PROVIDED BY (USED FOR) OPERATING ACTIVITIES:
<S> <C> <C> <C>
Net income (loss) $ (32,220) $ (24,804) $ 45,270
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) (19,929) (10,174) 1,834
Interest on Pay-in-Kind Notes and other noncash interest 17,515 16,319 5,346
Gain on sale of timberlands (13,518)
Other, net 3,496 3,062 (725)
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 7,361
Other, net (3,554) 1,520 12,307
- ----------------------------------------------------------------------------------------------------------
Cash provided by operating activities 53,825 104,937 132,274
- ----------------------------------------------------------------------------------------------------------
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 (533,126)
- ----------------------------------------------------------------------------------------------------------
Cash used for financing activities (22,751) (28,022) (93,810)
- ----------------------------------------------------------------------------------------------------------
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.
28
<PAGE>
Crown Vantage Inc.
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------
Unearned Foreign
Common Stock ESOP Currency Retained James
----------------- Shares Translation Earnings River's
(amounts in thousands) Shares Amounts and Other 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 (48,185)
Minimum pension liability $ (5,611) 5,611
Reclassification of foreign
currency translation adjustment $ 701 (701)
Issuance of Pay-in-Kind Notes,
net of discount (85,000)
Net proceeds paid to James River (484,941)
Distribution to James River
shareholders 8,446 $ 33,862 (33,862)
CHANGES IN EQUITY FOR THE PERIOD
AUGUST 25, 1995, THROUGH
DECEMBER 31, 1995:
Net income $ 13,187
Foreign currency translation adjustment (2,049)
ESOP and restricted stock activity, net 472 10,677 (9,841)
- ------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1995 8,918 44,539 (15,452) (1,348) 13,187
Net Loss (24,804)
Foreign currency translation adjustment 4,713
ESOP and restricted stock activity, net 190 39 3,480
Minimum pension liability adjustment 4,719
- ------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 29, 1996 9,108 44,578 (7,253) 3,365 (11,617)
Net Loss (32,220)
Foreign currency translation adjustment (2,027)
ESOP and restricted stock activity, net 560 1,253 2,390
Minimum pension liability adjustment 562
- ------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 28, 1997 9,668 $ 45,831 $ (4,301) $ 1,338 $ (43,837)
- ------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
See notes to consolidated financial statements.
29
<PAGE>
Crown Vantage Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1
- --------------------------------------------------------------------------------
ORGANIZATIONS AND OPERATIONS
Crown Vantage Inc. and subsidiaries (the "Company" or "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 Company (the
"Distribution").
James River transferred to the Company (including transfers to the Company's
wholly-owned subsidiary Crown Paper Co.) certain assets of the Predecessor
Business, and the Company assumed certain related liabilities from James River.
In addition, Crown Paper Co. 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 Company, 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.
30
<PAGE>
Crown Vantage Inc.
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 Vantage Inc. (the "Parent"), 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 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.
31
<PAGE>
Crown Vantage Inc.
Note 2 (continued)
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.
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 Shareholders' 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.
BASIC EARNINGS (LOSS) PER COMMON SHARE
The computation of basic loss per share for the years ended December 28, 1997,
and December 29, 1996, is based on the weighted average number of shares of
common stock outstanding for the period. During the fourth quarter of 1997 the
Company adopted Statement of Financial Accounting Standards No. 128 ("SFAS No.
128") "Earnings per Share." The restatement of prior period losses per share and
shares outstanding to conform with SFAS No. 128 was not material. Diluted losses
per share are not presented as they are the same as basic loss per share. The
number of shares considered outstanding does not include 327,000 and 174,000
32
<PAGE>
Crown Vantage Inc.
Note 2 (continued)
unearned shares held by the Employee Stock Ownership Plan Trust for 1997 and
1996, respectively. Earnings per common share information for the year ended
December 31, 1995, has been omitted from the accompanying consolidated
statements of operations since the Company as the Predecessor Business was not a
separate entity with its own capital structure until 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.
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.
33
<PAGE>
Crown Vantage Inc.
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
- --------------------------------------------------------------------------------
PROPERTY, PLANT AND EQUIPMENT
(amounts in thousands) 1997 1996
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
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
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
ACCRUED LIABILITIES
(amounts in thousands) 1997 1996
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
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>
34
<PAGE>
Crown Vantage Inc.
