<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