-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: keymaster@town.hall.org Originator-Key-Asymmetric: MFkwCgYEVQgBAQICAgADSwAwSAJBALeWW4xDV4i7+b6+UyPn5RtObb1cJ7VkACDq pKb9/DClgTKIm08lCfoilvi9Wl4SODbR1+1waHhiGmeZO8OdgLUCAwEAAQ== MIC-Info: RSA-MD5,RSA, lpxh6mwfA9tXMk0jFA86dqsaI0zpvjn3ZKzicupW/jrMoZtM0J2zZMRx+iIMmpP+ 84fwpaRCf6J5N+SLNFFcXw== 0000950109-95-000722.txt : 19950615 0000950109-95-000722.hdr.sgml : 19950615 ACCESSION NUMBER: 0000950109-95-000722 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 19941231 FILED AS OF DATE: 19950316 SROS: CBOE SROS: NYSE SROS: PSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: MEAD CORP CENTRAL INDEX KEY: 0000064394 STANDARD INDUSTRIAL CLASSIFICATION: PAPERS & ALLIED PRODUCTS [2600] IRS NUMBER: 310535759 STATE OF INCORPORATION: OH FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-02267 FILM NUMBER: 95521177 BUSINESS ADDRESS: STREET 1: MEAD WORLD HEADQUARTERS STREET 2: COURTHOUSE PLZ NORTHEAST CITY: DAYTON STATE: OH ZIP: 45463 BUSINESS PHONE: 5134956323 10-K 1 FORM 10-K ================================================================================ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1994 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _______________ to ______________ Commission File No. 1-2267 THE MEAD CORPORATION (Exact name of registrant as specified in its charter) Ohio 31-0535759 (State of Incorporation) (I.R.S. Employer Identification No.) MEAD WORLD HEADQUARTERS COURTHOUSE PLAZA NORTHEAST DAYTON, OHIO 45463 (Address of principal executive offices) Registrant's telephone number, including area code: 513-495-6323 Securities registered pursuant to Section 12(b) of the Act: Name of Each Exchange Title of Each Class on which Registered ------------------- --------------------- Common Shares Without Par Value New York Stock Exchange and Common Share Purchase Rights Chicago Stock Exchange Pacific Stock Exchange 9% Debentures due 2017 New York Stock Exchange _________________________ Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No . --- --- _________________________ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] _________________________ As of January 27, 1995, the aggregate market value of the voting shares held by non-affiliates of the Registrant was approximately $3,037,962,000 determined by multiplying the highest selling price of a Common Share on the New York Stock Exchange--Composite Transactions Tape on such date times the amount by which the total shares outstanding exceeded the shares beneficially owned by directors and executive officers of the Registrant. Such determination shall not, however, be deemed to be an admission that any person is an "affiliate" as defined in Rule 405 under the Securities Act of 1933. The number of Common Shares outstanding at February 28, 1995 was 57,941,098. DOCUMENTS INCORPORATED BY REFERENCE Portions of Registrant's Proxy Statement for the Annual Meeting of Shareholders scheduled to be held on April 27, 1995, are incorporated by reference in Part III; definitive copies of said Proxy Statement were filed with the Securities and Exchange Commission on March 16, 1995. ================================================================================ PART I Item 1. Business Mead manufactures and sells paper, pulp, paperboard, lumber and other wood products. Mead also manufactures and distributes school and office supplies, distributes paper and other industrial supplies. Mead was incorporated in 1930 under the laws of the state of Ohio as the outgrowth of a paper manufacturing business founded in 1846, and has its principal executive offices at Mead World Headquarters, Courthouse Plaza Northeast, Dayton, Ohio 45463, telephone (513) 495-6323. Except as otherwise indicated by the context, the terms "Company" or "Mead" as used herein refer to The Mead Corporation and its subsidiaries. Segment Information Segment information is also included in Note T on page 55. Paper Mead's Fine Paper division manufactures cut-size copier paper; uncoated and coated papers for commercial printing; form bond and carbonless paper and papers for conversion by others into business forms; and other uncoated papers for conversion by others into such products as greeting cards and bank checks. Mead's Publishing Paper division manufactures web coated offset paper for use by book, magazine, catalog and advertising brochure publishers. The Fine Paper division sells papers manufactured by both divisions nationwide, both on a direct basis to printers and converters and through paper merchants, including merchants owned by Mead. Additionally, Escanaba Paper Company, a wholly-owned subsidiary, sells its output to the Publishing Paper division of Mead, which resells the paper directly to publishers and printers. The pulp mills adjacent to the paper mills of these divisions and the pulp mill owned by an affiliate (see "Forest Products Affiliates") produce virtually all of the pulp required for use in these paper mills. The Company's Gilbert division manufactures cotton content and premium sulfite paper and premium recycled papers, including bond, banknote, texts