NOTE 6
- --------------------------------------------------------------------------------
LONG-TERM DEBT
<TABLE>
<CAPTION>
Consolidated long-term debt consists of the following:
(amounts in thousands) 1997 1996
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<S> <C> <C>
CROWN PAPER CO.
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
CROWN VANTAGE INC.
11.45% Senior Pay-in-Kind Notes, due 2007
less unamortized discount 113,185 98,742
- --------------------------------------------------------------------------------
545,063 552,732
Less current portion 1,000 6,761
- --------------------------------------------------------------------------------
$544,063 $545,971
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
</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
35
<PAGE>
Crown Vantage Inc.
Note 6 (continued)
1998. Crown Paper Co. is also subject to minimum tangible net worth
requirements. In addition, both the Company 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 Company.
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 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 facilities 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.
The interest on the $100 million 11.45% Senior Pay-in-Kind Notes (the "PIK
Notes") is due semi-annually in March and September, and may be paid in cash or
in additional PIK Notes until September 2003. Thereafter interest must be paid
in cash. As of December 28, 1997, interest due has been paid through the
issuance of additional PIK Notes. The PIK Notes are redeemable at the option of
the Company on or after September 2000 at a redemption price of 105.725%
declining to par in 2003 and thereafter. In addition, the Company may redeem up
to 33-1/3% of the outstanding principal amount prior to September 1998 from the
proceeds of one or more public offerings at a redemption price of 110.45% of the
principal amount (100% of the principal amount if held by James River). In the
event of a Change of Control (as defined in the underlying agreement) the
holders of the PIK Notes have the right to require the Company to purchase the
PIK Notes in cash at 101%. The PIK Notes have been recorded at a discount to
reflect an approximate market rate of interest of 13% at the Spin-Off. The PIK
Notes contain covenants, limitations and restrictions which in general are not
more restrictive than those contained in the Facility or the Notes.
At December 28, 1997, and December 29, 1996, estimated fair values of the
Company's long-term debt instruments were $556.0 million and $526.0 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.
36
<PAGE>
Crown Vantage Inc.
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 $ (55,348) $ (45,838) $ 69,156
Foreign 5,778 5,834 5,980
- ----------------------------------------------------------------------------------------------------------
Income (loss) before income taxes $ (49,570) $ (40,004) $ 75,136
- ----------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------
INCOME TAX EXPENSE (BENEFIT) CONSISTED OF THE FOLLOWING:
- ----------------------------------------------------------------------------------------------------------
(amounts in thousands) 1997 1996 1995
- ----------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------
Current:
Federal $ (693) $ (6,542) $ 23,108
State 1,775 (478) 4,295
Foreign 1,497 1,994 629
- ----------------------------------------------------------------------------------------------------------
Total current income tax expense (benefit) 2,579 (5,026) 28,032
- ----------------------------------------------------------------------------------------------------------
Deferred:
Federal (18,063) (9,444) (268)
State (2,193) (1,052) (49)
Foreign 327 322 2,151
- ----------------------------------------------------------------------------------------------------------
Total deferred income tax provision (benefit) (19,929) (10,174) 1,834
- ----------------------------------------------------------------------------------------------------------
Income tax expense (benefit) $ (17,350) $ (15,200) $ 29,866
- ----------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------
</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 (3.8) (3.8) 4.0
Amortization of goodwill .7 .9 0.5
Other items, net 3.1 (.1) 0.3
- ----------------------------------------------------------------------------------------------------------
Effective income tax rates (35.0)% (38.0)% 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
Discount on Pay-in-Kind Notes 4,675 5,174
Other items 4,881 4,069
- ----------------------------------------------------------------------------------------------------------
Total deferred tax liabilities 152,572 154,462
- ----------------------------------------------------------------------------------------------------------
Postretirement benefits other than pensions (40,874) (41,519)
Accrued liabilities (17,399) (16,092)
Net operating loss carryforward (25,789) (8,100)
Other items (890) (1,582)
- ----------------------------------------------------------------------------------------------------------
Total deferred tax assets (84,952) (67,293)
- ----------------------------------------------------------------------------------------------------------
Net deferred tax liability $ 67,620 $87,169
- ----------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------
</TABLE>
37
<PAGE>
Crown Vantage Inc.
Note 7 (continued)
The Company has recorded $17.7 million and $8.1 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 $45.6
million for 1997 and $19.9 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.
In connection with the Spin-Off, James River 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 Company 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 Company 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.
38
<PAGE>
Crown Vantage Inc.
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
- ----------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------
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:
- ----------------------------------------------------------------------------------------------------------
1997 1996 1995
- ----------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------
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>
39
<PAGE>
Crown Vantage Inc.
