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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 27, 1998
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
(State of incorporation) (I.R.S. Employer Identification No.)
300 Lakeside Drive, Oakland, California 94612-3592
(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 17, 1999 was approximately $24,500,000.
As of March 17, 1999, 10,356,758 shares of Common Stock of the registrant
were outstanding.
Portions of the registrant's Annual Report to Shareholders for the fiscal
year ended December 27, 1998 are incorporated by reference in Parts I, II and
IV. Portions of the registrant's definitive Proxy Statement for the Annual
Meeting of Shareholders scheduled for April 28, 1999 are incorporated by
reference in Part III.
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PART I
Item 1. Business
General
Crown Vantage Inc. and subsidiaries (the "Company" or "Crown Vantage") is a
major producer of value-added paper products for many different end-uses. The
Company operates in two segments: printing and publishing papers and specialty
papers. Special interest magazines, books, custom business forms and corporate
communications such as annual reports, stationery and promotions use Crown
Vantage printing and publishing papers. Specialty papers production supplies
both coated and uncoated papers principally for food and retail packaging
applications and conversion into such items as coffee filters, cups, plates,
disposable medical gowns and file folders.
During 1998, the Company operated 10 facilities using 30 diverse paper
machines with specialized capabilities. On March 25, 1999 the Company
announced the intended sale of its pulp and paper mills in New Hampshire. See
"Recent Development" in this Item 1.
The Company believes that its broad manufacturing capabilities enable 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.
The Company became an independent company when it was spun off from James
River Corporation of Virginia ("James River"), now known as Fort James
Corporation ("Fort James"), on August 25, 1995. James River distributed all of
the outstanding stock of the Company in a tax-free dividend to its shareholders.
The dividend provided one share of the Company's stock for every 10 shares of
James River stock held. The spin-off included certain 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.
Crown Paper Co. (a wholly owned subsidiary of Crown Vantage ("Crown
Paper")), 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"). Substantially
all of the net proceeds from the Financing ($485 million) were paid to James
River together with $100 million Senior Pay-in-Kind Notes issued by the Company
("PIK Notes") as a return of James River's capital investment. The distribution
of the Company's stock, transfer of assets and liabilities, Financing, and
return of capital are collectively referred to as the "Spin-Off."
On September 28, 1998 Crown Vantage and Crown Paper settled with Fort James
for the delivery of $25.1 million in PIK Notes to Crown Vantage and $8.1 million
in PIK Notes to Crown Paper in exchange for the mutual release from a variety of
claims that had arisen between Fort James, Crown Paper and Crown Vantage. This
resulted in an extraordinary gain of $19 million that is net of $2.4
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million in expenses and $11.8 million in taxes. The settlement amended the terms
of the remaining PIK Notes and allows Crown Vantage the right to call the
remaining PIK Notes and accrued interest at fair value at any time prior to
their maturity. The $8.1 million in PIK Notes held by Crown Paper are eliminated
upon consolidation. See "Liquidity and Capital Resources" on page 12 and Note 6
to the Consolidated Financial Statements on page 27 of the Company's 1998 Annual
Report to Shareholders for more information concerning the PIK Notes.
RECENT DEVELOPMENT
On March 25, 1999 the Company announced that it had reached an agreement
to sell its pulp and paper mills located in Berlin and Gorham, New Hampshire
for approximately $45 million. The net proceeds, after transaction costs and
funding of certain other liabilities, will be used to pay down debt. The
operations being sold include the pulp mill in Berlin, which produces
approximately 300,000 tons of hardwood and softwood pulp annually, and the
five paper machines in Gorham. Four of the paper machines manufacture
approximately 142,000 tons of printing and publishing papers, while the fifth
machine produces approximately 40,000 tons of commercial toweling annually.
As part of the sales agreement, Crown Vantage and the buyer have entered
into a strategic marketing and outsourcing alliance to certain value-added
printing and publishing paper grades. Crown Vantage will retain control of the
use of branded printing and publishing papers made at Berlin-Gorham facility,
which are integral to the Company's strategic printing and publishing papers
offering throughout the Crown Vantage system. In addition, Crown Vantage will
market, on behalf of the buyer, all other paper grades manufactured at Berlin-
Gorham (except toweling) for a period of three years.
Successful completion of the transactions discussed above is subject to a
number of risks and uncertainties including, but not limited to, the ability
of the buyer to successfully arrange financing, consent by Crown Vantage
lenders, transaction delays, failure to close the contemplated agreements,
failure by either party to successfully execute under the strategic marketing
and outsourcing alliance, and other factors, including business conditions and
the general economy, maintaining good customer and labor relations, and
competitive factors.
Historical information below concerning the Berlin and Gorham mills should
be considered in light of, and is qualified by reference to, the intended sale
of these mills.
Business Segments and End Use-Markets
Printing and Publishing Papers
Crown Vantage manufactures and markets both coated groundwood and uncoated
freesheet papers for printing and publishing applications. The Company's coated
groundwood papers are produced on two modern machines at its facility in St.
Francisville, Louisiana, which uses both kraft and groundwood pulp mills to
supply all pulp requirements. Groundwood papers are made from a blend of kraft
pulp and pulp produced by mechanically grinding wood to extract wood fibers.
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. These papers are produced and sold for end-use products such as
specialty magazines, catalogs, direct mail, and advertising supplements. The
paper is sold to publishers, commercial printers, including the four largest in
North America, and to merchant distributors. The strength of the coated
groundwood market is largely driven by the health of the retail market and is
correlated with retailer advertising expenditures. Printing and publishing
papers had one significant customer totaling 10.8% of the segment's net sales in
1998.
Uncoated printing and publishing papers are manufactured at the Company's
fully pulp-integrated facilities in Berlin and Gorham, New Hampshire, and at its
non-integrated facilities in Adams, Massachusetts; Ypsilanti, Michigan; and
Dalmore and Guardbridge, Scotland. Customer end uses include stationary, custom
business forms, books and manuals, annual reports and other corporate
communications. 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.
This segment includes the Company's market pulp and 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. The Berlin-Gorham, New Hampshire facility reserves the majority
of the pulp it produces for internal consumption but sold approximately 86,000
tons of pulp in 1998.
See "Recent Development" discussed above for information concerning the
announced sale of the Company's pulp and paper mills in New Hampshire.
Specialty Papers
Crown Vantage manufactures and sells bleached specialty papers for use in
food and retail packaging. The Company's coated and uncoated specialty papers
supply niche markets and these products are used by 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 generally exhibits less cyclicality to general
economic trends compared to producers of papers for other end-use products. The
Company's specialty packaging papers operations purchase all of their pulp and
therefore operating results are more susceptible to pulp price fluctuations.
Operating results benefit during periods of decreasing pulp prices from lower
raw material costs and suffer during periods of increasing pulp prices. The
benefit to operating results from the decline in pulp prices during 1998 has
been offset by declines in the average price per ton for the Company's specialty
packaging products. The decline in average price per ton during 1998 is
primarily due to the continuing economic crisis in Asia and its indirect affect
on the Company's specialty packaging papers
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as European producers are redirecting their output to North American markets and
as large integrated mills in North America are entering otherwise non-
traditional markets, thereby disrupting supply/demand balance and pricing for
the Company's specialty packaging papers. The Company's specialty papers are
produced at non-integrated facilities in Port Huron and Parchment, Michigan, and
Milford, New Jersey.
Crown Vantage also manufactures specialty converting papers at its fully
integrated facility in St. Francisville, Louisiana. The Company imparts
customer-specific technical requirements to these value-added papers for
conversion by its customers into end-uses such as paper cups and plates, coffee
filters, file folders and bacon board.
Financial information of the Company's segments is incorporated herein by
reference from Note 15 to the Consolidated Financial Statements included in the
Company's 1998 Annual Report to Shareholders.
Supply Requirements
Fiber. Wood fiber represents the largest single raw material cost for the
Company's two pulp-integrated facilities. In 1998, the Company's pulp mills
required approximately 2,387,000 green tons of wood, of which 1,219,000 green
tons were required at St. Francisville and 1,168,000 green tons were required at
Berlin-Gorham.
Approximately 20% of St. Francisville's wood requirements are met through
purchases of roundwood to supply the groundwood pulp mill. The remaining wood
supply requirements are met through purchases of a combination of wood chips and
roundwood that supply St. Francisville's kraft pulp mill. Approximately 40% of
St. Francisville's total fiber supply comes from a long-term supply arrangement
that expires in 2016. The remaining fiber supply is met through a combination
of purchases from private landowners, forest product companies and other
suppliers.
Berlin-Gorham purchases substantially all of its fiber supply from area
lumber mills under long-term supply agreements. Nearly all hardwood is chipped
on site while softwood is either chipped on site or chips are purchased from
area suppliers.
Pulp. For the Company's non-integrated facilities pulp represents the largest
single material cost. In 1998, the Company purchased approximately 285,000 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 sells its papers are highly competitive.
The Company competes with certain large major companies as well as small,
specialized companies. Competition is primarily based on price, although
product quality, distinctive technical 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
more than 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
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work force on shorter run production of high margin and value-added grades of
paper. As a result, the Company believes it is optimizing its varied
manufacturing capabilities in order to enhance its competitiveness.
The "Pulp & Paper 1999 North American Fact Book" indicates that the top ten
producers of coated groundwood papers accounted for approximately 89% of North
American capacity. Crown Vantage ranked 7th, with coated groundwood capacity
market share of approximately 6%. The top 15 producers of uncoated printing and
publishing papers accounted for 93.5% of North American capacity. The Company
ranked 14th, with uncoated printing and publishing papers capacity market share
of approximately 2.1%. The Company was the second largest manufacturer of
bleached packaging and specialty papers.
Customers
No individual customer exceeded 10% of the Company's consolidated 1998 net
sales. Sales to the Company's five largest customers in 1998 were approximately
24.1% 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 the end of 1998, the Company had approximately 3,550 employees of whom
approximately one-quarter were salaried and three-quarters were hourly
employees. All U.S. 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 Parchment, Mich., Adams, Mass., and Richmond, Va. mills,
which cover approximately 17.7% of the Company's hourly employees, expire before
January 1, 2000. 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 experienced 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 development of new and improved products primarily by using existing
technology and product development personnel located at its mills.
Environmental Protection Efforts
Information concerning environmental expenditures, hazardous substance
cleanup, environmental legal proceedings and other environmental matters
affecting the Company is incorporated by reference from text under the caption
"Other Matters" on page 14 of the Company's 1998 Annual Report to Shareholders
and Note 9 to the Consolidated Financial Statements also found in the Company's
1998 Annual Report to Shareholders.
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Capital Expenditures
Information concerning the Company's capital expenditures is incorporated
by reference from text under the caption "Investing Activities" on page 13 of
the Company's 1998 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. 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 that collectively
it believes are beneficial to the Company; however, the Company believes that
expiration of any patent would not have a material adverse effect on the
Company.
International Sales
In 1998, net sales by the Company's foreign subsidiaries totaled $65.5
million, or 7.7% of total net sales. The Company's domestic sales to foreign
customers were $48.7 million in 1998, approximately 5.7% 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 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 also
uses a few strategically located third party warehouses in different regions
throughout the U.S. to maintain certain grades of paper to meet customer
expectations of timely delivery. These warehouses typically ship products by
guaranteed pool trucks to stocking merchants, printers and other customers
throughout the U.S.
Cyclical Nature of the Paper Industry
Paper product markets, including those in which the Company competes, are
highly cyclical. This is characterized by periods of supply and demand
imbalance and sensitivity to changes in industry
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capacity. Demand for paper products is influenced to a significant degree by the
overall level of domestic and international economic activity that is beyond the
Company's control. A number of structural factors also 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 resulting 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.
Therefore, relatively small changes in operating rates due to changes in
domestic demand, capacity, and levels of imports may significantly affect
prices. The American Forest and Paper Association stated in its December 1998
annual capacity survey that no new printing and writing paper machines are
anticipated in the U.S. over the next three years. Pulp markets experience much
the same cyclicality as do paper markets. Operating results at the Company's
non-integrated facilities are influenced by pulp price fluctuations --
benefiting during periods of decreasing pulp prices and suffering during periods
of pulp price increases.
Leverage Resulting from the Spin-Off
The Spin-Off left the Company with 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, 1998 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>
Printing and Publishing Papers Specialty Papers
------------------------------------------------------------------------------ ----------------------------
Coated Uncoated
Groundwood Freesheet Other
<S> <C> <C> <C> <C>
Facilities: St. Francisville, LA Gorham, NH Richmond, VA St. Francisville, LA
Guardbridge, Berlin, NH Port Huron, MI
Scotland Gorham, NH Parchment, MI
Dalmore, Scotland Milford, NJ
Adams, MA
Ypsilanti, MI
1998 Sales
Volumes: 289,000 tons 241,000 tons 117,000 tons 322,000 tons
Primary No. 4, No. 5 medium to Text, cover and Cast-coated, pulp, Coffee filters, cup
Production: heavy weight grades for writing grades, and toweling and plate stock,
magazines and catalogs security papers, grease resistant
custom forms papers paper, labels,
and specialty multi-wall bags,
applications coated and uncoated
other packaging and
specialty applications
Special Coating, calendering Calendering, cast-coating, Calendering, creped
Production watermarks, sheeting, sheeting products, coating,
Capabilities: embossing waxing and chemical
treatment
Paper Machines 2 paper machines with 12 paper machines, 1 paper machine, 4 15 paper machines, 3
and Related on-machine coating, 4 assorted sheeters, cast-coating machines, with on-machine
Equipment: off-machine super-calenders rewinders and embossers 4 sheeters coating and hot/soft
calendering, 3 with
on-machine waxers, 3
off-machine coaters, 6
off-machine waxers
</TABLE>
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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 sought abatement of the tax increase on
the grounds that the City's valuations were excessive, and that New Hampshire
law exempted 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. On February 1, 1999, the Company finalized an agreement with the City,
which permanently settles the issues of taxability of factory machinery and for
the next three years significantly reduces the assessed value from recent
valuations of the Company's Berlin pulp mill. Over the three years the City of
Berlin's property taxes are expected to average $3 million annually at the
current assessed rate, which is some $2 million per year less than has been
billed over the past five years. The Company expects to reverse a property tax
accrual of approximately $9 million in the first quarter of 1999.
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 19 sites in the United States. The Company has previously settled
its remediation obligations at 12 of those sites. At 6 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 underway and a loss estimate for the potential
remediation effort is not yet possible. However, the Company's accrual for the
remediation investigation effort was $.4 million at December 27, 1998 and $.6
million at December 28, 1997. 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 on the nature or
extent of contamination, methods and associated costs 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 estimates 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 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. As with most manufacturing and many
other entities, there can be no assurance that the Company will not be named as
a PRP or incur liabilities through other means 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>
Robert A. Olah 49 Chief Executive Officer, President, Director
R. Neil Stuart 44 Executive Vice President, Chief Financial Officer
Katie Cutler 54 Senior Vice President, Corporate Communications
Edward A. Fusakio 57 Senior Vice President, Specialty Papers
Antoinette S. Gabriel 54 Senior Vice President, Chief Administrative Officer
C. Neil Henderson 60 Senior Vice President, Printing and Publishing Papers
Michael J. Hunter 38 Senior Vice President, Chief Accounting Officer
Christopher M. McLain 55 Senior Vice President and General Counsel, Secretary
</TABLE>
Robert A. Olah has been Chief Executive Officer, President and Director since
September 1998. Previously he served as President and Chief Operating Officer
since December 9, 1997. Previous thereto served as Senior Vice President,
Specialty Papers since 1996 and 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.
R. Neil Stuart has been Executive Vice President, Chief Financial Officer since
September 1998. Previously thereto served as Senior Vice President, Chief
Financial Officer since May 1996 and Managing Director at the Toronto-Dominion
Bank, New York.
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.
Edward A. Fusakio has been Senior Vice President, Specialty Papers since joining
the Company in September 1998. Previously served as Manager of Aseptic
Packaging and Technology and Manager of Technology and Product Liquid Packaging
Division, International Paper Corporation.
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, Printing and Publishing Papers
since September 1998 and previous thereto served as Uncoated Printing and
Publishing Papers since 1996 and 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 Senior Vice President, Chief Accounting Officer since
February 1999. Previously served as Vice President, Chief Accounting Officer
since January 1997 and Director of Financial Reporting for the Company since
December 1995. 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.
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.
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PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
The Company had approximately 8,100 shareholders of record of its Common Stock
as of March 17, 1999. The Company's Common Stock is traded on the NASDAQ
National Market System under the symbol CVAN (see Management Discussion and
Analysis "Continued Nasdaq Listing" of the Company's 1998 Annual Report to
Shareholders).
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 16, respectively, on pages 27 and 38, respectively, of the Company's
1998 Annual Report to Shareholders.
Item 6. Selected Financial Data
Selected financial data is incorporated herein by reference from page 7 of the
Company's 1998 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 8 through 17 of the
Company's 1998 Annual Report to Shareholders.
Item 7a. Qualitative and Quantitative Disclosures About Market Risk
Qualitative and Quantitative Disclosures About Market Risk is incorporated
herein by reference on page 14 of the Company's 1998 Annual Report to
Shareholders.
Item 8. Financial Statements and Supplementary Data
The Report of Independent Auditors as of and for the years ended December 27,
1998, December 28, 1997 and December 29, 1996, and the consolidated financial
statements of Crown Vantage Inc. are incorporated herein by reference from pages
18 through 38 of the Company's 1998 Annual Report to Shareholders. 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
None.
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 April 28, 1999 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.
Item 11. Executive Compensation
Information concerning executive compensation is incorporated herein by
reference from the following tables and related text, which are included in the
Company's Proxy Statement for the April 28, 1999 Annual Meeting of
12
<PAGE>
Shareholders: Summary Compensation Table, Options/SAR Grants in 1998, Aggregated
Option/SAR Exercises in 1998 and Fiscal Year End Option/SAR Values, 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 April 28, 1999 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 April 28, 1999 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
27, 1998, December 28, 1997 and December 29, 1996 and for the years then ended
and the following consolidated financial statements of the Company are
incorporated herein by reference from the Company's 1998 Annual Report to
Shareholders.
<TABLE>
<CAPTION>
1998 Annual
Report Page
<S> <C>
Report of Independent Auditors........................................................................... 18
Consolidated Statements of Operations- Years Ended December 27, 1998, December 28, 1997
and December 29, 1996................................................................................. 19
Consolidated Balance Sheets - December 27, 1998 and December 28, 1997.................................... 20
Consolidated Statements of Cash Flows - Years Ended December 27, 1998, December 28, 1997
and December 29, 1996................................................................................. 21
Consolidated Statement of Changes in Equity (Deficit) - Years Ended December 27, 1998,
December 28, 1997 and December 29, 1996.................................................................. 22
Notes to Consolidated Financial Statements............................................................... 23
</TABLE>
<TABLE>
<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 27, 1998, December 28, 1997 and December 29, 1996............................... Page 19
Schedule I - Condensed Financial Information of Registrant............................................. Page 20
</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.