and cover, and technical and specialty papers, and sells these products principally through paper merchants, including merchants owned by Mead. Mead's Specialty Paper division manufactures and sells, primarily through its own sales force, decorative laminating papers. This division also manufactures and sells absorbent, filter, synthetic fiber and other specialty papers. The division's principal customers include manufacturers that serve the building materials, automotive and furniture industries. The Mead Pulp Sales division sells market pulp worldwide manufactured by Northwood Pulp and Timber Ltd. of Canada, Aracruz Celulose S.A. of Brazil, and Escanaba Paper Company. Mead Pulp Sales also sells through its affiliates 1 International Fibre Sales in Europe and Pulp Asia Ltd. in Japan, and through independent agents in all major pulp consuming areas of the world. Packaging and Paperboard The Mead Packaging division designs and produces multiple packaging and packaging systems primarily for the beverage take-home market. The division operates through a network of subsidiaries, affiliates and licensees in the United States, Canada, Europe, Japan, the Far East and Pacific Rim, Mexico and Latin America. Demand for most beverage packaging is seasonal with inventories being built from November to March for the peak soft drink and beer sales of April through October. Mead Coated Board, Inc., a wholly-owned subsidiary of Mead, operates a coated paperboard mill near Phenix City, Alabama, sawmills in Cottonton, Alabama and Greenville, Georgia, and owns various timberlands in Alabama and Georgia. The subsidiary is engaged primarily in the manufacture of coated natural kraft products used by the beverage packaging industry and by manufacturers of folding cartons for soaps, food products, hardware and apparel. The entire output of the Phenix City mill is sold by Mead Coated Board, Inc. to the Mead Coated Board division. The division sells approximately 50% of the mill output to the Mead Packaging division. The remainder is sold to a wide range of domestic and foreign carton converters. The division's customers are most concerned about physical strength properties of the paperboard and its quality for reprographics. Mead started up a new CNK(R) paperboard facility adjacent to the Phenix City mill in late 1990, and has constructed additional sheeting facilities in foreign countries to handle a portion of the increased capacity. In 1993, the division commenced operations at new facilities at the Phenix City mill designed to enable the division to meet beverage packaging customer demand for post-consumer recycled content. The Mead Containerboard division sells standard and special purpose corrugated shipping containers manufactured at eight converting plants located in the Midwestern and Southeastern regions of the United States from raw materials received from outside sources and from the division's Stevenson, Alabama corrugating medium mill. The division also sells corrugating medium from the Stevenson mill to unaffiliated manufacturers of containers. Forest Products Affiliates Northwood Forest Industries Ltd. ("Northwood"), which is owned 50% by Mead and 50% by Noranda Forest Inc. ("Noranda"), manufactures bleached softwood kraft pulp at its 1,600 short ton-per-day mill in Prince George, British Columbia. The principal markets for its pulp are in the United States, western Europe and Japan. Lumber and plywood products are also produced at Northwood's five sawmills and its plywood plant in British Columbia. Northwood has the annual capacity to produce over one billion board feet of lumber and 175 million square feet of plywood (3/8-inch basis). Northwood's solid wood products' operations provide about 760,000 tons (Metric ODT) of wood chips or 70% of the fiber requirements for the pulp mill. A wood preserving operation also treats lumber and custom treats plywood from other sources. 2 Northwood Panelboard Company ("Panelboard"), a partnership owned 50% by Mead and 50% by Noranda located in Bemidji, Minnesota, has the annual capacity to produce approximately 340 million square feet of oriented structural board (3/8-inch basis). All of the wood products produced by Northwood and Panelboard are sold through a subsidiary of Noranda primarily in North America with approximately 20% sold to export markets. All of the market pulp produced by Northwood is sold by Mead Pulp Sales. Mead has a long-term contract with Northwood pursuant to which Mead is entitled to purchase such of Northwood's pulp production as it may require. Timberlands Mead obtains most of its wood requirements from private contractors or suppliers and from Company owned timberlands. The annual wood requirement for Mead's wholly-owned operations is approximately 7,500,000 tons, of which approximately 18% is obtained from timberlands owned or leased by Mead. The approximate annual requirement of wood for both Northwood and Panelboard is 5,800,000 tons. At Northwood, the majority of wood is obtained from Crown Lands through various types of cutting rights which are terminable or renegotiable at