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.
40
<PAGE>
Crown Vantage Inc.
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
41
<PAGE>
Note 10 (continued)
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.
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.
NOTE 11
- --------------------------------------------------------------------------------
SHAREHOLDERS' EQUITY
PREFERRED STOCK
The Company, without further action by the shareholders, is authorized to
designate and issue up to approximately 500,000 shares (in series) of Preferred
Stock and to fix as to any series the dividend rate, redemption prices,
preferences on dissolution, the terms of any sinking fund, conversion rights,
voting rights, and any other preferences or special rights and qualifications.
SHAREHOLDER RIGHTS PLAN
The Company has a rights plan designed to assure that the Company's shareholders
receive fair and equal treatment in the event of a proposed takeover of the
Company. Each share of Crown Vantage Common Stock has an associated preferred
share purchase right (a "Right") entitling the Right holders to purchase 1/1,000
of a share of Series A Cumulative Participating Preferred Stock (the "Preferred
Share") at an initial price of $85 (the "Purchase Price"). Each Preferred Share
will have a minimum preferential quarterly dividend of $1.00 per share, but will
be entitled to an aggregate dividend of 1,000 times each dividend on a share of
Crown Vantage Common Stock.
42
<PAGE>
Crown Vantage Inc.
Note 11 (continued)
The Rights will be exercisable only if a person or group acquires, or obtains
the right to acquire, beneficial ownership of 15% or more of the Company's
outstanding Common Stock or announces a tender or exchange offer for 15% or more
of the Company's outstanding Common Stock. Upon the occurrence of certain other
events, each Right entitles the holder to receive (in lieu of Preferred Shares)
shares of Common Stock of the Company (or, in certain circumstances, cash,
property, or other securities of Crown Vantage or, in certain other
circumstances, common stock of the acquiring entity) having a value of two times
the Purchase Price.
The Company will be entitled to redeem the Rights at $.01 per Right at any time
not later than 10 days after a person or group has acquired 15% or more of the
outstanding Common Stock of the Company. Until such time as they may be subject
to exercise, these Rights will not be issued in separate form and may not be
traded other than with the shares to which they are attached. If unexercised or
unredeemed, the Rights will expire September 1, 2005.
INCENTIVE STOCK PLAN
The Company has adopted the 1995 Incentive Stock Plan. The Incentive Stock Plan
is a long-term incentive plan designed to align the efforts and rewards of
officers and key employees with the maximization of Company performance and
increases in shareholder value. Under the Incentive Stock Plan, a maximum of
1,400,000 shares of the Company's Common Stock may be issued upon the exercise
of options and under awards of restricted stock, incentive stock, and deferred
stock.
A total of 70,600 and 190,500 shares of restricted stock was awarded during 1997
and 1996, respectively. At December 28, 1997, and December 29, 1996, 234,300 and
209,300 shares, respectively, of restricted stock were unvested. The market
value of restricted stock at each date of grant has been recorded as unearned
compensation and is being amortized to expense ($880,000 in 1997 and $840,000 in
1996) over the vesting periods, which range from one to six years.
OUTSIDE DIRECTORS' STOCK PLAN AND OPTION PLAN
The Company awards to each outside director that number of shares of Crown
Vantage Common Stock that, when multiplied by the fair market value of Crown
Vantage Common Stock at the grant date, most closely approximates (but does not
exceed) $12,500. In addition, the Company will determine an amount of cash
compensation to be paid to each outside director ("Cash Award"). If the outside
director so elects, the outside director will be awarded the number of shares of
Crown Vantage Common Stock that, when multiplied by the fair market value at the
grant date, most closely approximates (but does not exceed) 1.2 times the Cash
Award.
Upon joining the board, each outside director is granted an option to purchase
3,000 shares of Crown Vantage Common Stock (the "Outside Directors' Option
Plan"). As of each April 15 thereafter, each outside director is granted an
option to purchase 1,000 shares of Crown Vantage Common Stock. Options under the
Outside Directors' Option Plan generally have option prices based on average
high and low trading prices for the ten-day periods preceding the grant dates
and the options expire ten years after the grant dates.
NOTE 12
- --------------------------------------------------------------------------------
STOCK OPTION PLANS
The Company has elected to follow Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" (APB 25), and related interpretations
in accounting for its employee stock options. The exercise price of the
Company's employee stock options equals the market price of the underlying stock
on the date of grant and as a result no compensation expense is recognized under
APB 25. As discussed below, the alternative fair value accounting provided for
under Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation" ("SFAS No. 123"), requires use of option valuation
models that were not developed for use in valuing employee stock options.