13
<PAGE>
(a)(3) Exhibits
All exhibits, including those incorporated by reference:
Exhibit
No. Description
- ------ -----------
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* 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 Pulp Purchase Agreement between James River Paper and Crown
Paper
10.3(1) Form of Environmental Services Agreement between James River Paper and
Crown Paper
10.4(1) Form of Pulp Technology Services Agreement between James River Paper
and Crown Paper
10.5(1) Form of Cottonwood Pedigreed Plant Material Agreement between James
River Paper and Crown Paper
10.6(1) Form of St. Francisville Product Supply Agreement (Consumer Products
Business) between James River Paper and Crown Paper
10.7(1) Form of St. Francisville Product Supply Agreement (Packaging Business)
between James River Paper and Crown Paper
10.8(1) Form of Landfill Agreement between James River Paper and Crown Paper
10.9(1) Form of Allocation Agreement among JRC, James River Paper and Crown
Paper
10.10(1) Form of Packaging Papers Product Supply Agreement between James River
Paper and Crown Paper
10.11(1) Form of St. Francisville Wood Chip Supply Agreement between James
River Paper and Crown Paper
10.12(1) Form of St. Francisville Roundwood Supply and Cutting Rights Agreement
between James River Paper and Crown Paper
10.13(1) Form of Northeast Roundwood Supply Agreement between James River Paper
and Crown Paper
10.14(1) Form of Pension Funding Agreement among Crown Paper, Crown Vantage and
James River
10.15(1) Form of Guaranty Support Agreement among Crown Paper, Crown Vantage
and James River
10.16(1) Form of Eureka Trademark Agreement
10.17(1) Form of Crown Vantage Stock Option Plan for Outside Directors **
10.18(7) Crown Vantage Inc. Stock Award Plan for Outside Directors (as
amended) **
10.19(7) Second Amendment to the Crown Vantage Inc. Stock Award Plan for
Outside Directors **
10.20(6) Crown Vantage Inc. 1995 Incentive Stock Plan **
10.21(1) Form of Crown Vantage Inc. Stock Plus Employee Stock Ownership
Plan **
10.22(4) Form of Employment Agreement for Ernest S. Leopold dated December 5,
1995 **
10.23(2) Form of Nonstatutory Stock Option with Reload Feature Agreement under
the Registrant's 1995 Omnibus Incentive Stock Plan **
10.24(2) Form of Restricted Stock Award Agreement under the Registrant's 1995
Omnibus Incentive Stock Plan **
10.25(2) Form of Nonstatutory Stock Option Agreement under the Registrant's
1995 Stock Option Plan for Outside Directors **
10.26(2) Form of Restricted Stock Award Agreement under the Registrant's 1995
Stock Award Plan for Outside Directors **
10.27(4) Form of Agreement (Severance) dated December 5, 1995 **
10.28(4) Form of Amendment No. 1 to the Crown Vantage Inc. Stock Plus Employee
Stock Ownership Plan
10.29(3) Indenture between the Bank of New York, as trustee, and the Company,
relating to the Notes
10.30(7) First Supplemental Indenture between the Bank of New York, as trustee,
and the Company, relating to the Notes
10.31(3) Bank Credit Agreement among Morgan Guaranty Trust Company of New York,
as Agent, the Banks named therein, Crown Paper and Crown Vantage
10.32(7) Amendment No. 1 to Credit Agreement
10.33(7) Amendment No. 2 to Credit Agreement
10.34(3) Note Purchase Agreement Between JRC and Crown Vantage, relating to
the PIK Notes
10.35(7) Receivables Purchase Agreement
10.36(7) Purchase and Sale Agreement (relating to Receivables Purchase
Agreement)
10.37(7) Loan Agreement between Business Finance Authority of the State of New
Hampshire and Crown Paper Co.
14
<PAGE>
10.38(7) Refunding Loan Agreement between Business Finance Authority of the
State of New Hampshire and Crown Paper Co.
10.39(9) Amendment No. 3 to Credit Agreement
10.40(9) Amendment No. 4 to Credit Agreement
10.41(8) Option and Settlement Agreement Between Fort James Corporation and
Crown Vantage, relating to the PIK Notes
10.42(10) Amendment No. 1 to Form of Agreement (Severance) (a management
contract) **
10.43(11) Form of Agreement - Deferred Stock Awards for Selected Salaried
Employees **
10.44(11) Form of Agreement - Deferred Stock Awards for Senior Officers **
10.45(11) Description of Temporary Enhanced Severance **
10.46(12) Form of Employment Agreement (amendment No. 2) for Ernest S. Leopold
dated September 11, 1998 **
10.47(12) Amendment No. 5 to Credit Agreement
10.48* Amendment No. 6 to Credit Agreement
10.49* Second Supplemental Indenture between the Bank of New York, as
trustee, and the Company, relating to the Notes
13.1* Portions of the 1998 Annual Report to Shareholders, which are
specifically incorporated by reference herein
21.1(7) Subsidiaries
23.1* Consent of Ernst & Young LLP to the incorporation by reference of
their report dated January 29, 1999 into the Registration Statements
on Form S-8, File Nos. 33-96788, 33-96854, 33-96856, 333-09361, 333-
4420 and 333-52355
27* Financial Data Schedule
- -------------
(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 as Exhibits to Crown Vantage Inc.'s Annual Report on Form
10-K for the year ended December 29, 1996
(8) Previously filed in Form 8-K dated March 25, 1998.
(9) Previously filed as Exhibits to Crown Vantage Inc.'s Annual Report on Form
10-K for the year ended December 28, 1997
(10) Previously filed as Exhibits to Crown Vantage Inc.'s report on Form 10-Q
for the quarter ended March 29, 1998.
(11) Previously filed as Exhibits to Crown Vantage Inc.'s report on Form 10-Q
for the quarter ended June 28, 1998.
(12) Previously filed as Exhibits to Crown Vantage Inc.'s report on Form 10-Q
for the quarter ended September 28, 1998.
* Included as an exhibit herein.
** Indicates management contract or compensatory plan or arrangement.
(b) Reports on Form 8-K. Current Report, previously filed on Form 8-K dated
October 5, 1998, item 5, relating to the Company's settlement agreement with
Fort James on $33 million in PIK Notes.
Current Report, previously filed on Form 8-K dated January 27, 1999, item 5,
relating to the Company's anticipated weak fourth quarter 1998 pulp and paper
pricing, fourth quarter 1998 charges and Nasdaq hearing.
15
<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 16, 1999 Crown Vantage Inc.
(Registrant)
/s/ R. Neil Stuart /s/ Michael J. Hunter
- --------------------------- ---------------------------
R. Neil Stuart, Michael J. Hunter
Executive Vice President, Senior 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 16, 1999.
<TABLE>
<CAPTION>
Signature Title
- --------- -----
<S> <C>
/s/ George B. James Chairman and Director
- -------------------------------------------------------------------
George B. James
/s/ Robert A. Olah Chief Executive Officer, President and Director
- -------------------------------------------------------------------
Robert A. Olah
/s/ Ernest S. Leopold 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
</TABLE>
16
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
/s/ James S. Watkinson Director
- -------------------------------------------------------
James S. Watkinson
/s/ Donna L. Weaver Director
- -------------------------------------------------------
Donna L. Weaver
</TABLE>
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 16, 1999.
<TABLE>
<CAPTION>
Signature Title
- --------- -----
<S> <C>
/s/ R. Neil Stuart Chief Financial Officer
- -------------------------------------------------------
R. Neil Stuart
/s/ Michael J. Hunter Chief Accounting Officer
- -------------------------------------------------------
Michael J. Hunter
</TABLE>
17
<PAGE>
CROWN VANTAGE INC.
FINANCIAL STATEMENT SCHEDULE I
CONDENSED FINANCIAL STATEMENTS OF REGISTRANT
18
<PAGE>
Report of Independent Auditors
We have audited the consolidated financial statements of Crown Vantage Inc. and
subsidiaries as of December 27, 1998 and December 28, 1997 and for the three
years then ended, and have issued our report thereon dated January 29, 1999.
Our report on the consolidated financial statements of Crown Vantage Inc. has
been incorporated by reference in this Form 10-K from page 18 of the 1998 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.
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 29, 1999
19
<PAGE>
CROWN VANTAGE INC.
CONDENSED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Year Ended Year Ended Year Ended
(amounts in thousands) December 27, 1998 December 28, 1997 December 29, 1996
- ---------------------- ----------------- ----------------- -----------------
<S> <C> <C> <C>
Interest expense
$ (15,800) $(14,907) $(13,381)
----------------- ----------------- -----------------
Loss before income taxes, equity in
undistributed loss of subsidiaries and
extraordinary gain (15,800) (14,907) (13,381)
Income tax benefit 2,378 5,218 5,113
Equity in undistributed loss of subsidiaries
before extraordinary item (146,073) (22,531) (16,536)
----------------- ----------------- -----------------
Net loss before extraordinary item (159,495) (32,220) (24,804)
Extraordinary item, net 18,988
----------------- ----------------- -----------------
Net loss $(140,507) $(32,220) $(24,804)
================= ================= =================
</TABLE>
See notes to condensed financial statements.
20
<PAGE>
CROWN VANTAGE INC.
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
December 27, 1998 December 28, 1997
----------------- -----------------
(dollar amounts in thousands)
- -----------------------------
<S> <C> <C>
ASSETS
Deferred income taxes $ 6,327
Investment in subsidiaries 110,607
----------------- -----------------
Total Assets $ -0- $116,934
================= =================
LIABILITIES AND EQUITY
Current Liabilities:
Accrued liabilities $ 4,284 $ 4,718
----------------- -----------------
Total current liabilities 4,284 4,718
Investment in subsidiaries 27,126
Due to Crown Paper Co. 10,698
Long-term debt 95,992 113,185
----------------- -----------------
Total Liabilities 138,100 117,903
----------------- -----------------
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 - 9,876,842 and 9,668,313 shares
at December 27, 1998 and December 28, 1997, respectively 47,887 45,831
Unearned ESOP shares and other (974) (3,971)
Minimum pension liability (2,231) (330)
Cumulative foreign currency translation adjustment 1,562 1,338
Retained deficit (184,344) (43,837)
----------------- -----------------
(138,100) (969)
----------------- -----------------
Total Liabilities and Equity $ -0- $116,934
================= =================
</TABLE>
See notes to condensed financial statements.
21
<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
The amount of 11.45% Senior Pay-in-Kind Notes ("PIK Notes") outstanding to Fort
James on December 27, 1998 was $106.8 million and $125.3 million on December 28,
1997. The PIK Notes due to Fort James are recorded at a discount of $10.8
million on December 27, 1998 and $12.1 million on December 28, 1997 in order to
reflect a market rate of interest of 13% at the Spin-Off. Interest on 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 27, 1998, interest due has been paid through the issuance
of additional PIK Notes. On September 28, 1998 Crown Vantage and Crown Paper
settled with Fort James a variety of claims that had arisen between the
companies. The settlement resulted in the return of $25.1 million of PIK Notes
to Crown Vantage and the delivery of $8.1 million of PIK Notes to Crown Paper.
The settlement resulted in an extraordinary gain to the Parent Company of $19.0
million that is net of $2.4 million in expenses and $11.8 million in taxes. The
settlement amended the terms of the remaining PIK Notes and allows Crown Vantage
the right to call the remaining PIK Notes and accrued interest at fair value at
any time prior to their maturity. 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%.
Note 3 -- Cash Flow Information
On May 2, 1997, 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 was completely repaid in 1998 and bore interest of 11%.
As part of the PIK Note settlement discussed above, Crown Paper Co. paid $2.4
million for Crown Vantage's share of the expenses. This payment is included in
the due to Crown Paper balance for the year presented on the Balance Sheet.
Other than the cash flows described above, there were no other cash flows of the
Parent.
Note 4 -- Dividends
During 1998, 1997, and 1996, Crown Paper Co. neither paid nor declared dividends
to the Parent.
Note 5 -- Due to Crown Paper Co.
Included in "Due to Crown Paper" is the $8.1 million in 11.45% PIK Notes
transferred to Crown Paper as part of the settlement with Fort James. Also
included are $2.4 million of expenses paid by Crown Paper in behalf of Crown
Vantage, primarily for consent and investment banking fees associated with the
settlement with Fort James and accrued interest of $.2 million on the PIK Notes
due to Crown Paper.
22
<PAGE>
EXHIBIT 3.3
RESTATED BYLAWS OF
CROWN VANTAGE INC.
(as amended February 2, 1999)
ARTICLE I - MEETINGS OF STOCKHOLDERS
Section I.1 Closing of Transfer Books and Fixing of Record Date. For the
---------------------------------------------------
purpose of determining stockholders entitled to notice of, or to vote at, any
meeting of stockholders or any adjournment thereof, or entitled to receive
payment of any dividend, or in order to make a determination of stockholders for
any other proper purpose, the Board of Directors or the Executive Committee
shall fix in advance a date as the record date for any such determination of
stockholders, such date to be not more than 70 days before the meeting or
action. When a determination of stockholders entitled to vote at any meeting of
stockholders has been made as provided in this article, such determination shall
apply to any adjournment thereof, except as is otherwise provided by law.
Section I.2 Place and Time of Meetings. Meetings of stockholders shall be
--------------------------
held at such place, either within or without the Commonwealth of Virginia, and
at such time, as may be provided in the notice of the meeting.
Section I.3 Organization and Order of Business. The Chairman, (the
----------------------------------
"Chairman") or, in his absence, the Chief Executive Officer, shall serve as
chairman at all meetings of the stockholders. In the event of their absence or
if both individuals decline to serve, a majority of the shares entitled to vote
at such meeting may appoint any person to act as chairman. The Secretary of the
Corporation or, in his absence, an Assistant Secretary, shall act as secretary
at all meetings of the stockholders. In the event that neither the Secretary
nor any Assistant Secretary is present, the chairman of the meeting may appoint
any person to act as secretary of the meeting.
The Chairman shall have the authority to make such rules and regulations,
to establish such procedures and to take such steps as he or she may deem
necessary or desirable for the proper conduct of each meeting of the
stockholders, including, without limitation, the authority to make the agenda
and to establish procedures for (i) the dismissal of business not properly
presented, (ii) the maintenance of order and safety, (iii) placing limitations
on the time allotted to questions or comments on the affairs of the Corporation,
(iv) placing restrictions on attendance at a meeting by persons or classes of
persons who are not stockholders or their proxies, (v) restricting entry to a
meeting after the time prescribed for the commencement thereof and (vi) the
commencement, conduct and close of voting on any matter.
1
<PAGE>
Section I.4 Annual Meeting. The annual meeting of stockholders shall be
--------------
held on the third or second Thursday in April of each year as set by the Board
of Directors or on such other dates as shall be approved by the Board of
Directors.
At each annual meeting of stockholders, only such business shall be
conducted as is proper to consider and has been brought before the meeting (i)
by or at the direction of the Board of Directors or (ii) by a stockholder of the
Corporation who is a stockholder of record of a class of shares entitled to vote
on such business at the time of the giving of the notice hereinafter described
in this Section 1.4 and who complies with the notice procedures set forth in
this Section 1.4. In order to bring business before an annual meeting of
stockholders, a stockholder, in addition to complying with any other applicable
requirements, must have given timely written notice of his intention to bring
such business before the meeting to the Secretary of the Corporation. To be
timely, a stockholder's notice must be given, either by personal delivery or by
United States certified mail, postage prepaid, addressed to the Secretary of the
Corporation at the principal office of the Corporation and received (i) on or
after January 1st of the year in which the meeting will be held and before
February 1st of the year in which the meeting will be held or (ii) not less than
60 days before the date of the annual meeting if the date of such meeting, as
prescribed in these Bylaws, has been changed by more than 30 days.
Each such stockholder's notice shall set forth as to each matter the
stockholder proposes to bring before the annual meeting (i) the name and
address, as they appear on the Corporation's stock transfer books, of the
stockholder proposing such business, (ii) the class and number of shares of
stock of the Corporation beneficially owned by such stockholder, (iii) a
representation that such stockholder is a stockholder of record and intends to
appear in person or by proxy at such meeting to bring before the meeting the
business specified in the notice, (iv) a brief description of the business
desired to be brought before the meeting, including the complete text of any
resolutions to be presented at the meeting and the reasons for wanting to
conduct such business, and (v) any material interest which the stockholder has
in such business.
The Secretary of the Corporation shall deliver each such stockholder's
notice that has been timely received to the Chairman or a committee designated
by the Board of Directors for review.
Notwithstanding the foregoing provisions of this Section 1.4, a stockholder
seeking to have a proposal included in the Corporation's proxy statement for an
annual meeting of stockholders shall comply with the requirements of Regulation
14A under the Securities Exchange Act of 1934, as amended from time to time, or
with any successor regulation.
Section I.5 Special Meetings. Special meetings of the stockholders may be
----------------
called by the Chief Executive Officer or the Board of Directors. Only business
within the purpose or purposes described in the notice for a special meeting of
stockholders may be conducted at the meeting.
Section I.6 Notice of Meetings. Written notice stating the place, day and
------------------
hour of each meeting of stockholders and, in the case of a special meeting, the
purpose or purposes for which
2
<PAGE>
the meeting is called, shall be given by mail not less than ten nor more than 60
days before the date of the meeting (except when a different time is required in
these Bylaws or by law) to each stockholder of record entitled to vote at such
meeting and to such nonvoting stockholders as may be required by law. Such
notice shall be deemed to be effective when deposited in the United States mail
with postage thereon prepaid, addressed to the stockholder at his address as it
appears on the stock transfer books of the Corporation.
Notice of a stockholders' meeting to act on (i) an amendment of the
Articles of Incorporation; (ii) a plan of merger or share exchange; (iii) the
sale, lease, exchange or other disposition of all or substantially all the
property of the Corporation otherwise than in the usual and regular course of
business, or (iv) the dissolution of the Corporation, shall be given, in the
manner provided above, not less than 25 nor more than 60 days before the date of
the meeting. Any notice given pursuant to this paragraph shall state that the
purpose, or one of the purposes, of the meeting is to consider such action and
shall be accompanied by (x) a copy of the proposed amendment, (y) a copy of the
proposed plan of merger or share exchange, or (z) a summary of the agreement
pursuant to which the proposed transaction will be effected. If only a summary
of the agreement is sent to the stockholders, the Corporation shall also send a
copy of the agreement to any stockholder who requests it.
If a meeting is adjourned to a different date, time or place, notice need
not be given if the new date, time or place is announced at the meeting before
adjournment. However, if a new record date for an adjourned meeting is fixed
(which shall be done if the meeting is adjourned to a date more than 120 days
after the date fixed for the original meeting), notice of such date shall be
given to those persons entitled to notice who are stockholders as of the new
record date, unless a court provides otherwise.
Section I.7 Quorum and Voting Requirements. Each outstanding share of
------------------------------
common stock shall be entitled to one vote on each matter submitted to a vote at
a meeting of stockholders. Shares of other classes and series shall be entitled
to such vote as may be provided in the Articles of Incorporation.
Shares entitled to vote as a separate voting group may take action on a
matter at a meeting only if a quorum of those shares exists with respect to that
matter. Unless otherwise required by law, a majority of the votes entitled to
be cast on a matter by a voting group constitutes a quorum of that voting group
for action on that matter. Once a share is represented for any purpose at a
meeting, it is deemed present for quorum purposes for the remainder of the
meeting and for any adjournment of that meeting unless a new record date is or
shall be set for that adjourned meeting. If a quorum exists, action on a
matter, other than the election of directors, by a voting group is approved if
the votes cast within the voting group favoring the action exceed the votes cast
opposing the action, unless a greater number of affirmative votes is required by
law or by the Articles of Incorporation. Directors shall be elected by a
plurality of the votes cast by the shares entitled to vote in the election at a
meeting at which a quorum is present unless a different vote in required by the
Articles of Incorporation. Less than a quorum may adjourn a meeting.