the government's initiative and from third parties having similar cutting rights. At Panelboard, wood is obtained from both private landowners and various governmental sources (federal, state and county). As of December 31, 1994, Mead owned or controlled approximately 1,350,000 acres of timberlands in the United States. Approximately 107,000 acres of land are controlled by Mead under long-term agreements which expire at different times through 2027. Distribution and School and Office Products Zellerbach, Mead's distribution division, is a national distribution business which distributes a full line of printing papers, industrial supplies and packaging materials and equipment. These products are distributed through a network of wholesale locations and printer-supply retail outlets. The business units carry inventory or order products against sales orders, depending upon the product and service requirements. Zellerbach distributes not only products of Mead, but also those of several hundred other manufacturers. In the distribution of paper and other products, competing merchants frequently distribute products of the same supplier. The Mead School and Office Products division manufactures and distributes a line of school supplies (including filler paper, wirebound notebooks, portfolios and looseleaf binders) as well as a line of office supply products (including envelopes, filing supplies and vinyl folders and binders). The division's products are distributed primarily through mass market retailers, office supply superstores and warehouse clubs. The school supply segment is highly seasonal with inventories beginning to be built in the winter and spring 3 for shipment in late spring and summer, while the home and office products portion of the business is generally less seasonal in nature. Manufacturing and distribution is done from seven United States plants/distribution centers and one in Canada. The division also has a small manufacturing facility operated in Nuevo Laredo, Mexico. International Sales and Operations Outside of the United States and Canada, Mead and its affiliates operate a paperboard sheeting facility and are engaged in the manufacture of multiple systems and folding carton packaging in Europe, Asia and Latin America. Mead also has sales subsidiaries, affiliates, agents or distributors in a number of countries in Europe, Asia, Australia and Latin America. Competition Mead competes on a world-wide basis in its product lines, and the markets in which Mead sells its products are highly competitive. Several factors affect Mead's competitive position, including quality, technology, product design, customer service, price and cost. The Fine Paper and Publishing Paper divisions compete with numerous other major paper manufacturers. The Specialty division competes primarily with North American and European based decorative laminating papermakers. The Gilbert division competes with a number of other manufacturers of premium cotton, sulfite and recycled papers. The Coated Board division competes with other boxboard producers, including manufacturers of all types of coated recycled boxboard, coated solid bleach sulfate and folding boxboard. The Packaging division competes with a number of carton suppliers and machine manufacturers and one other global systems-based multiple packaging supplier. The Containerboard division competes primarily with container producers in several market areas. The Zellerbach division competes with national and regional merchant chains, as well as independent local merchants. The School and Office Products division competes with national and regional converters, some with broad product offerings and others focused on narrow product segments. Employee and Labor Relations Mead employs approximately 16,100 persons, of whom approximately 7,500 are production, maintenance and clerical employees represented by labor unions. Mead's 50% owned company, Northwood, employs approximately 2,400 persons. Mead and Northwood have approximately 50 labor agreements currently in force of which approximately one-third are subject to renegotiation each year. Mead's employee relation policies are based on mutual confidence and trust. All Mead labor contract negotiations during 1994 were concluded without any strikes. 4 Trademarks, Trade Names, Patents, and Franchises Mead has a large number of trademarks and trade names under which it conducts its business, including "Mead," "Mead Papers," "Mead Packaging," "Zellerbach," "Z," "Montag," "Super Shades," "Trans/Rite," "Trans/Tab," "Duodozen," "Cluster-Pak," "Cambridge," "Chief," "Apex," "Info," "Moistrite," "Trapper," "Trapper Keeper," "Neatbook," "Gilbert," "Gilcrest," "OPAS," "Signature," "CNK," "Five Star," "First Gear," "Neu-Tech," "Esse," "Organizer," "Spiral," "sig-NATURE," "Management Series," "NO! RULES," "Duraline," "Appli," "Duoply," and many others. Mead also has a great number and variety of patents, patent rights, licenses and franchises relating to its business. While, in the aggregate, the foregoing are of material importance to Mead's business, the loss of any one or any related