Stock options granted in 1997 and 1996 generally vest over a three-year period
and have maximum contractual lives of 10 years. A summary of the Company's stock
option activity and related information for the years ended December 28, 1997,
and December 29, 1996, follows:
43
<PAGE>
Crown Vantage Inc.
Note 12 (continued)
<TABLE>
<CAPTION>
1997 1996
- ------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------
Options Weighted-Average Options Weighted-Average
Exercise Price Exercise Price
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Outstanding-beginning of year 863,000 $17.48 490,600 $22.88
Granted 791,100 $ 6.44 389,600 $10.86
Exercised (7,700) $ 6.31
Forfeited (790,900) $16.11 (17,200) $20.28
---------- ---------
Outstanding-end of year 855,500 $ 7.24 863,000 $17.48
---------- ---------
---------- ---------
Exercisable at end of year 224,900 $ 6.79 180,000 $22.39
Weighted-average fair value of
options granted during
the year $1.36(1) $ 2.58(1)
- ------------------------------------------------------------------------------------------------
</TABLE>
(1) Using the Black-Scholes option valuation model discussed below.
Exercise prices for options outstanding as of December 28, 1997, ranged from
$6.31 to $11.44 with a weighted average exercise price of $7.24 per share. The
weighted-average remaining contractual life of those options is 9 years. During
the second quarter of 1997, the Company granted employees the opportunity to
exchange stock options granted during 1996 and 1995 for ratably fewer options
repriced as of April 29, 1997. The replacement stock options contained an
exercise price of $6.31 versus a weighted average exercise price of $17.48 for
the 1996 and 1995 options. Substantially all of the 1997 forfeitures resulted
from this exchange.
Pro forma information regarding net income and earnings per share is required by
SFAS No. 123 and has been determined as if the Company had accounted for its
employee stock options under the fair value method of that Statement. The fair
value for these options was estimated at the date of grant using a Black-Scholes
option pricing model with the following weighted-average assumptions: risk-free
interest rates of 6.45% and 6.36% for 1997 and 1996, respectively; dividend
yield of 3.0% for 1997 and 1996; volatility factor of the expected market price
of the Company's common stock of .18 and .19 for 1997 and 1996, respectively;
and a weighted-average expected life of the option of 7 years for 1997 and 1996.
For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the options' vesting period. The Company's pro
forma net loss for 1997 and 1996 is $32.6 million and $25.7 million,
respectively. The Company's pro forma loss per share in 1997 and 1996 is $3.66
and $2.99, respectively.
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Because
the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.
44
<PAGE>
Crown Vantage Inc.
NOTE 13
- --------------------------------------------------------------------------------
EMPLOYEE STOCK OWNERSHIP PLAN
The Company 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 Company's Common Stock. The
loan was completely repaid in 1997. On May 2, 1997, an additional 500,000 shares
of Common Stock of the Company 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. The shares pledged as collateral are reported as unearned ESOP shares in
the consolidated balance sheet. As the Company recognizes compensation expense
for its matching contribution, shares are committed for release from collateral
and the shares become outstanding for earnings per share computations.
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 14
- --------------------------------------------------------------------------------
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. Newark 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.
45
<PAGE>
NOTE 15
- -------------------------------------------------------------------------------
QUARTERLY FINANCIAL SUMMARY (UNAUDITED)
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------
(amounts in thousands, except shares First Second Third Fourth
and earnings (loss) per share amounts) Quarter Quarter Quarter Quarter Year
- ---------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------
1997
<S> <C> <C> <C> <C> <C>
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 (9,634) (10,852) (6,625) (5,109) (32,220)
Basic loss per share (1.10) (1.22) (.74) (.56) (3.61)
Shares used to compute loss per share 8,732 8,903 8,979 9,061 8,931
Stock price - High 8 1/2 9 1/2 12 1/4 12 12 1/4
- Low 6 3/8 5 1/2 7 1/2 7 1/8 5 1/2
- Close 6 5/8 7 1/8 11 3/4 7 3/4 7 3/4
- ---------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------
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) 3,062 (2,962) (9,568) (15,336) (24,804)
Basic earnings (loss) per share .36 (.35) (1.11) (1.77) (2.89)
Shares used to compute earnings
(loss) per share 8,518 8,561 8,618 8,686 8,596
Stock price - High 17 3/8 17 1/4 14 5/16 12 1/2 17 3/8
- Low 13 1/2 14 9 1/4 7 3/4 7 3/4
- Close 14 1/2 14 1/2 11 3/4 7 7/8 7 7/8
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
Note: Prior period earnings (loss) per share and shares used to compute
earnings (loss) per share have been restated to conform with SFAS No. 128 (see
"Note 2"). The restatement did not materially impact earnings (loss) per share
as previously reported.