3
<PAGE>
Section I.8 Proxies. A stockholder may vote his shares in person or by
-------
proxy. A stockholder may appoint a proxy to vote or otherwise act for him or
her by signing an appointment form, either personally or by his attorney-in-
fact. An appointment of a proxy is effective when received by the Secretary or
other officer or agent authorized to tabulate votes and is valid for 11 months
unless a longer period is expressly provided in the appointment form. An
appointment of a proxy is revocable by the stockholder unless the appointment
form conspicuously states that it is irrevocable and the appointment is coupled
with an interest.
The death or incapacity of the stockholder appointing a proxy does not
affect the right of the Corporation to accept the proxy's authority unless
notice of the death or incapacity is received by the Secretary or other officer
or agent authorized to tabulate votes before the proxy exercises his authority
under the appointment. An irrevocable appointment is revoked when the interest
with which it is coupled is extinguished. A transferee for value of shares
subject to an irrevocable appointment may revoke the appointment if he or she
did not know of its existence when he or she acquired the shares and the
existence of the irrevocable appointment was not noted conspicuously on the
certificate representing the shares. Subject to any legal limitations on the
right of the Corporation to accept the vote or other action of a proxy and to
any express limitation on the proxy's authority appearing on the face of the
appointment form, the Corporation is entitled to accept the proxy's vote or
other action as that of the stockholder making the appointment. Any fiduciary
entitled to vote any shares may vote such shares by proxy.
Section I.9 Waiver of Notice; Attendance at Meeting. A stockholder may
---------------------------------------
waive any notice required by law, the Articles of Incorporation or these Bylaws
before or after the date and time of the meeting that is the subject of such
notice. The waiver shall be in writing, be signed by the stockholder entitled
to the notice, and be delivered to the Secretary of the Corporation for
inclusion in the minutes or filing with the corporate records.
A stockholder's attendance at a meeting (i) waives objection to lack of
notice or defective notice of the meeting, unless the stockholder at the
beginning of the meeting objects to holding the meeting or transacting business
at the meeting, and (ii) waives objection to consideration of a particular
matter at the meeting that is not within the purpose or purposes described in
the meeting notice, unless the stockholder objects to considering the matter
when it is presented.
Section I.10 Action Without Meeting. Action required or permitted to be
----------------------
taken at a stockholders' meeting may be taken without a meeting and without
action by the Board of Directors if the action is taken by all the stockholders
entitled to vote on the action. The action shall be evidenced by one or more
written consents describing the action taken, signed by all the stockholders
entitled to vote on the action, and delivered to the Secretary of the
Corporation for inclusion in the minutes or filing with the corporate records.
Action taken under this section shall be effective according to its terms when
all consents are in the possession of the Corporation. A stockholder may
withdraw a consent only by delivering a written notice of withdrawal to the
Corporation prior to the time that all consents are in the possession of the
Corporation.
4
<PAGE>
If not otherwise fixed pursuant to the provisions of Section 1.1, the
record date for determining stockholders entitled to take action without a
meeting is the date the first stockholder signs the consent described in the
preceding paragraph.
If notice of proposed action is required to be given to nonvoting
stockholders and the action is to be taken by unanimous consent of the voting
stockholders, the Corporation shall give its nonvoting stockholders written
notice of the proposed action at least ten days before the action is taken. The
notice shall contain or be accompanied by the same material that would have been
required by law to be sent to nonvoting stockholders in a notice of a meeting at
which the proposed action would have been submitted to the stockholders for
action.
Section I.11 Voting List. The officer or agent having charge of the stock
-----------
transfer books of the Corporation shall make, at least ten days before each
meeting of stockholders, a complete list of the stockholders entitled to vote at
such meeting or any adjournment thereof, with the address of and the number of
shares held by each. The list shall be arranged by voting group and within each
voting group by class or series of shares. Such list shall be kept on file at
the registered office of the Corporation, or at its principal office or at the
office of its transfer agent or registrar, for a period of ten days prior to
such meeting and shall be subject to the inspection of any stockholder at any
time during usual business hours. Such list shall also be produced and kept
open at the time and place of the meeting and shall be subject to the inspection
of any stockholder during the whole time of the meeting for the purposes
thereof. The original stock transfer books shall be prima facia evidence as to
who are the stockholders entitled to examine such list or transfer books or to
vote at any meeting of the stockholders. The right of a stockholder to inspect
such list at any other time shall be subject to the limitations established by
law.
If the requirements of this section have not been substantially complied
with, the meeting shall, on the demand of any stockholder in person or by proxy,
be adjourned until such requirements are met. Refusal or failure to prepare or
make available the stockholders' list does not affect the validity of action
taken at the meeting prior to the making of any such demand, but any action
taken by the stockholders after the making of any such demand shall be invalid
and of no effect.
ARTICLE II - DIRECTORS
Section II.1 General Powers. The Corporation shall have a Board of
--------------
Directors. All corporate powers shall be exercised by or under the authority
of, and the business and affairs of the Corporation managed under the direction
of, its Board of Directors, subject to any limitation set forth in the Articles
of Incorporation.
Section II.2 Number and Term. The number of directors of the Corporation
---------------
shall be eight. This number may be changed from time to time by amendment to
these Bylaws to increase or decrease by 30 percent or less the number of
directors last elected by the stockholders, but only the stockholders may
increase or decrease the number by more than 30
5
<PAGE>
percent. No decrease in number shall have the effect of shortening the term of
any incumbent director. Each director shall hold office until his death,
resignation or removal or until his successor is elected.
Section II.3 Nomination of Candidates. No person shall be eligible for
------------------------
election as a director unless nominated (i) by the Board of Directors upon
recommendation of the Nominating Committee or otherwise or (ii) by a stockholder
entitled to vote on the election of directors pursuant to the procedures set
forth in this Section 2.3.
Nominations, other than those made by the Board of Directors, may be made
only by a stockholder who is a stockholder of record of a class of shares
entitled to vote for the election directors at the time of the giving of the
notice hereinafter described in this Section 2.3 and only if written notice of
the stockholder's intent to nominate one or more persons for election as
directors at a meeting of stockholders has been given, either by personal
delivery or by United States certified mail, postage prepaid, addressed to the
Secretary of the Corporation at the principal office of the Corporation and
received (i) on or after January 1st of the year in which the meeting will be
held and before February 1st of the year in which the meeting will be held, if
the meeting is to be an annual meeting and clause (ii) is not applicable, or
(ii) not less than 60 days before an annual meeting, if the date of the
applicable annual meeting, as prescribed in these Bylaws, has been changed by
more than 30 days, or (iii) not later than the close of business on the tenth
day following the day on which notice of a special meeting of stockholders
called for the purpose of electing directors is first given to stockholders.
Each such stockholder's notice shall set forth the following: (i) as to
the stockholder giving the notice (a) the name and address of such stockholder
as they appear on the Corporation's stock transfer books, (b) the class and
number of shares of stock of the Corporation beneficially owned by such
stockholder, (c) a representation that such stockholder is a stockholder of
record and intends to appear in person or by proxy at such meeting to nominate
the person or persons specified in the notice, and (d) a description of all
arrangements or understandings, if any, between such stockholder and each
nominee and any other person or persons (naming such person or persons) pursuant
to which the nomination or nominations are to be made; and (ii) as to each
person whom the stockholder wishes to nominate for election as a director (a)
the name, age, business address and, if known, residence address of such person,
(b) the principal occupation or employment of such person, (c) the class and
number of shares of the Corporation which are beneficially owned by such person,
and (d) all other information that is required to be disclosed about nominees
for election as directors in solicitations of proxies for the election of
directors under the Securities Exchange Act of 1934, as amended, or otherwise by
the rules and regulations of the Securities and Exchange Commission. In
addition, each such notice shall be accompanied by the written consent of each
proposed nominee to serve as a director if elected. Each such consent shall
also contain a statement from the proposed nominee to the effect that the
information about him or her contained in the notice is correct.
Section II.4 Election. Except as provided in Section 2.5 of this Article
--------
and in the Articles of Incorporation, the directors shall be elected by the
common stockholders and preferred stockholders entitled to vote with the common
stockholders at the annual meeting of
6
<PAGE>
stockholders, and those nominees who receive the greatest number of votes shall
be deemed elected even though they do not receive a majority of the votes cast.
No individual shall be named or elected as a director without his prior consent.
Section II.5 Removal; Vacancies. The stockholders may remove one or more
------------------
directors for cause. If a director is elected by a voting group, only the
stockholders of that voting group may vote to remove him or her. Unless the
Articles of Incorporation require a greater vote, a director may be removed if
the number of votes cast to remove him or her constitutes a majority of the
votes entitled to be cast at an election of directors of the voting group or
voting groups by which such director was elected. A director may be removed by
the stockholders only at a meeting called for the purpose of removing him or her
and the notice of the meeting must state that the purpose, or one of the
purposes of the meeting, is removal of the director.
A vacancy on the Board of Directors, including a vacancy resulting from the
removal of a director or an increase in the number of directors, may be filled
by (i) the stockholders, (ii) the Board of Directors or (iii) the affirmative
vote of a majority of the remaining directors though less than a quorum of the
Board of Directors, and may, in the case of a resignation that will become
effective at a specified later date, be filled before the vacancy occurs but the
new director may not take office until the vacancy occurs.
Section II.6 Compensation. The Board of Directors may fix the
------------
compensation of directors for their services and may provide for the payment of
all expenses incurred by directors in attending regular and special meetings of
the Board of Directors.
ARTICLE III - DIRECTORS' MEETINGS
Section III.1 Annual and Regular Meetings. An annual meeting of the Board
---------------------------
of Directors, which shall be considered a regular meeting, shall be held
immediately following each annual meeting of stockholders, for the purpose of
electing officers and carrying on such other business as may properly come
before the meeting. The Board of Directors may also adopt a schedule of
additional meetings which shall be considered regular meetings. Regular
meetings shall be held at such times and at such places, within or without the
Commonwealth of Virginia, as the Chief Executive Officer shall designate. If no
place is designated, regular meetings shall be held at the principal office of
the Corporation.
Section III.2 Special Meetings. Special meetings of the Board of
----------------
Directors shall be held on the call of the Chief Executive Officer or any three
members of the Board of Directors at the principal office of the Corporation or
at such other place as the Chief Executive Officer shall designate.
Section III.3 Telephone Meetings. The Board of Directors may permit any
------------------
or all directors to participate in a regular or special meeting by, or conduct
the meeting through the use of, any means of communication by which all
directors participating may simultaneously hear
7
<PAGE>
each other during the meeting. A director participating in a meeting by this
means is deemed to be present in person at the meeting.
Section III.4 Notice of Meetings. No notice need be given of regular
------------------
meetings of the Board of Directors.
Notice of special meetings of the Board of Directors shall be given to each
director in person or delivered to his residence or business address, or such
other place as he or she may have directed in writing, not less than 24 hours
before the meeting by mail, messenger, telecopy, telegraph, or other means of
written communication or by telephoning such notice to him or her. Any such
notice shall set forth the time and place of the meeting and state the purpose
for which it is called.
Section III.5 Quorum; Voting. A majority of the number of directors fixed
--------------
in these Bylaws shall constitute a quorum for the transaction of business at a
meeting of the Board of Directors. If a quorum is present when a vote is taken,
the affirmative vote of a majority of the directors present is the act of the
Board of Directors unless the act of a greater number is required by law, the
Articles of Incorporation or these Bylaws. A director who is present at a
meeting of the Board of Directors when corporate action is taken is deemed to
have assented to the action taken unless (i) he or she objects at the beginning
of the meeting, or promptly upon his arrival, to holding it or transacting
specified business at the meeting; or (ii) he or she votes against, or abstains
from, the action taken.
Section III.6 Waiver of Notice; Attendance at Meeting. A director may
---------------------------------------
waive any notice required by law, the Articles of Incorporation, or these Bylaws
before or after the date and time stated in the notice, and such waiver shall be
equivalent to the giving of such notice. Except as provided in the next
paragraph of this section, the waiver shall be in writing, signed by the
director entitled to the notice and filed with the minutes or corporate records.
A director's attendance at or participation in a meeting waives any
required notice to him or her of the meeting unless the director at the
beginning of the meeting or promptly upon his arrival objects to holding the
meeting or transacting business at the meeting and does not thereafter vote for
or assent to action taken at the meeting.
Section III.7 Action Without Meeting. Action required or permitted to be
----------------------
taken at a Board of Directors' meeting may be taken without a meeting if the
action is taken by all members of the Board. The action shall be evidenced by
one or more written consents describing the action taken, signed by each
director either before or after the action taken, and included in the minutes or
filed with the corporate records reflecting the action taken. Action taken
under this section shall be effective when the last director signs the consent
unless the consent specifies a different effective date in which event the
action taken is effective as of the date specified therein, provided the consent
states the date of execution by each director.
8
<PAGE>
ARTICLE IV - COMMITTEE OF DIRECTORS
Section IV.1 Committees. The Board of Directors may create one or more
----------
committees and appoint members of the Board of Directors to serve on them.
Unless otherwise provided herein, each committee shall have two or more members
who serve at the pleasure of the Board of Directors. The creation of a
committee and appointment of members to it shall be approved by the number of
directors required to take action under Section 3.5 of these Bylaws.
Section IV.2 Authority of Committees. To the extent specified by the
-----------------------
Board of Directors, each committee may exercise the authority of the Board of
Directors, except that a committee may not (i) approve or recommend to
stockholders action that is required by law to be approved by stockholders; (ii)
fill vacancies on the Board of Directors or any of its committees; (iii) amend
the Articles of Incorporation without stockholder approval; (iv) adopt, amend,
or repeal these Bylaws; (v) approve a plan of merger not requiring stockholder
approval; (vi) authorize or approve a distribution, except according to a
general formula or method prescribed by the Board of Directors; or (vii)
authorize or approve the issuance, or sale or contract for sale, of stock or
determine the designation and relative rights, preferences, and limitations of a
class or series of stock, except that the Board of Directors may authorize a
committee, or a senior executive officer of the Corporation, to do so within
limits specifically prescribed by the Board of Directors.
Section IV.3 Executive Committee. The Board of Directors shall appoint an
-------------------
Executive Committee consisting of two or more directors, which committee shall
have all of the authority of the Board of Directors except to the extent such
authority is limited by the provisions of Section 4.2.
Section IV.4 Audit Committee. The Board of Directors shall appoint an
---------------
Audit Committee consisting of not less than three directors, none of whom shall
be officers, which committee shall regularly review the adequacy of the
Corporation's internal financial controls, review with the Corporation's
independent public accountants the annual audit and other financial statements,
and recommend the selection of the Corporation's independent public accountants.
Section IV.5 Nominating Committee. The Board of Directors shall appoint a
--------------------
Nominating Committee consisting of not less than three directors, a majority of
whom shall not be officers or employees, which committee shall recommend to the
Board of Directors the names of persons to be nominated for election as
directors of the Corporation.
Section IV.6 Compensation Committee. The Board of Directors shall appoint
----------------------
a Compensation Committee consisting of not less than three directors, none of
whom shall be officers, which committee shall recommend to the Board of
Directors the compensation of directors and executive officers of the
Corporation, make awards under the Corporation's discretionary employee benefit
plans, and make recommendations from time to time to the Board of Directors
regarding the Corporation's compensation program.
9
<PAGE>
Section IV.7 Committee Meetings; Miscellaneous. The provisions of these
---------------------------------
Bylaws which govern meetings, action without meetings, notice and waiver of
notice, and quorum and voting requirements of the Board of Directors shall also
apply to committees of directors and their members.
ARTICLE V - OFFICERS
Section V.1 Officers. The officers of the Corporation shall be a
--------
Chairman; a Chief Executive Officer; a President; a Secretary; a Chief Financial
Officer; and such additional officers, including Vice Presidents and other
officers, as the Board of Directors may deem necessary or advisable to conduct
the business of the Corporation. Each of the Chairman and the Chief Executive
Officer shall be a member of the Board of Directors. The Board of Directors
shall also designate those officers who are deemed to be "Executive Officers."
Any two offices may be combined except the offices of Chief Executive Officer
and Secretary. The Board may designate that the Chairman be "non-executive" and
not an officer of the Corporation if the Chairman is not an employee of the
Corporation.
Section V.2 Election, Term. Officers shall be elected at each annual
--------------
meeting of the Board of Directors and shall hold office, unless removed, until
the next annual meeting of the Board of Directors or until their successors are
elected. Any officer may resign at any time upon written notice to the Board of
Directors.
Section V.3 Removal of Officers. Officers may be removed, with or
-------------------
without cause, at any time by the Board of Directors.
Section V.4.1 Duties of the Chairman. The Chairman shall perform such
----------------------
duties, from time to time, as may be assigned to him or her by the Board of
Directors. Unless he or she declines to serve, the Chairman shall preside at
all meetings of the stockholders and the Board of Directors.
Section V.4.2 Duties of the Chief Executive Officer. The Chief Executive
-------------------------------------
Officer shall have general charge of, and be charged with, the duty of
supervision of the business of the Corporation. In addition, he or she shall
perform such duties, from time to time, as may be assigned to him or her by the
Board of Directors.
Section V.4.3 Duties of the President. The President shall perform such
-----------------------
duties, from time to time, as may be assigned to him or her by the Board of
Directors. To the extent that such duties are not so assigned, such officer
shall have such authority and perform the duties which generally pertain to such
office, subject to the control of the Chief Executive Officer.
Section V.5 Duties of the Secretary. The Secretary shall have the duty
-----------------------
to see that a record of the proceedings of each meeting of the stockholders and
the Board of Directors, and any committee of the Board of Directors, is properly
recorded and that notices of all such meetings are duly given in accordance with
the provisions of these Bylaws or as required by law;
10
<PAGE>
he or she may affix the corporate seal to any document the execution of which is
duly authorized, and when so affixed may attest the same; and, in general, he or
she shall perform all duties incident to the office of secretary of a
corporation, and such other duties as, from time to time, may be assigned to him
or her by the Chief Executive Officer or the Board of Directors, or as may be
required by law.
Section V.6 Duties of the Chief Financial Officer. The Chief Financial
-------------------------------------
Officer shall have charge of and be responsible for all securities, funds,
receipts and disbursements of the Corporation, and shall deposit or cause to be
deposited, in the name of the Corporation, all monies or valuable effects in
such banks, trust companies or other depositories as shall, from time to time,
be selected by or under authority granted by the Board of Directors; he or she
shall be custodian of the financial records of the Corporation; he or she shall
keep or cause to be kept full and accurate records of all receipts and
disbursements of the Corporation and shall render to the Chief Executive Officer
and the Board of Directors, whenever requested, an account of the financial
condition of the Corporation; and shall perform such duties as may be assigned
to him or her by the Chief Executive Officer or the Board of Directors.
Section V.7 Duties of Other Officers. The other officers of the
------------------------
Corporation shall have such authority and perform such duties as shall be
prescribed by the Board of Directors or by officers authorized to appoint them
to their respective offices. To the extent that such duties are not so stated,
such officers shall have such authority and perform the duties which generally
pertain to their respective offices, subject to the control of the Chief
Executive Officer or the Board of Directors.