group of such intellectual property rights would not have a material adverse effect on the business of Mead. Environmental Laws and Regulations Mead's operations are subject to extensive regulation by various federal, state, provincial and local environmental control statutes and regulations. These regulations impose effluent and emission limitations, waste disposal and other requirements upon the operations of Mead, and require Mead to obtain and operate in compliance with the conditions of permits and similar authorizations from the appropriate governmental authorities. Mead has obtained, has applications pending, or is making application for such permits and authorizations. Mead does not anticipate that compliance with such statutes and regulations will have a material adverse effect on its competitive position since its competition is subject to the same statutes and regulations to a relatively similar degree. During the past five years (January 1, 1990 - December 31, 1994), Mead (including its share of Northwood expenditures) constructed air and water pollution control and other environmental facilities at a cost of approximately $91.8 million. Significant environmental expenditures in the future are anticipated to include long-term projects for maintenance and upgrade of wastewater treatment plants, air emission controls and the construction of solid waste disposal facilities. Due to changes in environmental laws and regulations, the application of such laws and regulations and changes in environmental control technology, it is not possible for Mead to predict with certainty the amount of capital expenditures to be incurred for environmental purposes, though management anticipates that these expenditures will increase as regulatory requirements become more stringent. Taking these uncertainties into account, Mead estimates that in the next five years it may be required to incur expenditures of approximately $334 million. A substantial portion of the expected increase in capital expenditures for the next five years is related to new regulations under the Clean Air Act and Clean Water Act, which are expected to be promulgated in final form by the United States Environmental Protection Agency ("USEPA") in early 1996. These regulations, proposed in December 1993, are intended to reduce air and water discharges of specific substances from pulp and paper mills in the United States, and to require installation of additional pollution control equipment based on 5 best available technology. The American Forest and Paper Association estimates that these regulations, if implemented in their present form, could cost the pulp and paper industry over $10 billion in capital expenditures, and force the closing of approximately 30 plants and the loss of an estimated 19,000 mill jobs. Mead believes, based on a review of Mead's operations, that implementation of the proposed regulations in their present form could significantly increase Mead's capital investments and operating costs over the next five years. Mead opposes these regulations as proposed because it believes that the environment can be protected for billions of dollars less in capital investment and without a significant negative impact on the United States pulp and paper industry's competitive position worldwide. Mead expects that the proposed regulations will be modified before being issued in final form in 1996. The USEPA issued proposed regulations implementing the Federal Great Lakes Critical Programs Act of 1990 ("GLCPA") in 1993, which was enacted as a result of an agreement between the United States and Canada in the 1970s to seek greater consistency for water quality standards among the Great Lakes states. The proposed regulations establish minimum water quality criteria, anti- degradation policies and implementation procedures. Current industry estimates indicate that compliance with these proposed regulations may cost affected forest products companies, in the aggregate, over $800 million. In September 1993, in response to the USEPA's request for comments on the proposed regulations, and based on certain assumptions and uncertainties described in Mead's comment letter, Mead estimated that the cost of complying with the proposed regulations, in respect of Mead's Escanaba facility, could range from $100 million to $150 million in capital expenditures, with a significant increase in annual operating costs. These costs are not included in Mead's anticipated environmental expenditures discussed above. Mead opposes these regulations as proposed because Mead believes they are unnecessary and unreasonable. At this time, Mead cannot make any conclusions as to the effect of the final rules, which are expected to be promulgated by the USEPA in 1995. Mead believes that most of its earlier expenditures for environmental control have been beneficial. However, Mead and its trade associations have challenged and are continuing to challenge in administrative and judicial proceedings federal and state environmental control regulations which they do not believe are beneficial to the environment or the