46
<PAGE>
EXHIBIT 23.1
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of Crown Vantage Inc.:
We have audited the consolidated statements of operations, cash flows, and
changes in equity of Crown Vantage Inc. and subsidiaries, as described in
Note 2, for the year ended December 31, 1995 which financial statements are
included on pages 26 through 46 of the 1997 Annual Report to shareholders of
Crown Vantage Inc. and incorporated by reference herein. We have also
audited the financial statement schedule for the period since inception
through December 31, 1995 listed in the index on page 12 of this Form 10-K.
These financial statements are the responsibility of the management of Crown
Vantage Inc. 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 Vantage Inc. and subsidiaries, as described in Note 2, for the year
ended December 31, 1995, in conformity with generally accepted accounting
principles. In addition, in our opinion, the financial statement schedule
referred to above, when considered in relation to the basic financial
statements taken as a whole, presents fairly, in all material respects, the
information required to be included therein.
COOPERS & LYBRAND L.L.P.
Oakland, California
February 23, 1996
23
<PAGE>
EXHIBIT 23.2
CROWN VANTAGE INC.
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the registration statements
of Crown Vantage Inc. on Forms S-8 (File No. 33-96788, File No. 33-96854,
File No. 33-96856, File No. 333-09361 and File No. 333-4420) of our report
dated February 23, 1996 on our audit of the consolidated statements of
operations and cash flows of Crown Vantage Inc. for the year ended December
31, 1995, and the related financial statement schedule for the period from
August 25, 1995 (date of inception) through December 31, 1995, which report
is included as Exhibit 23.1 to this Form 10-K.
COOPERS & LYBRAND L.L.P.
San Francisco, California
March 24, 1998
24
<PAGE>
EXHIBIT 23.3
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statements
(Form S-8 Nos. 33-96788, 33-96854, 33-96856, File No. 333-09361 and 333-4420),
of Crown Vantage Inc. of our report dated January 30, 1998, with respect to
the consolidated financial statements of Crown Vantage Inc. incorporated by
reference in the Annual Report on Form 10-K for the years ended December 28,
1997 and December 29, 1996 and our report on the financial statement schedule,
on page 18 of this Form 10-K.
ERNST & YOUNG LLP
San Francisco, California
March 24, 1998
25
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<RESTATED>
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> YEAR YEAR
<FISCAL-YEAR-END> DEC-28-1997 DEC-29-1996
<PERIOD-START> DEC-30-1996 JAN-01-1996
<PERIOD-END> DEC-28-1997 DEC-29-1996
<CASH> 11,415 1,175
<SECURITIES> 0 0
<RECEIVABLES> 41,287 56,469
<ALLOWANCES> 500 465
<INVENTORY> 104,117 97,975
<CURRENT-ASSETS> 178,192 184,559
<PP&E> 1,249,167 1,240,119
<DEPRECIATION> 627,891 561,965
<TOTAL-ASSETS> 880,574 945,596
<CURRENT-LIABILITIES> 135,539 148,293
<BONDS> 544,063 545,971
0 0
0 0
<COMMON> 45,831 44,578
<OTHER-SE> (46,800) (15,505)
<TOTAL-LIABILITY-AND-EQUITY> 880,574 945,596
<SALES> 897,492 925,376
<TOTAL-REVENUES> 897,492 925,376
<CGS> 837,452 850,419
<TOTAL-COSTS> 837,452 850,419
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 599 465
<INTEREST-EXPENSE> 65,228 63,301
<INCOME-PRETAX> (49,570) (40,004)
<INCOME-TAX> (17,350) (15,200)
<INCOME-CONTINUING> (32,220) (24,804)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (32,220) (24,804)
<EPS-PRIMARY> (3.61) (2.89)<F1>
<EPS-DILUTED> (3.61) (2.89)<F2>
<FN>
<F1>RESTATED DUE TO SFAS NO. 128
<F2>RESTATED DUE TO SFAS NO. 128
</FN>
</TABLE>