Section V.8 Voting Securities of Other Corporations. Any one of the
---------------------------------------
Chief Executive Officer or the Chief Financial Officer shall have power to act
for and vote on behalf of the Corporation at all meetings of the stockholders of
any corporation in which this Corporation holds stock, or in connection with any
consent of stockholders in lieu of any such meeting.
Section V.9 Bonds. The Board of Directors may require that any or all
-----
officers, employees and agents of the Corporation give bond to the Corporation,
with sufficient sureties, conditioned upon the faithful performance of the
duties of their respective offices or positions.
11
<PAGE>
ARTICLE VI - CERTIFICATES OF STOCK
Section VI.1 Form. Stock of the Corporation shall, when fully paid, be
----
evidenced by certificates containing such information as is required by law and
approved by the Board of Directors. Certificates shall be signed by the Chief
Executive Officer, the Chief Financial Officer, or any Vice President and the
Secretary or an Assistant Secretary or the Treasurer or an Assistant Treasurer
and may (but need not) be sealed with the seal of the Corporation. The seal of
the Corporation and any or all of the signatures on such certificates may be a
facsimile, engraved or printed. In case any such officer or any transfer agent
or registrar who has signed or whose facsimile signature has been placed upon
any such certificate shall have ceased to hold office before such certificate is
issued, the certificate shall, nevertheless, be valid.
Section VI.2 Lost, Stolen or Destroyed Stock Certificates. The
--------------------------------------------
Corporation may issue a new stock certificate in the place of any certificate
theretofore issued which is alleged to have been lost, stolen or destroyed and
may require the owner of such certificate, or his legal representative, to give
the Corporation a bond, sufficient to indemnify it against any claim that may be
made against it on account of the alleged loss, theft or destruction of any such
certificate or the issuance of any such new certificate.
Section VI.3 Transfer. The Board of Directors may make such rules and
--------
regulations concerning the issue, registration and transfer of certificates
representing the stock of the Corporation as it deems necessary or proper and
may appoint transfer agents and registrars. Unless otherwise provided,
transfers of stock and of the certificates representing such stock shall be made
upon the books of the Corporation by surrender of the certificates for the stock
transferred, accompanied by written assignments given by the owners or their
attorneys-in-fact.
ARTICLE VII - MISCELLANEOUS PROVISIONS
Section VII.1 Corporate Seal. The corporate seal of the Corporation shall
--------------
be circular and shall have inscribed thereon, within and around the
circumference, "CROWN VANTAGE INC." In the center shall be the word "SEAL".
Section VII.2 Fiscal Year. The fiscal year of the Corporation shall be
-----------
determined in the discretion of the Board of Directors, but in the absence of
any such determination it shall be a fiscal year of either 52 or 53 weeks ending
on the last Sunday in December.
Section VII.3 Amendments. These Bylaws may be amended or repealed, and
----------
new Bylaws may be made, at any regular or special meeting of the Board of
Directors by a majority of the Board. Bylaws made by the Board of Directors may
be repealed or changed and new Bylaws may be made by the stockholders, and the
stockholders may prescribe that any Bylaw made by them shall not be altered,
amended or repealed by the Board of Directors.
12
<PAGE>
ARTICLE VIII - VIRGINIA CONTROL
SHARE ACQUISITION STATUTE
The provisions of Article 14.1 of the Virginia Stock Corporation Act
((S)13.1-728.1 et seq.) in effect on the 14th day of August, 1995, shall not
apply to the acquisition of shares of this Corporation.
13
<PAGE>
EXHIBIT 10.48
AMENDMENT NO. 6 TO CREDIT AGREEMENT
AMENDMENT dated as of December 11, 1998 among CROWN PAPER CO. (the
"Borrower"), CROWN VANTAGE INC. ("Holdings"), 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 heretofore 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. Defined Terms. 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. Amendment to the Definition of Consolidated EBITDA. The
definition of "Consolidated EBITDA" set forth in Section 1.1 of the Agreement is
amended to read in its entirety as follows:
" Consolidated EBITDA" means, for any fiscal period, Consolidated EBIT for
such period plus, to the extent deducted in determining Consolidated Net Income
for such period, (i) the aggregate amount of depreciation, amortization, non-
cash incentive compensation expense and other similar non-cash charges, (ii)
solely for any period ended on or prior to December 31, 1997 and solely to the
extent not included in clause (i), the lesser of (x) the aggregate amount of
write-downs, write-offs or reserves with respect to the rebuild of the Number
One Paper Machine at St. Francisville and (y) $2,500,000 and (iii) solely for
any period ended on or prior to December 31, 1998 and solely to the extent not
included in clause (i), (x) the aggregate amount of write-offs with respect to
the stream of
<PAGE>
lease payments on a co-generation facility at St. Francisville, up to
$17,000,000 in the aggregate and (y) the aggregate amount of December non-
recurring charges with respect to environmental compliance and workers
compensation costs, up to $5,000,000 in the aggregate, in each case as described
by the Borrower to the Banks prior to the date of effectiveness of Amendment
No.6 to this Agreement dated as of December 11, 1998 among the Borrower,
Holdings, the Banks and the Administrative Agent.
Section 3. 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:
Fiscal Quarter Ratio
-------------- -----
Fourth quarter of 1998 fiscal year 0.145:1
Thereafter 0.200:1
Section 4. 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:
Fiscal Quarter Ratio
-------------- -----
Fourth quarter of 1998 fiscal year 1.50:1
Thereafter 2.50:1
Section 5. Net Worth. Section 5.14 of the Agreement is amended to read
in its entirety as follows:
2
<PAGE>
SECTION 5.14. Minimum Consolidated Tangible Net Worth. Consolidated
---------------------------------------
Tangible Net Worth will at no time during any fiscal period set forth below be
less than the amount set forth in the table below opposite such period; provided
that calculations of Consolidated Tangible Net Worth shall exclude the effect of
(i) the aggregate amount of the pretax write-offs with respect to the stream of
lease payments on a co-generation facility at St. Francisville, up to
$17,000,000 in the aggregate, (ii) the aggregate amount of the pretax December
non-recurring charges with respect to environmental compliance and workers
compensation costs, up to $5,000,000 in the aggregate and (iii) the aggregate
amount of the potential pre-tax non-cash asset write-downs, up to $195,000,000
in the aggregate, in each case as described by the Borrower to the Banks prior
to the date of effectiveness of Amendment No. 6 to this Agreement dated as of
December 11, 1998 among the Borrower, Holdings, the Banks and the Administrative
Agent:
Period Amount
- --------------------------------------------------------------------------------
6/30/98-12/30/98 $ 50,000,000
- --------------------------------------------------------------------------------
12/31/98-3/30/99 $ 50,000,000
- --------------------------------------------------------------------------------
3/31/99-12/30/99 $ 75,000,000
- --------------------------------------------------------------------------------
Thereafter $100,000,000
- --------------------------------------------------------------------------------
Section 6. Delivery of 1999 Strategic Plan. A new Section 5.26 is added
to the Agreement immediately after Section 5.25 thereof, to read in its entirety
as follows:
SECTION 5.26. 1999 Bankers Meeting. On or prior to February 15, 1999,
--------------------
the Borrower shall host a bankers meeting where the Borrower shall discuss with
the Banks the strategic plan for the 1999 fiscal year, which plan shall include
the Borrower's operating and capital expenditure budgets and cash flow forecast
on a quarterly basis for such fiscal year (which shall include a projected
consolidated balance sheet of the Borrower and its Consolidated Subsidiaries as
of the last day of each fiscal quarter and the related projected statements of
consolidated income and cash flows for such fiscal quarter and for the portion
of such fiscal year to end at the end of such fiscal quarter).
Section 7. Governing Law. This Amendment shall be governed by and
construed in accordance with the laws of the State of New York.
3
<PAGE>
Section 8. 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 that has delivered an executed counterpart
hereof (or telegraphic, telex or other written confirmation of execution of a
counterpart hereof) to the Administrative Agent on or prior to December 21,
1998, an amendment fee in such amount as shall have been previously agreed upon
between the Borrower and the Banks.
4
<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
----------------------------------
Title: EVP & CFO
CROWN VANTAGE INC.
By /s/ R. Neil Stuart
---------------------------------
Title: EVP & CFO
5
<PAGE>
MORGAN GUARANTY TRUST COMPANY OF
NEW YORK
By /s/ Stephen J. Hannan
----------------------------------
Title: Vice President
THE BANK OF NEW YORK
By /s/ Robert J. Louk
----------------------------------
Title: Vice President
CERES FINANCE LTD.
By /s/ David Egglishaw
----------------------------------
Title: Director
THE CHASE MANHATTAN BANK
By /s/ Lenard Weiner
----------------------------------
Title: Managing Director
6
<PAGE>
BANK AUSTRIA CREDITANSTALT
CORPORATE FINANCE, INC.
By /s/ Jack R. Bertges
--------------------------------------
Title: Senior Vice President
By /s/ James F. McCann
--------------------------------------
Title: Vice President
CHRISTIANIA BANK og KREDITKASSE
By /s/ Carl Petter Svendsen
--------------------------------------
Title: Senior Vice President
By /s/ Peter M. Dodge
--------------------------------------
Title: Senior Vice President
DRESDNER BANK AG, NEW YORK AND GRAND
CAYMAN BRANCHES
By /s/ John W. Sweeney
--------------------------------------
Title: Assistant Vice President
By /s/ Brigitte Sacin
--------------------------------------
Title: Assistant Treasurer
7
<PAGE>
FIRST SOURCE FINANCIAL LLP, by FIRST SOURCE
FINANCIAL, INC., its Agent/Manager
By /s/ John P. Thacker
--------------------------------------
Title: Senior Vice President
KZH III LLC
By /s/ Virginia Conway
--------------------------------------
Title: Authorized Agent
KZH HIGHLAND-2 LLC
By /s/ Virginia Conway
--------------------------------------
Title: Authorized Agent
THE LONG-TERM CREDIT BANK OF
JAPAN, LTD., LOS ANGELES AGENCY
By /s/ Noboru Akahane
--------------------------------------
Title: Deputy General Manager
8
<PAGE>
MARINE MIDLAND BANK
By /s/ Susan L. LeFevre
--------------------------------------
Title: Authorized Signatory
MERRILL LYNCH PRIME RATE PORTFOLIO
By: Merrill Lynch Asset Management, LP,
as Investment Advisor
By /s/ Andrew C. Liggio
--------------------------------------
Title: Authorized Signatory
MERRILL LYNCH SENIOR FLOATING RATE FUND, INC.
By /s/ Andrew C. Liggio
--------------------------------------
Title: Authorized Signatory
NATEXIS BANQUE BFCE
By /s/ Jordan Sadler
--------------------------------------
Title: Associate
By /s/ William C. Maier
--------------------------------------
Title: Senior Vice President
9
<PAGE>
NATIONSBANK, N.A.
By /s/ Christopher R. Gernhard
--------------------------------------
Title: Vice President
THE NORTHWESTERN MUTUAL LIFE INSURANCE
COMPANY
By /s/ Richard A. Strait
--------------------------------------
Title: Its Authorized Representative
PNC BANK, NATIONAL ASSOCIATION
By /s/ Philip K. Liebscher
--------------------------------------
Title: Vice President
MORGAN STANLEY DEAN WITTER PRIME INCOME
TRUST
By /s/ Peter Gewirtz
--------------------------------------
Title: Authorized Signatory
10
<PAGE>
PAMCO CAYMAN LTD.
By: Highland Capital Management LP, as
Collateral Manager
By /s/ James Dondero,
--------------------------------------
Title: CFA, CPA
President
Highland Capital
Management L.P.
KEYPORT LIFE INSURANCE COMPANY
By: Stein Roe & Farnham Incorporated, as
Agent for Keyport Life Insurance Company
By /s/ Brian W. Good
--------------------------------------
Title: Vice President & Portfolio
Manager
SOUTHERN PACIFIC BANK
By /s/ Charles D. Martorano
--------------------------------------
Title: Senior Vice President
STRATA FUNDING LTD.
By /s/ David Egglishaw
--------------------------------------
Title: Director
11
<PAGE>
VAN KAMPEN SENIOR INCOME TRUST
By /s/ Jeffrey W. Maillet
--------------------------------------
Title: Senior Vice President &
Director
VAN KAMPEN PRIME RATE INCOME TRUST
By /s/ Jeffrey W. Maillet
--------------------------------------
Title: Senior Vice President & Director
ML CBO IV (CAYMAN) LTD.
By: Highland Capital Management LP, as
Collateral Manager
By /s/ James Dondero
--------------------------------------
Title: CFA, CPA
President
Highland Capital
Management L.P.
MORGAN GUARANTY TRUST COMPANY, as
Administrative Agent and Collateral Agent
By /s/ Stephen J. Hannan
--------------------------------------
Title: Vice President
12
<PAGE>
EXHIBIT 10.49
EXECUTION COPY
CROWN PAPER CO., as Issuer
and
THE BANK OF NEW YORK, as Trustee
- -------------------------------------------------------------------------------
SECOND SUPPLEMENTAL INDENTURE
Dated as of September 28, 1998
to
Indenture
Dated as of August 23, 1995
- -------------------------------------------------------------------------------
11% Senior
Subordinated Notes
due 2005
<PAGE>
SECOND SUPPLEMENTAL INDENTURE (hereafter, the "Second Supplemental
Indenture") dated as of September 28, 1998 between CROWN PAPER CO. (hereinafter,
the "Company"), a corporation duly organized and existing under the laws of the
Commonwealth of Virginia, and THE BANK OF NEW YORK (hereinafter, the "Trustee"),
a banking corporation organized and existing under the laws of the State of New
York.
W I T N E S S E T H :
WHEREAS, the Company has heretofore executed and delivered to the
Trustee an Indenture dated as of August 23, 1995 (as amended by the First
Supplemental Indenture dated October 18, 1996, hereinafter, the "Indenture")
providing for the issuance of the Company's 11% Senior Subordinated Notes due
2005 (hereinafter, the "Securities"); and
WHEREAS, pursuant to Section 902 of the Indenture, the Company has
obtained the consent of the Holders of not less than a majority in principal
amount of the outstanding Securities to the amendments made hereby;
WHEREAS, the Board of Directors of the Company has authorized the
execution of this Supplemental Indenture and its delivery to the Trustee;
WHEREAS, the Company has delivered an Officers' Certificate and
Opinion of Counsel to the Trustee pursuant to Section 903 of the Indenture; and
WHEREAS, all other actions necessary to make this Supplemental
Indenture a legal, valid and binding obligation of the parties hereto in
accordance with its terms and the terms of the Indenture have been performed;
NOW, THEREFORE, in consideration of the premises and for other good
and valuable consideration, the receipt of which is hereby acknowledged, the
Company covenants and agrees with the Trustee, for the equal and proportionate
benefit of all present and future holders of Securities, as follows:
Section 1. The definition of "Permitted Investment" in Section 101 of
the Indenture shall read in its entirety as follows:
"Permitted Investment" means (i) Investments in any Wholly Owned
Subsidiary or any Person which, as a result of such Investment, (a) becomes
a Wholly Owned Subsidiary or (b) is merged or consolidated with or into, or
transfers or conveys substantially all of its assets to, or is liquidated
into, the Company or any Wholly Owned Subsidiary; (ii) Indebtedness of the
Company or a Subsidiary described under clauses (iv), (v) and (vi) of the
definition of "Permitted Indebtedness"; (iii) Temporary Cash Investments;
(iv) Investments acquired by the Company or any Subsidiary in connection
with an Asset Sale permitted under Section 1012 to the extent such
<PAGE>
2
Investments are non-cash proceeds as permitted under such covenant; (v)
Investments acquired by the Company or any Subsidiary in connection with
any sale, conveyance, transfer, lease or other disposition (collectively, a
"transfer") of any properties or assets to another Person, which transfer
does not constitute an Asset Sale; (vi) a loan of up to $10.1 million to
the ESOP by the Company as contemplated by the Contribution Agreement;
(vii) Investments in existence on the date of this Indenture; and (viii)
the receipt of $8,045,796 in aggregate principal amount of Holdings PIK
Notes from the Fort James Entities in the Spin-Off Settlement pursuant to
the terms of the Spin-Off Settlement Agreement.
Section 2. The definition of "Asset Sale" in Section 101 of the
Indenture shall read in its entirety as follows:
"Asset Sale" means any sale, issuance, conveyance, transfer, lease or
other disposition (including, without limitation, by way of merger,
consolidation or Sale and Leaseback Transaction) (collectively, a
"transfer"), directly or indirectly, in one or a series of related
transactions, of: (i) any Capital Stock of any Subsidiary; (ii) all or
substantially all of the properties and assets of any division or line of
business of the Company or its Subsidiaries; or (iii) any other properties
or assets of the Company or any Subsidiary other than in the ordinary
course of business. For the purposes of this definition, the term "Asset
Sale" shall not include any transfer of properties and assets (A) that is
governed by Article Eight, (B) that is by the Company to any Guarantor, or
by any Subsidiary to the Company or any Wholly Owned Subsidiary in
accordance with the terms of this Indenture, (C) that is of obsolete
equipment in the ordinary course of business, (D) the sale by the Company
of its mill and related operations located in Milford, New Jersey, (E) the
sale by the Company of timber properties (other than in a Timber Asset
Swap) in an aggregate principal amount of up to $10 million during the term
of the Indenture, (F) in addition to the items described in clauses (A)
through (E), assets, the Fair Market Value of which in the aggregate during
the term of this Indenture, for all transfers, does not exceed $40 million,
or (G) in the Spin-Off Settlement pursuant to the terms of the Spin-Off
Settlement Agreement.
Section 3. Section 101 of the Indenture is hereby further amended by
adding the following defined terms in the proper alphabetical order:
"Fort James Entities" means Fort James Corporation (successor by merger to
James River Corporation), Fort James Operating Company, Fort James Fiber
Company and Fort James International Holdings, Ltd.
"Holdings PIK Notes" means the 11.45% Senior Pay-in-Kind Notes due 2007
issued by Holdings.
"Spin-Off Settlement" means the transactions contemplated by Sections 2.2
through 2.9, inclusive, of the Spin-Off Settlement Agreement.
<PAGE>
3
"Spin-Off Settlement Agreement" means the Option and Settlement Agreement
dated as of March 18, 1998 among the Fort James Entities, Holdings and the
Company.
Section 4. For all purposes of this Second Supplemental Indenture,
except as otherwise herein expressly provided or unless the context otherwise
requires: (i) the terms and expressions used herein shall have the same
meanings as corresponding terms and expressions used in the Indenture; and (ii)
the words "herein", "hereof" and "hereby" and other words of similar import used
in this Second Supplemental Indenture refer to this Second Supplemental
Indenture as a whole and not to any particular Section hereof.
Section 5. The Trustee accepts this Second Supplemental Indenture and
the amendment of the Indenture effected thereby and agrees to execute the trust
created by the Indenture as hereby amended, but only upon the terms and
conditions set forth in the Indenture, including the terms and provisions
defining and limiting the liabilities and responsibilities of the Trustee, which
terms and provisions shall in like manner define and limit its liabilities in
the performance of the trust created by the Indenture as hereby amended.
Section 6. Except as hereby expressly amended, the Indenture and the
Securities issued thereunder are in all respects ratified and confirmed and all
the terms, conditions and provisions thereof shall remain in full force and
effect.
Section 7. This Second Supplemental Indenture shall form a part of
the Indenture for all purposes, and every holder of Securities heretofore or
hereafter authenticated and delivered shall be bound hereby.