public. In some instances, those trade associations may also seek legislative remedies to correct unnecessary or impractical requirements of existing laws. Dioxin currently cannot be detected under normal operating conditions in treated effluents from Mead's three U. S. bleached paper mills. Taking into account current regulatory efforts and the process and control equipment installed at Mead's bleached paper mills, management does not believe that any required actions in response to dioxin concerns will have a material adverse effect on the Company. Mead has been notified by the USEPA and by several state or local governments that it may be liable under federal environmental laws or under applicable state or local laws with respect to the cleanup of hazardous substances at 13 sites currently operated or used by Mead. Mead is also currently named as a potentially responsible party ("PRP"), or has received third 6 party requests for contributions, in several superfund proceedings under federal, state and local laws with respect to at least 18 sites sold by Mead over many years or owned by contractors used by Mead for disposal purposes. Some of these proceedings are described in more detail in Part I, Item 3, "Legal Proceedings." There are other former Mead facilities and those of contractors which may contain contamination or which may have contributed to potential superfund sites but for which Mead has not received any notice or claim. Mead's potential liability for all these sites will depend upon several factors, including the extent of contamination, the method of remediation, insurance coverage and contribution by other PRPs. Although the costs that Mead may be required to pay for remediation of all these owned and unowned sites are not certain at this time, Mead has established reserves of approximately $40 million relating to current environmental litigation and proceedings which it believes are probable and reasonably estimable. These reserves were established after considering the number of other PRPs, their ability to pay their portion of the costs, the volumetric amount, if any, of Mead's contribution, and other factors. Expenses to be charged to this reserve are not included in the anticipated capital expenditures for the next five years discussed above. Item 2. Properties Mead considers that its facilities are suitable and adequate for the operations involved. With the exception of certain warehouses, general offices and timberlands which are leased, including properties which are leased from corporations the common shares of which are owned by The Mead Retirement Master Trust, and certain warehouses which are owned or leased and managed by third parties for Zellerbach, Mead owns all of the properties described herein. For additional information regarding leases see Note P on page 53. For additional information concerning Mead's timberlands and properties of affiliates, see Item 1. Business. Mead's corporate headquarters are in Dayton, Ohio and its principal facilities are at the locations listed below:
Business Unit Facility Locations Principal Use - --------------------------- ------------------------- ------------------------ Fine Paper Chillicothe, Ohio Pulp mill, coated, uncoated and carbonless paper mill Indianapolis, Indiana Carbonless coating facility Kingsport, Tennessee/1/ Pulp mill, coated and uncoated paper mill Publishing Paper Escanaba, Michigan Pulp mill, coated paper mill Gilbert Paper Menasha, Wisconsin Cotton and recycled content and specialty paper mill - -------------------------
/1/ Mead announced in 1994 its intention to seek a buyer for this facility 7 Specialty Paper South Lee, Massachusetts Decorative laminating and specialty papers mills Packaging Anniston, Alabama Paperboard packaging, Atlanta, Georgia multiple packaging Godfrey, Illinois systems for beverage Fairless Hills, and food, packaging Pennsylvania machinery manufacturing Ajax, Ontario, Canada or repair facilities Chateauroux, France and ink manufacture Trento, Italy Roosendaal, The Netherlands Trier-Ehrang, Germany Bristol, England Shimada, Japan Bilbao, Spain Buenos Aires, Argentina Santiago, Chile Containerboard 8 plants within the Corrugated shipping United States located containers primarily in midwest and manufacturing facilities southern regions Stevenson, Alabama Corrugating medium mill Coated Board Phenix City, Alabama Coated paperboard mill, Venlo, The Netherlands sheeting facilities and Cottonton, Alabama sawmills Greenville, Georgia Hong Kong United Kingdom School and Office Products 7 manufacturing and Home, office and school distribution locations products manufacturing throughout the United and distribution States, one in Toronto, facilities Ontario, Canada and one manufacturing location in Nuevo Laredo, Mexico Zellerbach 48 wholesale locations Paper, packaging throughout the United equipment and supplies States; one converting distribution facilities operation; 35 printer-supply retail outlets; and 5 third party warehouses
8 Item 3. Legal Proceedings In September 1993 Mead signed a Consent Order with USEPA under Section 3008(h) of the Resource Conservation and Recovery Act with respect to a landfill (the Storage Depot Site) owned and operated by Mead Fine Paper division's Chillicothe, Ohio, mill. Pursuant to the terms of that Order, Mead will undertake certain investigative and remedial work designed to control releases of hazardous substances from the Site. Work has begun and is expected to continue through 1995. Mead believes that the U.S. Navy is legally responsible for the groundwater contamination at the Storage Depot Site, including the cost of implementing the Consent Order. In 1992, Mead filed a declaratory judgment action against the U.S. Navy seeking to have the Navy take responsibility for any required remediation. In 1993, both Mead and the U.S. Navy filed motions for partial summary judgment on the issue of liability, and allocation of responsibility for clean up costs, both of which motions were denied in January 1994. Attempts to mediate this proceeding ended in October 1993 without any resolution. Proceedings continue in court. In March 1991, Mead was served with a complaint entitled Beazer East Inc. ---------------- v. The Mead Corporation, C.A. No. 91-0408, filed in the United States - ----------------------- District Court for the Western District of Pennsylvania. The complaint alleges that the USEPA seeks to require Beazer to conduct a site-wide environmental investigation regarding hazardous substances, wastes and constituents at the Woodward Facility located in Dolomite, Alabama, and to propose preferred corrective measures for the site. Mead acquired the Woodward Facility by merger in 1968, and in 1974 sold it to Koppers, Inc., which was later acquired by Beazer. The complaint alleges that Mead is liable to Beazer for contribution for past and future costs to be incurred by Beazer as a result of any corrective measures required at the site. In October 1992, the district court granted Mead's motion to dismiss all of plaintiff's allegations in this proceeding except those relating to alleged liability under CERCLA and alleged indemnity under the 1974 sale contract. In June 1993, the court granted Mead's motion for summary judgment and dismissed the case. This decision was reversed by the United States Court of Appeals for the Third Circuit in September 1994. Proceedings continue in court regarding Beazer's contribution claim. Although the extent of contamination and the method of remediation to be required are not known at this time, based on information currently available to Mead, after considering established reserves, rights to contribution and potential insurance coverage, Mead does not expect this proceeding will have a material adverse effect on the financial condition or results of operation of the Company. The Tennessee Department of Environment and Conservation ("TDEC") advised Mead in September 1991 that a closed coke manufacturing facility located in Chattanooga, Tennessee (formerly owned by Mead) is a hazardous substance site within the meaning of the Tennessee Hazardous Waste Management Act, and that Mead may be a potentially responsible or liable party. In June 1994 Mead agreed with TDEC to commence a removal action at the closed coke plant site to permit demolition of structures, removal of asbestos, control of surface water ponding and repairs to fencing. The removal action was completed by December 1994. In August 1993, the federal Agency for Toxic Substances and Disease Registry ("ATSDR") issued a health advisory for a site identified as the Tennessee Products Site, which included the coke manufacturing facility formerly owned by 9 Mead. In January 1994, the USEPA proposed adding the Tennessee Products Site to the National Priorities List ("NPL"). Mead objected to the proposed listing on several grounds, but in particular because of the inclusion of the coke facility with non-contiguous, geographically distinct properties in the area, including the Chattanooga Creek. In November 1994, the USEPA sent special notice letters under CERCLA to several PRPs, including Mead, regarding the performance of a remedial investigation/feasibility study ("RI/FS") of the aggregated Tennessee Products Site. The PRPs, including Mead, have responded that they will not perform an RI/FS on the aggregated site. A preliminary PRP search by USEPA indicates that dumping in Chattanooga Creek occurred when the coke plant was doubled in size to meet World War II government requirements. The coke plant was owned by the Defense Plant Corporation during World War II and sold by the War Assets Administration in 1946. Woodward Iron Company, formerly a division of Mead, acquired the coke plant in 1964, and Mead sold the coke plant site to third parties in 1974. Although the extent of contamination and the possible methods of remediation are not known at this time, based on information currently available to Mead, after considering established reserves, rights to contribution and potential insurance coverage, Mead does not believe that this proceeding will have a material adverse effect on the financial condition or results of operation of the Company. In March 1994, Mead