Section 8. This Second Supplemental Indenture may be executed in any
number of counterparts, each of which when so executed shall be deemed to be an
original, and all of such counterparts shall together constitute one and the
same instrument.
<PAGE>
4
Section 9. This Second Supplemental Indenture shall be construed in
accordance with and governed by the laws of the State of New York (without
giving effect to the conflict of laws principles thereof).
IN WITNESS WHEREOF, the parties hereto have caused this Second
Supplemental Indenture to be duly executed, all as of the day and year first
above written.
CROWN PAPER CO.
By: /s/ Christopher M. McLain
---------------------------------------
Name: Christopher M. McLain
Title: Senior Vice President
THE BANK OF NEW YORK, as Trustee
By: /s/ Thomas C. Knight
---------------------------------------
Name: Thomas C. Knight
Title: Assistant Vice President
<PAGE>
EXHIBIT 13.1
Crown Vantage Inc.
<TABLE>
<CAPTION>
Selected Financial Data
- -----------------------------------------------------------------------------------------------------------------
Year Ended December
- -----------------------------------------------------------------------------------------------------------------
(dollar amounts in millions) 1998 1997 1996 1995(a) 1994(a)
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Results of Operations
Net sales $ 851 $ 897 $ 925 $ 1,077 $ 875
Gross margin 54 60 75 156 43
Selling and administrative expenses 62 56 52 56 57
Operating income (loss) (b) (172) 14 23 100 (14)
Interest expense 65 65 63 26 2
Net Income (loss) before extraordinary item (159) (32) (25) 45 (10)
Basic loss per share before extraordinary item (c) (16.79) (3.61) (2.89)
Balance Sheet Data
Cash and cash equivalents $ 10 $ 11 $ 1 $ 5 $ 12
Working capital 55 43 36 87 98
Property, plant and equipment, net 434 621 678 668 699
Total assets 689 881 946 985 987
Total long-term debt 556 545 553 567 26
Other Financial Data
EBITDA (d) $ 79 $ 100 $ 104 $ 180 $ 63
Capital expenditures 42 59 81 47 53
Operating income (loss) before fixed asset
write-downs and other charges and gains (e) (8) 4 23 100 (14)
Selected Operating Data
Employees 3,552 3,850 3,995 4,162 4,324
Tons sold (thousands of tons) 969 982 948 985 990
Pulp purchases (thousands of tons) 285 252 261 289 309
Pulp sold (thousands of tons) 86 57 43 44 57
- -----------------------------------------------------------------------------------------------------------------
</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")
that 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 year ended December 25, 1994.
(b) 1998 operating loss includes a $146.9 million fixed asset write-down
(mainly at the Berlin-Gorham, N.H. pulp and paper mills) and a $16.9
million charge for the discounted net future lease payments for a
co-generation facility at the St. Francisville, La., mill that no longer
provides substantive use or benefit to the mill. 1997 operating income
includes a $13.5 million gain from the sale of timberlands and a $3.3
million charge due to the closure of the Newark, Del., facility.
(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.
The 1998 extraordinary gain is from the return of $33.2 million in
Pay-in-Kind Notes from Fort James, which is $19.0 million net of tax.
(d) EBITDA represents income (loss) before income taxes, interest expense and
depreciation and amortization. 1998 EBITDA excludes the $146.9 million
fixed asset write-down and the $16.9 million charge discussed in footnote
(b) above, and it includes a $3.0 million work force reduction charge. 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, Del., facility. 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.
(e) Excludes items discussed in (b) above.
7
<PAGE>
Crown Vantage Inc.
Management's Discussion and Analysis of Financial Condition
and Results of Operations
- --------------------------------------------------------------------------------
Corporate Overview
Business Segments
Crown Vantage Inc. and subsidiaries (the "Company" or "Crown Vantage") is a
major producer of value-added paper products for a diverse array of end-uses.
The Company operates in two segments: printing and publishing papers and
specialty papers. Printing and publishing papers are primarily for applications
such as special interest magazines, books, custom business forms, corporate
communications and promotions (e.g., annual reports and stationery) and other
graphics applications. Specialty papers are principally for food and retail
packaging applications and conversion into such items as coffee filters, labels,
cups and plates, and disposable medical gowns.
The Company's two largest facilities are integrated operations located in St.
Francisville, La., and Berlin and Gorham, N.H. 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, Mass.; Ypsilanti,
Mich., 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, Mich., and Milford, N.J. In addition to its primary
paper-making operations, the Company operates a cast-coating facility in
Richmond, Va., that produces coated paper and board for graphics and packaging
uses.
The Company believes that its broad manufacturing capabilities allow it to offer
a wider range of products and basis weights serving more specialized markets
than most of its North American competitors. The Company focuses its operations
on the higher value-added market niches of the segments 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 there are fewer substitutes for these products.
Consolidated Results of Operations -- 1998 Compared to 1997
Net Sales: The Company's net sales decreased by 5.2% to $851.0 million for the
52-week year ended December 27, 1998 compared to $897.5 million for the 52-week
year ended December 28, 1997. The decrease in sales is largely due to a 3.9%
decrease in average net sales price per ton and a 1.3% decrease in tons sold
during 1998 compared to 1997.
Operating Income (Loss)
The Company had an operating loss of $172.1 million in 1998 compared to
operating income of $14.3 million in 1997. The decrease in operating results is
attributable to fixed asset write-downs of $146.9 million (primarily at the
Berlin-Gorham, N.H., pulp and paper mill) and a charge of $16.9 million that
represents the discounted net future lease payments for a co-generation facility
at the St. Francisville, La., mill that no longer provides substantive use or
benefit to the mill (see Note 2 and Note 13 to the Consolidated Financial
Statements). 1997 operating income included a gain of $13.5 million for the sale
of timberlands and a charge of $3.3 million for closure of the Newark, Del.,
facility. Excluding the fixed asset write-down and co-generation charge
discussed above, the operating loss in 1998 was $8.3 million compared to
operating profit of $4.2 million in 1997, excluding the mill closure charge and
timberland sale gain discussed above. Contributing to the decline in operating
results are the decreases in average net sales price per ton and tons sold
discussed above that are partially offset by reduced costs primarily from lower
raw material costs and the Company's cost reduction program. Gross margin as a
percent of sales was 6.4% for 1998 compared to 6.7% for 1997. The gross margin
decrease was due to the decline in net sales price per ton discussed above,
which was partially offset by a 3.6% decrease in average cost per ton sold in
1998 compared to 1997.
Selling and administrative expenses increased $6.5 million to $62.4 million in
1998 compared to $55.9 million in 1997. The increase is primarily due to Year
2000 compliance costs, one-time expenditures associated with certain of the
Company's strategic initiatives, higher sales and marketing costs associated
with stocking programs to provide faster delivery times to customers and one
time contractual compensation costs.
Interest Expense
Interest expense decreased from $65.2 million in 1997 to $64.7 million in 1998.
The decrease in interest expense is primarily due to debt reduction that
occurred in the fourth quarter of 1997.
8
<PAGE>
Crown Vantage Inc.
Tax Provision
The income tax benefit in 1998 totaled $75.9 million compared to $17.4 million
in 1997. The income tax rates were 32.2% in 1998 and 35.0% in 1997. Income tax
benefits for 1998 have been reduced by a deferred tax asset valuation allowance
of $14.2 million. The Company anticipates that, in accordance with Statement of
Financial Accounting Standards No. 109 "Accounting for Income Taxes," tax
benefits resulting from operating losses in the foreseeable future would at
least be partially offset by deferred tax asset valuation allowances.
Basic Loss Per Share
Basic loss per share was $14.79 for 1998, $3.61 for 1997 and $2.89 for 1996.
Diluted losses per share are not presented as these amounts are the same as
basic losses per share.
- --------------------------------------------------------------------------------
Results of Operations by Business Segment
- --------------------------------------------------------------------------------
Net Sales and Tonnage by Segment
- --------------------------------------------------------------------------------
For the Year Ended 1998 1997 1996
- --------------------------------------------------------------------------------
(sales in millions, tons in thousands) Tons Sales Tons Sales Tons Sales
Printing and Publishing Papers:
Coated groundwood 289 $232 280 $198 258 $214
Uncoated 241 221 239 233 240 239
Other (a) 118 60 109 82 96 83
Specialty Papers 321 338 354 384 354 389
- --------------------------------------------------------------------------------
Total Company 969 $851 982 $897 948 $925
================================================================================
(a) Represents market sales of pulp to third parties, toweling, and cast-coated
papers. Pulp sales excludes approximately 32,000 tons in 1998, 42,000 tons
in 1997, and 44,000 tons in 1996 that were transferred to other Company
facilities.
Operating Income (Loss) by Segment (in millions)
- --------------------------------------------------------------------------------
For the Year Ended 1998 1997 1996
- --------------------------------------------------------------------------------
Printing and Publishing Papers $(166) $ 1 $ 12
Specialty Papers (6) 13 11
- --------------------------------------------------------------------------------
Total operating income (loss) $(172) $ 14 $ 23
================================================================================
Printing and Publishing Papers
Within this business segment, the Company produces coated groundwood and
uncoated freesheet papers. This segment also includes the Company's toweling and
pulp operations in Berlin-Gorham, N.H., and cast-coating operations in Richmond,
Va.
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 retailer advertising
expenditures. Net sales of coated groundwood papers increased 17.3% in 1998
compared to 1997. The increase is primarily due to a 13.5% increase in average
net sales price per ton and a 3.4% increase in tons sold. While demand for
coated groundwood papers was strong for most of 1998, coated paper imports
increased significantly during the year resulting in industry-wide mill
inventory builds and price discounting during the latter part of 1998. The
current supply/demand imbalance poses a threat of continued price discounting
that may negatively impact prices of the Company's coated groundwood papers in
future periods.
Customer end-use products within uncoated printing and publishing papers 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
9
<PAGE>
Crown Vantage Inc.
printing and publishing papers category make Crown Vantage less susceptible,
though not immune, to economic cycles. Net sales for uncoated printing and
publishing papers decreased 5.0% during 1998 compared to 1997. The decrease in
net sales is primarily due to a 5.7% decrease in average sales price per ton.
Despite strong domestic demand, the current economic crisis in Asia coupled with
a strong U.S. Dollar have resulted in lower exports by U.S. paper producers and
increased imports into the U.S. from Asia, Europe, and South America. This
abundance of uncoated freesheet paper has negatively impacted demand and pricing
for some of the Company's uncoated printing and publishing papers, resulting in
depressed prices for the Company's lower value products. The 1998 supply levels
of these papers in the marketplace also resulted in the Company's partial shift
in mix to lower value-added grades in order to maintain volume during this
period of supply/demand imbalance, which also negatively impacted the Company's
average net selling price.
Other products reported within printing and publishing papers include the
Company's toweling, pulp and cast-coating operations. Cast-coating provides a
high gloss finish for a premium grade of coated paperboard used for graphics and
packaging applications. Net sales decreased by $22.9 million during 1998
compared to 1997 primarily due to a change in product mix as tons sold of higher
priced cast-coated papers and toweling, declined by 38.8% and tons of pulp sold
increased by 50.1%. The decline in cast-coated papers and toweling is primarily
due to the decision by certain customers during the last half of 1997 to use
their own internal resources. The Company continues to aggressively pursue
replacing the lost tonnage with new product development and trials of engineered
papers in progress. Tons of pulp sold is a function of market demand as well as
managing, to the Company's best advantage, internal pulp integration. The
increase in pulp tons sold is principally due to the availability of pulp for
sale that in the prior year was used internally and to improved operating
efficiencies.
Operating Income (Loss)
The operating loss of $166.1 million in 1998 declined $167.1 million from an
operating profit of $1 million in 1997. The fixed asset write-downs and charges
associated with the co-generation facility affected both segments. The
allocation of these charges to this segment and the primary reasons for the
decline in operating results during 1998 are the fixed asset write-downs of
$145.2 million and a $12.1 million charge for the co-generation facility. The
1997 operating profit includes the $13.5 million gain from the sale of certain
timberlands and a $3.3 million charge for the closure of the Newark, Del.,
facility. Operating results before the nonrecurring items discussed above are
operating losses of $8.8 million for 1998 and $9.2 million for 1997.
Specialty Papers
Within this segment, the Company produces specialty papers for use in food and
retail packaging and converting end uses.
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 labels, multi-wall bags for pet foods, food
service papers, flexible packaging, and technical and industrial specialty
products such as disposable medical gowns. The Company's specialty packaging
papers business is principally driven by consumer spending patterns and has
historically exhibited less cyclicality due to general economic trends compared
to producers of papers for other end-use products. The Company's specialty
packaging papers operations in Milford, N.J., and Parchment and Port Huron,
Mich., purchase all of their pulp and are therefore susceptible to pulp price
fluctuations. Operating results benefit during periods of decreasing pulp prices
and suffer during periods of increasing pulp prices. The Company manufactures
specialty converting papers on two paper machines at its fully integrated
facility in St. Francisville, La. 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.
Specialty papers had net sales of $338.2 million for 1998 compared to net sales
in 1997 of $384.5 million. The 12.0% decrease in net sales is primarily due to a
3.1% decrease in average selling price per ton and a 9.2% decrease in tons sold
in 1998 compared to 1997. The continuing economic crisis in Asia is indirectly
affecting the Company's specialty packaging papers as European producers are
redirecting their output to North American markets and as large integrated mills
in North America are entering otherwise non-traditional markets, thereby
disrupting supply/demand balance and pricing for the Company's specialty
packaging papers.
10
<PAGE>
Crown Vantage Inc.
Operating Income (Loss)
The operating loss of $6.1 million in 1998 declined $19.5 million from an
operating profit of $13.4 million in 1997. The decrease in operating income in
1998 from 1997 is primarily due to the decline in tons sold and average price
per ton discussed above. Contributing to the decline are the fixed asset write-
downs of $1.7 million and a $4.8 million charge for the co-generation facility
lease allocated to this segment. These were partially offset by lower raw
material costs and improved operating efficiencies. Before the nonrecurring
items discussed above, this segment had an operating profit of $.4 million in
1998.
- --------------------------------------------------------------------------------
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 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 compared to 1996. The decrease in sales
prices began in early 1996 and prices remained depressed through most of 1997.
Operating Income
Operating income of $14.3 million in 1997 decreased $8.4 million from $22.7
million in 1996. The decrease in operating income is primarily attributable to
the decreased pricing discussed above and is partially offset by the Company's
cost reduction program, gain on sale of timberlands (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.
Selling and administrative expenses increased $3.7 million to $55.9 million in
1997 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 compared to 1996.
Tax Provision
The income tax benefit in 1997 totaled $17.4 million compared to $15.2 million
in 1996. The effective income tax rates were 35.0% and 38.0% in 1997 and 1996,
respectively.
Printing and Publishing Papers
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 compared to $213.6
million in 1996, a 7.3% decrease. The decrease in net sales is due to a 14.4%
average decrease in coated groundwood prices in 1997 compared to 1996. This was
partially offset by an increase of 21,600 tons sold in 1997 compared to 1996.
During the fourth quarter of 1997 a mechanical failure on the No. 2 paper
machine at the St. Francisville, La., facility caused a loss in production of
approximately 3,000 tons.
Net sales of uncoated printing and publishing papers in 1997 were $233.0 million
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 compared to 1996. Tons sold in 1997 were approximately the same as 1996.
Net sales for the Company's toweling, pulp and cast-coating operations declined
$1.7 million in 1997 compared to 1996. The decline in net sales is primarily due
to a 9.0% decrease in average net sales price per ton and a 2.3% decrease in
tons sold for the Company's toweling and cast-coated products. The decrease in
average selling price per ton is the result of fewer tons sold from the
Company's cast-coating operations whose papers generally command premium
pricing. This was partially offset by a 14,700 ton increase in tons sold of
pulp.
11
<PAGE>
Crown Vantage Inc.
Operating income from the sale of printing and publishing papers was $1.0
million in 1997, a $10.6 million decrease from operating income of $11.6 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
and fewer tons sold from the cast-coating operations. The decrease in operating
income was partially offset by the $13.5 million gain from the timberlands sale
and increased volume of coated groundwood sold in 1997 compared to 1996. During
the fourth quarter of 1997, the Company closed its Newark, Del., facility and
shifted most of the 2,200 tons of the 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
During 1997, Crown Vantage's specialty papers business generated net sales of
$384.4 million compared to net sales in 1996 of $388.9 million. The 1.2%
decrease in net sales is primarily due to a 1.2% 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 specialty papers generated operating profits of $13.4
million compared to $11.1 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 compared to 1996. Industry pulp prices remained approximately the
same in 1997 compared to 1996. Improvements in operating results were partially
offset by the price decreases discussed above.
- --------------------------------------------------------------------------------
Liquidity and Capital Resources
General
The Company became an independent company upon the spin-off by James River
Corporation of Virginia ("James River"), now known as Fort James Corporation
("Fort James"), of certain assets and related liabilities from its Communication
Papers Business and the paper-based part of its Food and Consumer Packaging
Business. On August 25, 1995, James River distributed to its shareholders all
the outstanding stock of Crown Vantage (the "Spin-Off").
In connection with the Spin-Off, Crown Paper Co. (a wholly-owned subsidiary of
the Company) 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 $38.2
million has been issued at December 27, 1998). The revolving credit can be used
for general corporate purposes, working capital needs, and permitted
investments. At December 27, 1998, $75.0 million of the revolving credit was
outstanding and $36.8 million of the aggregate line was available if needed. The
outstanding balance on Term Loan A was paid in full in October 1997 and had an
average interest rate of 8.42% for that year. Term Loan B had an average
interest rate of 9.19% during 1998 and 9.14% during 1997. The revolving line of
credit had an average interest rate of 8.57% during 1998 and 1997. The Bank
Credit Facility is collateralized by substantially all the assets of Crown Paper
Co. Also in connection with the Spin-Off, Crown Paper Co. issued $250 million of
11% Senior Subordinated Notes (the "Notes") through a public debt offering,
which are unsecured and due in 2005.
As a return of its capital investment in Crown Vantage, James River was paid the
net proceeds from Term Loans A and B, the initial borrowing on the revolving
line of credit, and the Notes. 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; 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
12
<PAGE>
Crown Vantage Inc.
approximate market rate interest of 13% at the Spin-Off date. On September 28,
1998 Crown Vantage and Crown Paper Co. settled with Fort James a variety of
claims that had arisen between the companies. The settlement resulted in the
return of $25.1 million of PIK Notes to Crown Vantage and the delivery of $8.1
million of PIK Notes to Crown Paper Co. The $8.1 million in PIK Notes assets
held by Crown Paper are reclassified in consolidation against the PIK Notes
indebtedness. The settlement resulted in an extraordinary gain of $19.0 million
that is net of $2.4 million in expenses and $11.8 million in taxes. The
settlement amended the terms of the remaining PIK Notes and allows Crown Vantage
the right to call the remaining PIK Notes and accrued interest at fair value at
any time prior to their maturity.
Operating Activities
Net cash provided by operating activities was $14.1 million in 1998, $53.8
million in 1997 and $104.9 million in 1996.
The decline in operating cash flows in 1998 compared to 1997 is primarily due to
the operating loss before the charges for the fixed asset write-down and
co-generation facility (totaling $163.8 million) of $8.3 million in 1998
compared to a $4.2 million operating profit in 1997 (excluding the gain on
timberland sale and the facility closure charge) and changes in working capital
accounts. The decline in operating cash flows in 1997 compared to 1996,
excluding the effect of the $43 million sales of receivables in 1996, primarily
results from the $32.2 million net loss incurred in 1997 versus a net loss of
$24.8 million in 1996. Cash provided by operating activities in 1996 includes
the $43 million in proceeds received from the Company's sales of certain
accounts receivable discussed above.
Investing Activities
Net cash used in investing activities totaled $43.9 million in 1998, $20.8
million in 1997 and $81.1 million in 1996. In 1997 the Company realized $36
million in proceeds from the sale of the timberlands, which were used to
partially prepay Term Loan A. The Company's business is capital intensive. Pulp
and paper mills consist of an extensive network of buildings, machinery, and
equipment, which require continual upgrades, replacement, modernization and
improvement. Capital expenditures in 1998 totaled $42.1 million primarily for
capital maintenance projects and environmental spending. Capital expenditures in
1997 totaled $59.3 million relating primarily to capital maintenance projects
and $7.9 million in 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 were $80.9 million, which related primarily to
capital maintenance projects, and $32.9 million for the rebuild of the Number 1
paper machine at the St. Francisville mill. Planned capital expenditures for
1999 are approximately $40 million.
Financing Activities
Net cash provided by financing activities was $28.2 million in 1998. Repayments
on Term Loan B totaled $1.8 million in 1998.
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.
13
<PAGE>
Crown Vantage Inc.
- --------------------------------------------------------------------------------
Other Matters
Market Risk
The Company incurred fixed and variable rate debt in connection with the
Spin-Off. In addition, the Company uses variable rate debt to finance
operations, for capital spending programs and for general corporate purposes.
Futures contracts used to hedge exposures to foreign currency risks are
immaterial.
Our market risk exposure for changes in interest rates relates primarily to debt
obligations.
The following table presents principal amounts and related weighted average
interest rates by year of expected maturity for the Company's debt obligations.
For obligations with variable interest rates, the table sets forth interest
rates that are based on current rates and principle amounts due and does not
attempt to project future interest rates. This information should be read in
conjuction with Note 6 to the Consolidated Financial Statements.
- --------------------------------------------------------------------------------
Debt
- --------------------------------------------------------------------------------
2003 & Fair value
(In millions) 1999 2000 2001 2002 beyond @ 12/27/98
- --------------------------------------------------------------------------------
Fixed rate $356.8 $275.8
Average interest rates 11.12%
Variable rate $ 1.0 $ 1.3 $ .8 $122.0 $ 46.1 $171.2
Average interest rates 9.19% 9.19% 9.19% 8.81% 9.19%
Industrial Revenue bonds $ 39.3 $ 39.0
Average interest rates 7.55%
- --------------------------------------------------------------------------------
The Company's other market risk is primarily due to its ownership of mills in
Scotland. The translation of their financial statements from their functional
currency to U.S. dollars is accounted for in equity under foreign currency
translation adjustments. These operations comprise less than 10% of the
Company's sales and assets. Although we monitor foreign currency fluctuations
and trends, through December 27, 1998 we have decided not to hedge our net
investment in our foreign operations.
Debt Covenants
In connection with the bank credit facility as amended, Crown Paper Co. is
required to comply with certain financial covenants that include maintaining
minimum quarterly cash flow to debt and interest coverage ratios as well as
minimum tangible net worth. Crown Paper Co. amended certain financial covenants,
which had been established at the Spin-Off in 1995, in the fourth quarter of
1998, and remained in compliance for 1998. During the first quarter of 1999 the
Company again amended these financial covenants for the fiscal year ended
December 26, 1999 and remains in compliance with the Bank Credit Facility. The
Company has had to amend the debt covenants for each of the last three years
including 1999 as the extended weakness in the paper markets prevented the
Company from achieving the original financial covenants that were established at
the peak of the paper market cycle when the Company was spun off. Without
significant improvements in paper markets in 1999 and 2000, the Company
anticipates that it will need to revise its 2000 financial covenants when they
revert to the 1995 levels.
Work Force Reduction
During 1998 the Company accrued $3.0 million relating to an announced 5% work
force reduction. The accrual is for anticipated expenses resulting from the work
force reduction, primarily for severance and benefit payments to the
approximately 230 affected employees. Both hourly and salaried employees from
manufacturing, maintenance, and office staff were affected. As of December 27,
1998 approximately $1.6 million had been paid, and the remainder will be paid
during the first half of 1999.
Environmental Expenditures
Pulp and paper manufacturing companies are subject to regulations 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 requires
14
<PAGE>
Crown Vantage Inc.
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. To control and monitor the
discharge of pollutants into air, water, and land, the Company spent
approximately $21.5 million during 1998 and $18.6 million during 1997. In 1998,
approximately $6.4 million of these expenditures were capitalized and $15.1
million were expensed. In 1997, approximately $2.6 million of these expenditures
were capitalized and $16.0 million were expensed. The Company has accrued $12.2
million at December 27, 1998 and $12.0 million at December 28, 1997 primarily
for estimated landfill site restoration, post-closure and monitoring costs.
The Environmental Protection Agency signed final rules affecting pulp and paper
industry discharges of wastewater and gaseous emissions ("Cluster Rules"), which
became effective April 15, 1998. These Cluster Rules require changes in the
pulping, bleaching and 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 beginning in 1999 and extending over the next
two to five years. The Company's 1998 environmental capital spending includes
$3.6 million for compliance with the Cluster Rules. There are risks and
uncertainties associated with the Company's estimate that could cause total
capital expenditures and timing of such expenditures to be materially different
from current estimates, including changes in technology, interpretation of rules
by government agencies 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 19 sites in the United States. The Company has previously settled
its remediation obligations at 12 of those sites. At 6 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 an estimate for the potential
remediation effort costs is not yet possible. However, the Company's accrual for
the remediation investigation effort was $.4 million at December 27, 1998 and
$.6 million at December 28, 1997. 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 on the nature or
extent of contamination, methods and associated costs 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 estimates the Company's share of investigation
and remediation costs 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 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. As with most manufacturing
and many other entities, there can be no assurance that the Company will not be
named as a PRP or incur liabilities through other means 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 concerns the potential inability of computer applications,
information technology systems, and certain software-based "embedded" control
systems to properly recognize and process date-sensitive information as the Year
2000 approaches and beyond. The Company could suffer material adverse impacts on
its operations and financial results if the applications and systems used by the
Company, or by third parties with whom the Company does business, do not
accurately or adequately process or manage dates or other information as a
result of the Year 2000 issue.
The Company has completed a review of its financial accounting system for
purposes of evaluating the Year 2000 issue. The Company's software provider has
indicated that it will certify this financial accounting system as Year
2000-compliant upon completion of the next scheduled upgrade. This upgrade,
including independent testing performed by the Company, is scheduled for
completion during the first quarter of 1999. There can be no assurance that all
Year 2000 issues in this software will be adequately resolved by this or other
future software releases.
The Company also uses a variety of other software
15
<PAGE>
Crown Vantage Inc.
applications, business information systems, accounting subsystems, process
control systems and related software, communication devices, and networking and
other operating systems. The Company has completed its inventory of all such
systems and is currently in the process of testing, upgrading, replacing, or
otherwise modifying these systems to adequately address the Year 2000 issue. The
Company believes it will be able to timely modify or replace its affected
systems to prevent any material detrimental effects on operations and financial
results. The Company anticipates this effort will continue, with appropriate
testing, remediation and/or replacement taking place during the first half of
1999. The Company has completed approximately 85% of this effort through 1998.
Possible risks of this process include but are not limited to the ability of the
Company's personnel and outside vendors to adequately and timely identify and
resolve all critical Year 2000 issues, and the Company's ability to secure
additional Year 2000 expertise during this time of high demand if an
unanticipated material problem requires skills the Company or its third party
vendors currently do not possess. The Company can give no assurance that all
critical Year 2000 issues will be resolved in a timely manner or that
potentially unresolved issues would not have a material adverse impact on the
results of operations.
The Company has certain key relationships with customers, vendors and outside
service providers. Failure by the Company's key customers, vendors and outside
service providers to adequately address the Year 2000 issue could have a
material adverse impact on the Company's operations and financial results. The
Company is currently assessing the Year 2000 readiness of these key customers,
vendors and outside service providers and, at this time, cannot determine what
the impact of their readiness will be on the Company. This assessment includes
but is not limited to soliciting responses from each of these parties concerning
their Year 2000 readiness and review of public documents filed by many of these
parties. Management expects to complete the assessment of these key customers,
vendors and outside service providers during the first half of 1999. The Company
is primarily relying upon the voluntary disclosures from third parties for this
review of their Year 2000 readiness.
The Company anticipates that its affected systems will be remediated or replaced
to address the Year 2000 issue in a timely manner and is currently focusing its
resources in those areas. The Company is also developing contingency plans
regarding the Year 2000 issue for its internal systems. Many of the identified
risks from key customers, vendors and outside service providers are both general
and speculative in nature, such as possible power or telecommunication failures,
breakdowns in transportation systems, inability to process financial
transactions, and similar events affecting general business services. As the
Company completes its assessment of Year 2000 readiness of key customers,
vendors and outside service providers, management intends to develop contingency
plans to mitigate material known detrimental effects that may be caused by their
Year 2000 noncompliance. However, it is unlikely that any contingency plan would
mitigate the adverse impact to the financial condition or operations of the
Company of any catastrophic event due to the Year 2000 issue that leads to a
prolonged disruption of essential services.
Management believes that total Year 2000 costs will range between $2.5 million
and $3.5 million. The costs associated with this effort are in addition to the
Company's regular information technology budget. As of December 27, 1998 the
Company has incurred costs related to the Year 2000 issue of approximately $1.6
million. In addition to the costs mentioned above, the Company's capital
spending for planned upgrading of certain information systems to enhance the
capabilities of those systems was accelerated in part due to the Year 2000
issue. The total estimated increase in accelerated capital spending for these
systems is anticipated to be under $3 million. The Company's current estimates
of the amount of time and costs necessary to remediate and test its computer
systems are based on the facts and circumstances existing at this time. The
estimates were made using assumptions of future events including the continued
availability of certain resources, Year 2000 readiness plans, implementation
success by key third party vendors, and other factors. New developments may
occur that could increase the Company's estimates of the amount of time and
costs necessary to modify and test its various information and non-information
systems. These potential developments include but are not limited to the
availability and increased cost of personnel trained in this area of expertise,
the ability to locate and correct all relevant computer codes and equipment, and
any unanticipated Year 2000 problems from key customers, vendors, and outside
service providers.
16
<PAGE>
Crown Vantage Inc.
Continued Nasdaq National Market Listing
The Company's common stock price has fallen below the $5 minimum maintenance
standard for continued listing on the Nasdaq National Market. The Company shared
its management initiatives with Nasdaq on February 5, 1999. Subsequently, the
Company received an extension stipulating that the stock will continue to trade
on the Nasdaq National Market so long as a closing bid price of at least $5 per
share is achieved by June 18, 1999 and thereafter the stock maintains a closing
bid price of at least $5 per share for a minimum of 10 consecutive trading days.
If the shares are de-listed, the Company anticipates that the shares may be
traded on the Nasdaq Over-the-Counter Bulletin Board. The stock price, stock
trading liquidity, analyst coverage, and the Company's ability to raise capital
might be adversely affected if the stock is de-listed from the Nasdaq National
Market or fails to trade actively or at all on the Bulletin Board, both of which
are not within the control of the Company.
Settlement of Berlin Property Tax Case
On February 1, 1999, the Company finalized an agreement with the City of Berlin,
N.H., concerning assessed values and taxability of factory machinery. Over the
next three years the agreement significantly reduces the assessed value from
recent valuations of the Company's Berlin pulp mill. The Company expects to
reverse a property tax accrual of approximately $9 million in the first quarter
of 1999, which relates to amounts over-accrued for previous tax years.
Forward Looking Statements
Certain statements within Management's Discussion and Analysis and elsewhere are
forward-looking within the meaning of the Private Securities Litigation Reform
Act of 1995. These statements are subject to various risks and uncertainties
that could cause the actual results to be materially different from the
Company's current expectations. These forward-looking statements can be
identified by use of language such as plans, expects, estimates, anticipates,
believes, possible and other similar words or phrases. In addition to the
factors discussed above, there are other factors that could cause the actual
results to differ materially. These other factors include but are not limited to
business conditions and the general economy, both global and domestic; prices
for the Company's products; the duration and depth of the Asian economic crisis;
the effects of the Asian economic crisis on other regions around the world;
competitive factors; maintaining good labor relations; the Company's ability to
successfully implement its Year 2000 plans; possible de-listing of Crown Vantage
stock from the Nasdaq National Market; the Company's ability to comply with debt
covenants, and maintaining good customer relations.
17
<PAGE>
Crown Vantage Inc.
Report Of Independent Auditors
To the Board of Directors and Shareholders of Crown Vantage Inc.:
We have audited the accompanying consolidated balance sheets of Crown Vantage
Inc. and subsidiaries as of December 27, 1998 and December 28, 1997, and the
related consolidated statements of operations, cash flows, and changes in equity
(deficit) for each of the three years in the period ended December 27, 1998.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and 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 financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Crown Vantage Inc.
and subsidiaries at December 27, 1998 and December 28, 1997 and the consolidated
results of their operations and their cash flows for each of the three years in
the period ended December 27, 1998 in conformity with generally accepted
accounting principles.
Ernst & Young LLP
San Francisco, California
January 29, 1999, except for Note 6, paragraph 4, as to which the date is
February 26, 1999
18
<PAGE>
Crown Vantage Inc.
Consolidated Statements of Operations
<TABLE>
<CAPTION>
======================================================================================================
52 Weeks 52 Weeks 52 Weeks
Ended Ended Ended
December 27, December 28, December 29,
(amounts in thousands, except per share amounts) 1998 1997 1996
======================================================================================================
<S> <C> <C> <C>
Net sales $ 850,994 $ 897,492 $ 925,376
Cost of goods sold 796,935 837,452 850,419
- ------------------------------------------------------------------------------------------------------
Gross margin 54,059 60,040 74,957
Asset impairment and other charges (163,834) (3,325)
Gain on timberlands sale 13,518
Selling and administrative expenses (62,360) (55,889) (52,215)
- ------------------------------------------------------------------------------------------------------
Operating income (loss) (172,135) 14,344 22,742
Interest expense (64,672) (65,228) (63,301)
Other income, net 1,400 1,314 555
- ------------------------------------------------------------------------------------------------------
Loss before income taxes and extraordinary item (235,407) (49,570) (40,004)
Income tax benefit (75,912) (17,350) (15,200)
- ------------------------------------------------------------------------------------------------------
Net loss before extraordinary item (159,495) (32,220) (24,804)
Extraordinary item, net of tax 18,988
- ------------------------------------------------------------------------------------------------------
Net Loss $(140,507) $ (32,220) $ (24,804)
=======================================================================================================
Loss per share before extraordinary item $ (16.79) $ (3.61) $ (2.89)
Earnings per share extraordinary item 2.00
Basic loss per share $ (14.79) $ (3.61) $ (2.89)
=======================================================================================================
</TABLE>
See notes to consolidated financial statements.
19
<PAGE>
Crown Vantage Inc.
Consolidated Balance Sheets
<TABLE>
<CAPTION>
============================================================================================
(dollar amounts in thousands) December 27, 1998 December 28, 1997
============================================================================================
<S> <C> <C>
Assets
Current Assets:
Cash and cash equivalents $ 9,806 $ 11,415
Accounts receivable 41,022 40,787
Inventories 102,397 104,117
Prepaid expenses and other current assets 3,481 7,393
Deferred income taxes 15,067 14,480
- ---------------------------------------------------------------------------------------------
Total current assets 171,773 178,192
- ---------------------------------------------------------------------------------------------
Property, plant and equipment, net 434,075 621,276
Other assets 43,839 38,090
Unamortized debt issue costs 11,808 14,039
Intangibles, net 27,852 28,977
- ---------------------------------------------------------------------------------------------
Total Assets $ 689,347 $ 880,574
- ---------------------------------------------------------------------------------------------
Liabilities and Deficit
============================================================================================
Current Liabilities:
Accounts payable $ 40,916 $ 54,181
Accrued liabilities 75,268 80,358
Current portion of long-term debt 1,000 1,000
- ---------------------------------------------------------------------------------------------
Total current liabilities 117,184 135,539
- ---------------------------------------------------------------------------------------------
Long-term debt 555,241 544,063
Accrued postretirement benefits other than pensions 100,736 102,397
Other long-term liabilities 37,880 17,444
Deferred income taxes 16,406 82,100
- ---------------------------------------------------------------------------------------------
Total Liabilities 827,447 881,543
- ---------------------------------------------------------------------------------------------
Shareholders' Equity (Deficit):
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 - 9,876,842 shares and
9,668,313 shares at December 27, 1998, and
December 28, 1997, respectively 47,887 45,831
Unearned ESOP shares and other (974) (3,971)
Other Cumulative Comprehensive Income (Loss):
Minimum pension liability (2,231) (330)
Cumulative foreign currency translation adjustment 1,562 1,338
Retained deficit (184,344) (43,837)
- ---------------------------------------------------------------------------------------------
Total Deficit (138,100) (969)
- ---------------------------------------------------------------------------------------------
Total Liabilities and Deficit $ 689,347 $ 880,574
=============================================================================================
</TABLE>
See notes to consolidated financial statements
20
<PAGE>
Crown Vantage Inc.
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
=====================================================================================================================
52 Weeks 52 Weeks 53 Weeks
Ended Ended Ended
December 27, December 28, December 29,
(amounts in thousands) 1998 1997 1996
=====================================================================================================================
<S> <C> <C> <C>
Cash provided by (used for) operating activities:
Net Loss $(140,507) $ (32,220) $ (24,804)
Items not affecting cash:
Depreciation and cost of timber harvested 84,851 83,373 79,252
Amortization of goodwill and other intangibles 1,125 1,124 1,125
Deferred income tax benefit (78,068) (19,929) (10,174)
Interest on Pay-in-Kind Notes and other noncash interest 17,823 17,515 16,319
Gain on sale of timberlands (13,518)
Asset impairment and other charges 163,834 3,325
Other, net 7,060 3,496 3,062
Extraordinary gain, pre-tax (30,775)
Change in current assets and liabilities:
Accounts receivable (includes $43,000 sold in 1996) (235) 15,217 49,676
Inventories 220 (6,142) 3,344
Other current assets 3,325 7,532 (9,948)
Accounts payable (12,286) 1,493 (4,958)
Other current liabilities (5,090) (3,887) 523
Other, net 2,827 (3,554) 1,520
- ---------------------------------------------------------------------------------------------------------------------
Cash provided by operating activities 14,104 53,825 104,937
- ---------------------------------------------------------------------------------------------------------------------
Cash provided by (used for) investing activities:
Expenditures for property, plant and equipment (42,056) (59,309) (80,914)
Proceeds from sale of property, plant, and equipment 489 36,740 71
Other, net (2,321) 1,735 (232)
- ---------------------------------------------------------------------------------------------------------------------
Cash used for investing activities (43,888) (20,834) (81,075)
- ---------------------------------------------------------------------------------------------------------------------
Cash provided by (used for) financing activities:
Repayments of Term Loans (1,825) (46,712) (52,538)
Proceeds from draw down of Revolving Credit 126,000 122,000 191,000
Repayments of Revolving Credit (96,000) (102,000) (176,000)
Proceeds from issuance of Industrial Revenue Bonds,
less underwriting costs 4,701 12,100
Payments of other long-term debt (740) (2,584)
- ---------------------------------------------------------------------------------------------------------------------
Cash provided by (used for) financing activities 28,175 (22,751) (28,022)
- ---------------------------------------------------------------------------------------------------------------------
Increase (decrease) in cash and cash equivalents (1,609) 10,240 (4,160)
Cash and cash equivalents, beginning of year 11,415 1,175 5,335
- ---------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of year $ 9,806 $ 11,415 $ 1,175
=====================================================================================================================
</TABLE>
See notes to consolidated financial statements.
21
<PAGE>
Crown Vantage Inc.
Consolidated Statement of Changes in Equity (Deficit)
<TABLE>
<CAPTION>
====================================================================================================================================
Unearned Foreign
Common Stock ESOP Currency Retained
------------ Comprehensive Shares Translation Earnings
(amounts in thousands) Shares Amounts Loss and Other Adjustment (Deficit)
====================================================================================================================================
<S> <C> <C> <C> <C> <C> <C>
Balance December 31, 1995 8,918 $ 44,539 $ (15,452) $ (1,348) $ 13,187
Net Loss $ (24,804) (24,804)
Foreign currency translation adjustment 4,713 4,713
Minimum pension liability adjustment 4,719 4,719
----------
Comprehensive loss (15,372)
==========
ESOP and restricted stock activity, net 190 39 3,480
- ------------------------------------------------------------------------------------------------------------------------------------
Balance December 29, 1996 9,108 44,578 (7,253) 3,365 (11,617)
Net Loss (32,220) (32,220)
Foreign currency translation adjustment (2,027) (2,027)
Minimum pension liability adjustment 562 562
----------
Comprehensive loss (33,685)
==========
ESOP and restricted stock activity, net 560 1,253 2,390
- ------------------------------------------------------------------------------------------------------------------------------------
Balance December 28, 1997 9,668 45,831 (4,301) 1,338 (43,837)
Net Loss (140,507) (140,507)
Foreign currency translation adjustment 224 224
Minimum pension liability adjustment (1,901) (1,901)
----------
Comprehensive loss $(142,184)
==========
ESOP and restricted stock activity, net 209 2,056 2,997
- ------------------------------------------------------------------------------------------------------------------------------------
Balance December 27, 1998 9,877 $ 47,887 $ (3,205) $ 1,562 $(184,344)
====================================================================================================================================
</TABLE>
See notes to consolidated financial statements.
22
<PAGE>
Crown Vantage Inc.
Notes to Consolidated Financial Statements
Note 1
- --------------------------------------------------------------------------------
Organization and Operations
Crown Vantage Inc. and subsidiaries (the "Company" or "Crown Vantage") is a
major producer of value-added paper products for a diverse array of end-uses.
The Company's two segments 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 30 diverse paper machines with sales primarily in North America. The
Company became an independent company when it was spun off from James River
Corporation of Virginia, now known as Fort James Corporation. The spin-off and
initial capitalization are referred to as the "Spin-Off."
On December 27, 1998, the Company employed approximately 3,550 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 Parchment, Mich.; Adams, Mass., and Richmond, Va., facilities, which
cover approximately 17.7% of the Company's hourly employees, expire before
January 2000. 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 its initial capitalization.
23
<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. (a wholly owned subsidiary),
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 27, 1998, and December 28, 1997. The accompanying financial statements
also include the consolidated results of operations of the Company for the 52
weeks ended December 29, 1996. The Company's fiscal year includes the 52 or 53
weeks ending on the last Sunday in December.
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 are 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 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 use of the assets are 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 useful lives of its long-lived assets, future production volumes and
costs, future sales volumes, demand for the Company's product mix and prices
that reflect the use of its long-lived assets and market conditions. Based on
this assessment, the Company recorded a $146.9 million charge during the fourth
quarter of 1998 to write down impaired assets. These assets were primarily at
the Berlin-Gorham, N.H., pulp and paper mills and were written down to the
present value of their estimated future cash-flows as a measure of fair value
(see "Note 13"). Although the Company believes it has a reasonable basis for its
estimates, it is reasonably possible that the Company's estimate of future cash
flows could change from current estimates which could result in recognizing, in
future periods, additional material impairment losses on its long-lived assets
at Berlin-Gorham or other facilities.
Unamortized Debt Issue Costs
Debt issue costs, incurred primarily at the Spin-Off, are deferred and 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 (included in intangibles), which relates to the St. Francisville, La.,
mill, totaled $40.1 million at December 27, 1998, and December 28, 1997, and is
presented net of accumulated amortization of $13.2 million at December 27, 1998,
and $12.2 million at December 28, 1997. The recoverability of goodwill has been
evaluated to determine whether current events or circumstances warrant
adjustments to the carrying value. As of December 27, 1998, and December 28,
1997, management believes that no significant impairment of goodwill was
indicated.
24
<PAGE>
Crown Vantage Inc.
Note 2 (continued)
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.
Income Taxes
No provision is made for U.S. federal income taxes on $10.5 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 and were less than
$.1 million for each of the years presented.
Selected Sales Information
During 1998, 1997, and 1996 export sales to foreign markets from the Company's
domestic operations represented less than 10% of the Company's net sales for
that year. Net sales from the Company's two Scottish facilities were 7.7% for
1998, 7.6% for 1997 and 7.4% for 1996. No single customer accounted for more
than 10% of net sales during 1998, 1997, or 1996.
Basic Earnings (Loss) Per Common Share
The computation of basic loss per share for the years ended December 27, 1998,
December 28, 1997, and December 29, 1996, is based on the weighted average
number of shares of common stock outstanding for the period. The weighted
average shares outstanding are 9,502,000 for 1998; 8,931,000 for 1997; and
8,596,000 for 1996. Diluted loss per share is the same as basic loss per share
for the years presented. The number of shares considered outstanding does not
include 327,000 and 174,000 unearned shares held by the Employee Stock Ownership
Plan Trust for 1997 and 1996, respectively.
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.
Reclassifications
Certain 1997 and 1996 amounts have been reclassified to conform to the 1998
presentation.
Note 3
- --------------------------------------------------------------------------------
Sale of Accounts Receivable
The Company entered into a five-year agreement expiring in 2000 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 the amount permitted.
The amount sold as of December 27, 1998 is $39.7 million and $43 million as of
December 28, 1997 and December 29, 1996.
The proceeds from sales are less than the face amount of the undivided interests
in accounts receivable sold and this discount ($2.7 million in 1998, $2.8
million in 1997 and $1.6 million in 1996) is included in selling and
administrative expenses in the consolidated statement of operations.
25
<PAGE>
Crown Vantage Inc.
Note 4
- --------------------------------------------------------------------------------
Concentration 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 any
significant concentration of credit risk.
Accounts receivable at the Company's facilities in Scotland totaled $18.5
million on December 27, 1998 and $18.3 million on December 28, 1997. There were
no other significant concentrations of foreign credit risk on December 27, 1998,
or December 28, 1997.
Note 5
- --------------------------------------------------------------------------------
Supplemental Balance Sheet Information
- --------------------------------------------------------------------------------
Inventories
(amounts in thousands) 1998 1997
- --------------------------------------------------------------------------------
Raw materials $ 24,716 $ 27,911
Work-in-process 6,757 7,038
Finished goods 46,469 45,936
Stores and supplies 34,142 35,569
- --------------------------------------------------------------------------------
112,084 116,454
Last-in, first-out reserve (9,687) (12,337)
- --------------------------------------------------------------------------------
Total inventories $ 102,397 $ 104,117
- --------------------------------------------------------------------------------
Valued at lower of cost or market:
Last-in, first-out $ 57,072 $ 56,402
First-in, first-out 45,325 47,715
- --------------------------------------------------------------------------------
Total inventories $ 102,397 $ 104,117
- --------------------------------------------------------------------------------
Property, Plant and Equipment
(amounts in thousands) 1998 1997
- --------------------------------------------------------------------------------
Land and improvements $ 33,968 $ 39,955
Buildings 135,344 143,399
Machinery and equipment 999,448 1,043,162
Construction in progress 14,892 16,100
- --------------------------------------------------------------------------------
1,183,652 1,242,616
Accumulated depreciation (756,019) (627,891)
- --------------------------------------------------------------------------------
427,633 614,725
Timber, net 6,442 6,551
- --------------------------------------------------------------------------------
Net property, plant and equipment $ 434,075 $ 621,276
- --------------------------------------------------------------------------------
Accrued Liabilities
(amounts in thousands) 1998 1997
- --------------------------------------------------------------------------------
Compensated absences $ 11,238 $ 11,835
Employee insurance benefits 13,251 15,267
Accrued post retirement benefits
other than pensions, current portion 2,947 3,004
Accrued interest 11,410 12,203
Taxes payable, other than income taxes 11,268 10,083
Other accrued liabilities 25,154 27,966
- --------------------------------------------------------------------------------
Total accrued liabilities $ 75,268 $ 80,358
- --------------------------------------------------------------------------------
26
<PAGE>
Crown Vantage Inc.
Note 6
- --------------------------------------------------------------------------------
Long-Term Debt
Consolidated long-term debt consists of the following:
(amounts in thousands) 1998 1997
- --------------------------------------------------------------------------------
Crown Paper Co.
Bank Credit Facility:
Revolving credit, average interest rate 8.57%
in 1998 and 1997, due 2002 $ 75,000 $ 45,000
Term Loan B, average interest rate 9.19% in 1998
and 9.14% in 1997, due 2003 96,175 98,000
- --------------------------------------------------------------------------------
171,175 143,000
11% Senior Subordinated Notes, due 2005 250,000 250,000
Industrial Revenue Bonds, average interest rate
7.55% in 1998 and 7.91% in 1997, payable to 2026 39,074 38,878
Crown Vantage Inc.
11.45% Senior Pay-in-Kind Notes, due 2007
less unamortized discount 95,992 113,185
- --------------------------------------------------------------------------------
556,241 545,063
Less current portion 1,000 1,000
- --------------------------------------------------------------------------------
$555,241 $544,063
- --------------------------------------------------------------------------------
Maturities of long-term debt, excluding the revolver, for the next five years
are: 1999 - $1.0 million; 2000 - $1.3 million; 2001 - $.8 million; 2002 - $47.0
million, and 2003 - $46.1 million. Cash paid for interest in 1998, 1997, and
1996 totaled $ 45.6 million, $46.0 million, and $45.8 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 $38.2 million has been issued at December 27, 1998).
This revolving credit can be used for general corporate purposes, working
capital needs, and permitted investments. At December 27, 1998, $75.0 million of
the revolving credit was outstanding and $36.8 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 Loan 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 1998
or 1997. The Company is also required to make prepayments (in varying
percentages of net proceeds) upon the occurrence of certain events that 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, Crown Paper Co. is required to comply with
certain financial covenants. During the fourth quarter of 1998 Crown Paper Co.
amended its financial covenants and remained in compliance with the Facility.
The Facility, as amended on February 26, 1999, requires Crown Paper Co. to
maintain the following covenants for the fiscal year ended December 26, 1999:
27
<PAGE>
Crown Vantage Inc.
Note 6 (continued)
- --------------------------------------------------------------------------------
1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
1999 1999 1999 1999
- --------------------------------------------------------------------------------
Minimum Cash Flow Ratio .13:1 .12:1 .10:1 .11:1
Interest Coverage Ratio 1.42:1 1.30:1 1.09:1 1.17:1
Adjusted Minimum Tangible
Net Worth (in millions $ 75.0 $ 60.0 $ 55.0 $ 47.5
- --------------------------------------------------------------------------------
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 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
that in general are not more restrictive than those contained in the Facility.
The face amount of 11.45% Senior Pay-in-Kind Notes ("PIK Notes") outstanding on
December 27, 1998 was $106.8 million and $125.3 million on December 28, 1997.
The PIK Notes are recorded net of a discount of $10.8 million on December 27,
1998 and $12.1 million on December 28, 1997 in order to reflect a market rate of
interest of 13% at the Spin-Off. Interest on the $100 million 11.45% 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 27, 1998, interest due has been paid through the issuance
of additional PIK Notes. On September 28, 1998 Crown Vantage and Crown Paper Co.
settled with Fort James a variety of claims that had arisen between Fort James,
Crown Paper and Crown Vantage. The settlement resulted in the return of $25.1
million of PIK Notes to Crown Vantage and the delivery of $8.1 million of PIK
Notes to Crown Paper Co. The $8.1 million in PIK Notes assets held by Crown
Paper Co. are reclassified in consolidation against the PIK Notes' indebtedness.
The settlement resulted in an extraordinary gain of $19.0 million that is net of
$2.4 million in expenses and $11.8 million in taxes. The settlement amended the
terms of the remaining PIK Notes and allows Crown Vantage the right to call the
remaining PIK Notes and accrued interest at fair value at any time prior to
their maturity. 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 contain
covenants, limitations and restrictions that in general are not more restrictive
than those contained in the Facility or the Notes.
Proceeds from the sale of industrial revenue bonds are used to finance eligible
project costs, of which $1.3 million and $3.4 million are included in cash and
cash equivalents at December 27, 1998, and December 28, 1997, respectively.
At December 27, 1998 and December 28, 1997, estimated fair values of the
Company's long-term debt instruments were $486.0 million and $556.0 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 available to the Company for debt having similar characteristics.
28
<PAGE>
Crown Vantage Inc.
Note 7
- --------------------------------------------------------------------------------
Income Taxes
The components of loss before income taxes and extraordinary item were as
follows:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
(amounts in thousands) 1998 1997 1996
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Domestic $(241,429) $ (55,348) $ (45,838)
Foreign 6,022 5,778 5,834
- -------------------------------------------------------------------------------------------------------------------------
Loss before income taxes $(235,407) $ (49,570) $ (40,004)
- -------------------------------------------------------------------------------------------------------------------------
Income tax expense (benefit) consisted of the following:
- -------------------------------------------------------------------------------------------------------------------------
(amounts in thousands) 1998 1997 1996
- -------------------------------------------------------------------------------------------------------------------------
Current:
Federal $ (693) $ (6,542)
State $ 730 1,775 (478)
Foreign 1,426 1,497 1,994
- -------------------------------------------------------------------------------------------------------------------------
Total current income tax expense (benefit) 2,156 2,579 (5,026)
- -------------------------------------------------------------------------------------------------------------------------
Deferred:
Federal (83,519) (18,063) (9,444)
State (9,397) (2,193) (1,052)
Valuation allowance 14,178
Foreign 670 327 322
- -------------------------------------------------------------------------------------------------------------------------
Total deferred income tax benefit (78,068) (19,929) (10,174)
- -------------------------------------------------------------------------------------------------------------------------
Income tax benefit $ (75,912) $ (17,350) $ (15,200)
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
Principal reasons for the differences between the federal statutory income tax
rate on the loss before income taxes and extraordinary item, and the Company's
effective tax rate were as follows:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
Percent of Pretax Loss
- -------------------------------------------------------------------------------------------------------------------------
1998 1997 1996
- -------------------------------------------------------------------------------------------------------------------------
<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) (3.8)
Valuation allowance 6.0
Amortization of goodwill .2 .7 .9
Other items, net .4 3.1 (.1)
- -------------------------------------------------------------------------------------------------------------------------
Effective income tax rates (32.2)% (35.0)% (38.0)%
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
The income tax effects of temporary differences that gave rise to the net
deferred tax assets and liabilities as of December 27, 1998 and December 28,
1997, were as follows:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
(amounts in thousands) 1998 1997
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Excess of book over tax basis of property, plant and equipment $ 66,039 $ 129,073
Pension benefits, net 15,407 13,943
Discount on Pay-in-Kind Notes 4,190 4,675
Other items 5,475 4,881
- -------------------------------------------------------------------------------------------------------------------------
Total deferred tax liabilities 91,111 152,572
- -------------------------------------------------------------------------------------------------------------------------
Postretirement benefits other than pensions (40,229) (40,874)
Accrued liabilities (27,079) (17,399)
Net operating loss carryforward (36,354) (25,789)
Other items (1,153) (890)
- -------------------------------------------------------------------------------------------------------------------------
Total deferred tax assets (104,815) (84,952)
- -------------------------------------------------------------------------------------------------------------------------
Valuation allowance 15,043
- -------------------------------------------------------------------------------------------------------------------------
Net deferred tax liability $ 1,339 $ 67,620
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
29
<PAGE>
Crown Vantage Inc.
Note 7 (continued)
The Company recorded deferred tax benefits for the net operating losses of $10.6
million in 1998, $17.7 million in 1997, and $8.1 million in 1996. The Company
has federal and state net operating loss carryforwards of approximately $27.2
million for 1998 that expire in 2018, $45.6 million for 1997 that expire in 2012
and $19.9 million for 1996 that expire in 2011. The Company made estimated tax
payments of $.8 million in 1998, $.7 million in 1997 and $1.6 million in 1996,
of which $1.2 million was recovered in 1997. The Company recorded a $15.0
million valuation allowance against the deferred tax assets as of December 27,
1998. This included a reduction of the deferred tax benefit of $14.2 million and
the elimination of the tax assets associated with the minimum pension liability
of $.8 million.
Note 8
- --------------------------------------------------------------------------------
Pension and Other Benefit 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
U.S. pension plans transferred to the Company and corresponding accumulated
participant benefits were frozen (the "Frozen Plans"). New pension plans (the
"New Plans") were then established by the Company that have terms substantially
similar to the Frozen Plans. James River entered into an agreement with the PBGC
providing 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 liabilities arising from the termination of the plan. 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.
Post-retirement benefit plans ("Other Benefits") are provided for certain
salaried and substantially all hourly employees. 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.
The consolidated financial statements include the present value of benefit
obligations, related components of pension and other benefit costs, unrecognized
net gains and plan assets that were derived from actuarial calculations.
30
<PAGE>
Crown Vantage Inc.
Note 8 (continued)
Summary information on the Company's pension and other benefit plans is as
follows:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
Pension Benefits Other Benefits
- ----------------------------------------------------------------------------------------------------------------------
(amounts in thousands) 1998 1997 1998 1997
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Change in benefit obligation
Benefit obligation at beginning of year $ 281,048 $ 244,531 $ 70,523 $ 79,323
Service cost 7,314 5,310 1,174 1,090
Interest cost 20,109 19,306 5,126 5,033
Amendment 268 1,570
Plan participants' contributions 1,437 1,350 903 842
Actuarial (gain) loss 13,750 25,006 415 (11,295)
Benefits paid (16,615) (16,025) (5,240) (4,470)
- ----------------------------------------------------------------------------------------------------------------------
Benefit obligation at end of year $ 307,311 $ 281,048 $ 72,901 $ 70,523
- ----------------------------------------------------------------------------------------------------------------------
Change in plan assets
Fair value of plan assets at beginning of year $ 337,134 $ 281,753
Actual return on plan assets 22,124 66,399
Company contributions 6,771 3,647
Plan participants' contributions 1,437 1,350
Benefits paid (16,615) (16,025)
- ----------------------------------------------------------------------------------------------------------------------
Fair value of plan assets at end of year $ 350,851 $ 337,124
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
Plan assets are invested primarily in domestic equity and fixed income mutual
funds. The following table sets forth the funded status of the Company's pension
plans and other benefit plans at December 27, 1998, and December 28, 1997:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
Pension Plans Other Benefits Plans
- ----------------------------------------------------------------------------------------------------------------------
(amounts in thousands) 1998 1997 1998 1997
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Funded status (over/(under)funded) $ 43,540 $ 56,076 $ (72,901) $ (70,523)
Unrecognized net gain (8,365) (24,851) (20,631) (22,777)
Unrecognized prior service cost (gain) 10,011 11,275 (10,151) (12,101)
Unrecognized net transition (asset) liability 55 (3,348)
Minimum pension liability (4,115) (2,184)
- ----------------------------------------------------------------------------------------------------------------------
Net asset (liability) $ 41,126 $ 36,968 $(103,683) $(105,401)
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
Amounts applicable to certain of the Company's pension plans with accumulated
benefit obligations and projected benefit obligations in excess of plan assets
are as follows:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
1998 1997
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Projected benefit obligation $ 21,981 $ 18,025
Accumulated benefit obligation 21,653 17,796
Fair value of plan assets 18,474 16,455
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
31
<PAGE>
Crown Vantage Inc.
Note 8 (continued)
The components of the Company's net pension and other benefit costs, which
include the Company's pension plan in Scotland, were as follows:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------
Pension Plans Other Benefits Plans
- -----------------------------------------------------------------------------------------------------------------------------
(amounts in thousands) 1998 1997 1996 1998 1997 1996
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Service cost $ 7,314 $ 5,310 $ 5,344 $ 1,174 $ 1,090 $ 1,582
Interest cost 20,109 19,305 19,055 5,126 5,033 5,919
Net investment income on plan assets (27,511) (69,794) (27,088)
Net amortization 730 45,827 6,196 (3,352) (3,886) (1,965)
Contributions to multiemployer
pension plans 19 53 52
- -----------------------------------------------------------------------------------------------------------------------------
Net benefit cost $ 661 $ 701 $ 3,559 $ 2,948 $ 2,237 $ 5,536
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
Net amortization of pension and other benefit costs 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
and other benefit costs and related pension and other benefit obligations were
as follows:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------
Pension Benefits Other Benefits
- -----------------------------------------------------------------------------------------------------------------------------
1998 1997 1998 1997
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Discount Rate 7.0% 7.5% 7.0% 7.5%
Assumed rate of increase in compensation levels 4.0% 4.0%
Expected long-term rate of return on plan assets 10.0% 10.0%
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
Changes in actuarial assumptions for 1998 resulted in an increase to the net
periodic pension and other benefit costs of $.6 million and the related
accumulated benefit obligation of $5.6 million. The assumed health care cost
trend rate used in measuring the accumulated benefit obligation for other
benefits was 6.5% in 1998, declining by 0.5% per year through 2002 to an
ultimate rate of 4.5%. The effect of a 1% change in the health care cost trend
rate assumptions is as follows:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------
1% increase 1% decrease
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Service and interest cost $ .8 $ .7
Accumulated postretirement benefit obligation $ 8.1 $ 7.0
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
Other assets include net noncurrent pension assets of $43.8 million on December
27, 1998 and $38.0 million on December 28, 1997, exclusive of the additional
minimum pension liabilities. The additional minimum pension liabilities of $4.1
million on December 27, 1998 and $2.2 million on December 28, 1997 were offset
by intangible assets of $1.9 million and $1.7 million, respectively. The
additional minimum pension liabilities were offset by charges to shareholders'
equity on December 27, 1998 of $2.2 million, net of no deferred taxes due to the
valuation allowance (see Note 7), and $.3 million, net of deferred taxes of $.2
million on December 28, 1997.
32
<PAGE>
Crown Vantage Inc.
Note 9
- --------------------------------------------------------------------------------
Commitments and Contingent Liabilities
Leases
As of December 27, 1998, future minimum rental payments under noncancelable
operating leases were as follows:
- --------------------------------------------------------------------------------
(amounts in thousands) Minimum Rentals
- --------------------------------------------------------------------------------
1999 $ 5,750
2000 5,653
2001 5,292
2002 5,103
2003 4,353
Later years 10,716
- --------------------------------------------------------------------------------
Total future minimum rentals $ 36,867
- --------------------------------------------------------------------------------
Rent expense totaled $6.5 million in 1998, $6.6 million in 1997 and $6.7 million
in 1996.
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 position of the Company
but could materially affect consolidated results of operations in a given year.
The Company has accrued $12.2 million at December 27, 1998 and $12.0 million at
December 28, 1997 primarily for estimated landfill site restoration,
post-closure and monitoring costs. In addition, 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 19 sites in the
United States. The Company has previously settled its remediation obligations at
12 of those sites. At 6 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 underway and a loss estimate for the potential remediation
effort costs is not yet possible. However, the Company's accrual for the
remediation investigation effort was $.4 million at December 27, 1998 and $.6
million at December 28, 1997. 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 on the nature or
extent of contamination, methods and associated costs 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 estimates 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 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. As with most manufacturing
and many other entities, there can be no assurance that the Company will not be
named as a PRP or incur liabilities through other means at additional sites in
the future or that the costs associated with such additional sites would not be
material.
The Environmental Protection Agency signed final rules affecting pulp and paper
industry discharges of wastewater and gaseous emissions ("Cluster Rules") which
became effective on April 15, 1998. 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 beginning in 1999 and extending over the next
two to five years. The Company's 1998 environmental capital spending includes
$3.6 million for compliance with the Cluster Rules. There are risks and
uncertainties associated with the Company's estimate that could cause total
capital expenditures and timing of such expenditures to be materially different
from current estimates, including changes in technology, interpretation of the
rules by government agencies that is substantially different from the Company's
interpretation, or other items.
33
<PAGE>
Crown Vantage Inc.
Note 10
- --------------------------------------------------------------------------------
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, 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.
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
1,700,000 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.
There were no restricted stock awards in 1998. Restricted stock awarded during
1997 was 70,600 shares. Shares of unvested restricted stock were 184,000 shares
on December 27, 1998 and 234,300 shares on December 28, 1997. The market value
of restricted stock at each date of grant has been recorded as unearned
compensation and is being amortized to expense ($1,043,000 in 1998, $880,000 in
1997 and $840,000 in 1996) over the vesting periods, which range from one to six
years.
Note 11
- --------------------------------------------------------------------------------
Stock Option and Deferred Stock Award Plans ("Stock Awards")
The Company uses the intrinsic value method in accounting for its employee Stock
Awards. The application of this method has resulted in no compensation expense
being recognized. 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 generally vest over a three-year period and have maximum
contractual lives of 10 years. Deferred stock awards (granted to employees in
1998) totaling 585,000 shares have contractual lives of 3 years and vest upon
meeting certain Company stock price performance. The deferred stock awards vest
at various percentages as the Company's stock sustains prices of $15, $20 or $25
per share over 20 consecutive trading days. No deferred stock awards vested in
1998.
34
<PAGE>
Crown Vantage Inc.
Note 11 (continued)
A summary of the Company's Stock Award activity and related information for the
years ended December 27, 1998, and December 28, 1997, follows:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
1998 1997
- ---------------------------------------------------------------------------------------------------------------------
Weighted Average Weighted Average
Stock Awards Exercise Price Stock Awards Exercise Price
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Outstanding-beginning of year 855,500 $ 7.24 863,000 $ 17.48
Granted 601,000 (2) 791,100 $ 6.44
Exercised (56,800) $ 6.33 (7,700) $ 6.31
Forfeited (69,000) $ 3.88 (790,900) $ 16.11
------------ ------------
Outstanding-end of year 1,330,700 (2) 855,500 $ 7.24
------------ ------------
Exercisable at end of year 127,900 $ 7.03 224,900 $ 6.79
Weighted average fair value
(at grant date) of Stock Awards
granted during the Year:
Stock options $ .68(1) $ 1.36(1)
Deferred stock $ 10.37(1)
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Using the Black-Scholes option valuation model discussed below.
(2) Exercise prices for stock options outstanding as of December 27, 1998,
ranged from $2.94 to $11.44 with a weighted average exercise price of $7.08
per share with an exercise price for the preponderance of the shares at
$6.31 per share. The weighted average exercise price for stock options
granted during 1998 was $4.74. The weighted-average remaining contractual
life of stock options outstanding on December 27, 1998 is approximately
8 years Deferred stock awards will vest based on the Company's stock price
performance and effectively have an exercise price of $0. The remaining
contractual life for the deferred stock awards is approximately 2 years.
In 1997, the Company granted employees the opportunity to exchange stock options
granted during 1995 and 1996 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 1995 and 1996 options.
Substantially all of the 1997 forfeitures resulted from this exchange.
Pro forma information regarding net loss and loss per share is required by SFAS
No. 123 and has been determined as though the Company had accounted for its
employee Stock Awards under the fair value method of that Statement. The fair
value for these Stock Awards 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 5.43% for 1998 and 6.45% for 1997;
dividend yield of 3.0% for 1998 and 1997; volatility factor of the expected
market price of the Company's common stock of .21 and .18 for 1998 and 1997,
respectively; and a weighted-average expected life of 3 years for the deferred
stock awards and 7 years for the stock options granted in 1998 and 7 years for
1997. For purposes of pro forma disclosures, the estimated fair value of the
Stock Awards is amortized to expense over the vesting period. The Company's pro
forma net loss for 1998, 1997 and 1996 is $140.8 million, $32.6 million and
$25.7 million, respectively. The Company's pro forma loss per share in 1998,
1997 and 1996 is $14.81, $3.66 and $2.99, respectively.
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options that 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 and deferred stock 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.
35
<PAGE>
Crown Vantage Inc.
Note 12
- --------------------------------------------------------------------------------
Employee Stock Ownership Plan
Currently the Company sponsors an Employee Stock Ownership Plan ("ESOP") that is
available to substantially all employees of the Company. Participants may elect
to contribute up to 16% of their compensation as pretax contributions under
Internal Revenue Code 401(k). The Company will make matching contributions (up
to a maximum of 6%) based on each participant's contribution. On December 27,
1998, 381,000 shares were authorized but not yet issued to the ESOP.
Prior to the fourth quarter of 1998, the ESOP was leveraged and was funded by
loans from Crown Paper Co., with the proceeds used to purchase shares of the
Company's Common Stock. One loan was repaid in 1997 and the other loan was
repaid in 1998. Prior to the loans being paid off, the Company's annual
contributions to the ESOP in the form of matching contributions was equal to the
amount needed by the ESOP to make the principal and interest payments on the
loan.
When the ESOP was leveraged, shares were pledged as collateral for this debt. As
the debt was repaid, shares were released from collateral and allocated to
employees who made 401(k) contributions that year, based on the proportion of
debt service paid in the year. The shares pledged as collateral were reported as
unearned ESOP shares in the consolidated balance sheet. As the Company
recognized compensation expense for its matching contribution, shares were
committed for release from collateral and the shares became outstanding for
earnings per share computations.
Compensation expense for the 401(k) match and the ESOP was $3.8 million in 1998
and $2.7 million in 1997.
The ESOP shares as of December 27, 1998, and December 28, 1997, were as follows:
- --------------------------------------------------------------------------------
Number of Shares
1998 1997
- --------------------------------------------------------------------------------
Allocated shares 944,000 516,000
Shares released/
issued for allocation 101,000
Unearned shares 327,000
- --------------------------------------------------------------------------------
Total ESOP shares 944,000 944,000
- --------------------------------------------------------------------------------
Fair value of unearned
shares at end of year $ -0- $2,534,000
- --------------------------------------------------------------------------------
Note 13
- --------------------------------------------------------------------------------
Asset Impairment, Timberland Gain and Other Charges
During the fourth quarter of 1998, the Company determined that the estimated
future cash flows for certain of its fixed assets (primarily at the Berlin and
Gorham, N.H., pulp and paper mills) were insufficient to recover the net book
value of those assets. Accordingly, the Company recorded an asset impairment
charge of $146.9 million in the fourth quarter of 1998 to write down those
assets. Also, the Company determined that the co-generation facility at the St.
Francisville, La., mill no longer provides substantive use or benefit to the
mill. Based on this assessment, the Company recorded a $16.9 million charge
during the fourth quarter of 1998, which represents discounted net future lease
payments.
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.
During the fourth quarter of 1997, the Company closed its Newark, Del., facility
and recorded a charge related to the closure of the mill in the fourth quarter
of 1997 totaling $3.3 million.
Note 14
- --------------------------------------------------------------------------------
Work Force Reduction
During 1998, the Company accrued $3.0 million relating to the announced 5% work
force reduction. The accrual is for anticipated expenses resulting from the work
force reduction, primarily for severance and benefit payments to the
approximately 230 affected employees. Both hourly and salaried employees from
manufacturing, maintenance, and office staff were affected. As of December 27,
1998 approximately $1.6 million had been paid and the remainder will be paid
during the first half of 1999.
36
<PAGE>
Crown Vantage Inc.
Note 15
- --------------------------------------------------------------------------------
Segment Information
The Company is organized around two segments based primarily on similarities in
products, the manufacturing process and customers.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------
(amounts in millions) 1998 1997 1996
Operating income (loss):
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Printing & Publishing Papers $ (166.1) $ 1.0 $ 11.6
Specialty Papers (6.0) 13.3 11.1
- -------------------------------------------------------------------------------------------------------------
Total $ (172.1) $ 14.3 $ 22.7
- -------------------------------------------------------------------------------------------------------------
EBITDA:
Printing & Publishing Papers $ 54.1 $ 64.4 $ 72.8
Specialty Papers 24.1 34.6 30.9
Other .7 1.0 .4
- -------------------------------------------------------------------------------------------------------------
Total $ 78.9 $ 100.0 $ 104.1
- -------------------------------------------------------------------------------------------------------------
Total assets:
Printing & Publishing Papers $ 457.6 $ 631.4 $ 678.5
Specialty Papers 204.1 222.0 237.0
Other 27.6 27.2 30.1
- -------------------------------------------------------------------------------------------------------------
Total $ 689.3 $ 880.6 $ 945.6
- -------------------------------------------------------------------------------------------------------------
Net sales:
Printing & Publishing Papers $ 512.8 $ 513.0 $ 536.5
Specialty Papers 338.2 384.5 388.9
- -------------------------------------------------------------------------------------------------------------
Total $ 851.0 $ 897.5 $ 925.4
- -------------------------------------------------------------------------------------------------------------
Depreciation and amortization expense:
Printing & Publishing Papers $ 62.3 $ 63.3 $ 60.2
Specialty Papers 23.7 21.2 20.2
- -------------------------------------------------------------------------------------------------------------
Total $ 86.0 $ 84.5 $ 80.4
- -------------------------------------------------------------------------------------------------------------
Asset impairment, other charges, and timberland gain:
Printing & Publishing Papers $ (157.3) $ 10.2
Specialty Papers (6.5)
- -------------------------------------------------------------------------------------------------------------
Total $ (163.8) $ 10.2
- -------------------------------------------------------------------------------------------------------------
Expenditures for property, plant and equipment:
Printing & Publishing Papers $ 27.2 $ 43.5 $ 60.8
Specialty Papers 13.9 13.0 16.0
Other 1.0 2.8 4.1
- -------------------------------------------------------------------------------------------------------------
Total $ 42.1 $ 59.3 $ 80.9
- -------------------------------------------------------------------------------------------------------------
</TABLE>
Both operating income (as used in the statement of operations) and EBITDA are
used by the Company's chief operating decision makers to assess the performance
of these segments. EBITDA represents income (loss) before income taxes, interest
expense and depreciation and amortization. 1998 EBITDA for Printing and
Publishing Papers excludes the $145.2 million fixed asset write-down and the
$12.1 million charge for future lease payments for the co-generation facility at
the St. Francisville, La., mill. Specialty Papers' 1998 EBITDA excludes $1.7
million for the fixed asset write-down and the $4.8 million charge for future
lease payments for the co-generation facility at the St. Francisville, La.,
mill. Printing and Publishing Papers' 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, Del. facility. "Other" consists primarily of corporate balances not
allocated to segments such as prepaid pension assets, deferred income taxes and
the balance sheet effect of certain financing arrangements. Other's revenue is
interest income. The allocation of pension costs to the segments is actuarially
determined. Corporate general and administrative expenses are allocated based on
tons sold.
37
<PAGE>
Crown Vantage Inc.
Note 16
- --------------------------------------------------------------------------------
Quarterly Financial Summary (unaudited)
<TABLE>
<CAPTION>
(amounts in thousands except shares First Second Third Fourth
and loss per share amounts) Quarter Quarter Quarter Quarter Year
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1998
Net sales $ 221,806 $ 215,413 $ 211,768 $ 202,007 $ 850,994
Gross margin 8,998 11,982 21,679 11,400 54,059
Net loss before
extraordinary item (14,214) (12,302) (6,992) (125,987) (159,495)
Basic loss per share
before extraordinary item (1.55) (1.32) (.73) (12.69) (16.79)
Net loss (14,214) (12,302) (6,992) (106,999) (140,507)
Basic loss per share (1) (1.55) (1.32) (.73) (10.78) (14.79)
Shares used to compute
loss per share 9,185 9,333 9,560 9,929 9,502
Stock price - High 9 3/8 12 3/4 10 1/2 4 3/4 12 3/4
- Low 6 6 1/2 2 3/8 2 2
- Close 7 3/4 9 7/8 2 1/2 2 3/8 2 3/8
- -----------------------------------------------------------------------------------------------------------------------------
1997
Net sales $ 228,641 $ 224,932 $ 226,808 $ 217,111 $ 897,492
Gross margin 17,164 10,752 20,598 11,526 60,040
Net loss (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
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Basic loss per share is weighted average calculation performed on a
quarterly and year-to-date basis that can result in the sum of the quarters
not equaling the year-to-date basic loss per share, which is in accordance
with generally accepted accounting principles. In 1998, the large loss and
increase in weighted average shares outstanding that occurred in the fourth
quarter significantly impacted the calculation and is the primary reaso for
the sum of the four quarters basic loss per share not equaling the year-to-
date basic loss per share.
38
<PAGE>
EXHIBIT 23.1
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, 333-4420 and
333-52355), of Crown Vantage Inc. of our report dated January 29, 1999, except
for Note 6, paragraph 4, as to which the date is February 26, 1999, 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 27, 1998, December 28, 1997 and December 29, 1996 and our
report on the financial statement schedule, on page 19 of this Form 10-K.
ERNST & YOUNG LLP
San Francisco, California
March 25, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-27-1998
<PERIOD-START> DEC-29-1997
<PERIOD-END> DEC-27-1998
<CASH> 9,806
<SECURITIES> 0
<RECEIVABLES> 41,522
<ALLOWANCES> 500
<INVENTORY> 102,397
<CURRENT-ASSETS> 171,773
<PP&E> 1,190,094
<DEPRECIATION> 756,019
<TOTAL-ASSETS> 689,347
<CURRENT-LIABILITIES> 117,184
<BONDS> 555,241
0
0
<COMMON> 47,887
<OTHER-SE> (185,987)
<TOTAL-LIABILITY-AND-EQUITY> 689,347
<SALES> 850,994
<TOTAL-REVENUES> 850,994
<CGS> 796,935
<TOTAL-COSTS> 796,935
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 64,672
<INCOME-PRETAX> (235,407)
<INCOME-TAX> (75,912)
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<DISCONTINUED> 0
<EXTRAORDINARY> 18,988
<CHANGES> 0
<NET-INCOME> (140,507)
<EPS-PRIMARY> (14.79)
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</TABLE>