received a Notice of Violation from USEPA for alleged violations of the Ohio State Implementation Plan ("SIP") under the Clean Air Act and an Order to conduct a compliance test on one of its boilers. USEPA had alleged that on two occasions emissions of particulate matter from one of the boilers at the Mead Fine Paper mill in Chillicothe, Ohio exceeded levels allowed under the SIP. Subsequent tests have demonstrated compliance. No penalties were assessed and Mead does not anticipate any further action in this proceeding. Mead has been informed by Ohio EPA that it is contemplating an enforcement action seeking penalties from Mead for various alleged, unrelated air violations at the Mead Fine Paper mill in Chillicothe, Ohio dating back to 1989. The alleged violations concerned particulate emissions from a coal-fired boiler in 1989, the absence of a permit for the facility's chlorine unloading station and the untimely installation of equipment to control odors. Ohio EPA and Mead are discussing these allegations, and Mead does not believe that any such proceeding will have a material adverse effect on the Company. Additional information is included in Part I, Item 1, "Business-- Environmental Laws and Regulations," Note M on page 47 and Note Q on page 54. Mead is involved in various other litigation and administrative proceedings arising in the normal course of business, which, in the opinion of management, after considering established reserves, will not have a material adverse effect on the financial condition or results of operations of Mead. Item 4. Submission of Matters to a Vote of Security Holders Not applicable. 10 Executive Officers of the Company The Executive Officers of Mead as of February 1, 1995, their ages, their positions and offices with Mead, and the principal occupation (unless otherwise stated, position is with Mead) of such Executive Officers during the past five years are as follows:
Name Age Position and Offices ---- --- -------------------- William R. Graber 51 Vice President and Chief Financial Officer since December 1993; prior to that Vice President and Treasurer since April 1993; Treasurer since September 1992; Controller since April 1991; Manager, Finance Operations, Motor Business, General Electric Company ("GE") since July 1990; prior thereto Manager, Financial Service Operations, GE Aircraft Engines. Elias M. Karter 54 Vice President, Operating Officer since July 1994; prior to that Vice President, Manufacturing & Technology. Raymond W. Lane 46 Vice President, Operating Officer since July 1994; prior to that President of Mead School and Office Products Division. Steven C. Mason 58 Director; Chairman of the Board and Chief Executive Officer since May 1992 and President since December 1994; Vice Chairman during April 1991 to May 1992; prior to that President and Chief Operating Officer. Charles J. Mazza 52 Vice President, Human Resources. Wallace O. Nugent 56 Vice President, Purchasing and Logistics since January 1993; prior to that Vice President, Marketing and Supply. Thomas E. Palmer 55 Vice President and General Counsel since September 1991; prior to that a partner with Squire, Sanders & Dempsey. Jerome F. Tatar 48 Vice President, Operating Officer since July 1994; prior to that President of Mead Fine Paper Division.
All Executive Officers of Mead are elected annually by the Board of Directors. 11 PART II Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters Mead's Common Shares are listed on the New York, Chicago and Pacific Stock Exchanges, trading under the symbol "MEA." Information on market prices and dividends is set forth below:
MARKET PRICES PER COMMON SHARE - ------------------------------ 1994 1993 ---------------- ---------------- High Low High Low ------- ------- ------- ------- First quarter $48.125 $39.750 $45.875 $37.500 Second quarter 46.250 39.125 47.375 40.500 Third quarter 52.875 42.000 48.500 41.250 Fourth quarter 53.250 43.375 45.750 39.500 DIVIDENDS PAID PER COMMON SHARE - ------------------------------- 1994 1993 ---- ---- First quarter $ .25 $ .25 Second quarter .25 .25 Third quarter .25 .25 Fourth quarter .25 .25 ------- ------- Year $1.00 $1.00 ======= =======
The number of Common shareowners of record as of February 28, 1995, was 57,941,098. See Note H on page 42 for information regarding the amount of retained earnings available for dividends. 12 Item 6. Selected Financial Data Five-Year Data on Operations, Liquidity, Financial Condition and Capital Resources
(All dollar amounts in millions, except per share amounts) - ------------------------------------------------------------------------------------------------------ December 31 1994 1993 1992 1991 1990 - ------------------------------------------------------------------------------------------------------ Operations: Net sales $4,557.5 $4,239.0 $4,208.4 $4,109.7 $4,332.3 Earnings from continuing operations 89.6 95.7 13.7 26.2 94.1 Earnings from continuing operations per common and common equivalent share 1.52 1.61 .23 .45 1.51 Liquidity: Working capital 806.5 380.3 375.2 284.5 273.9 Current ratio 1.7 1.6 1.6 1.4 1.4 Net cash provided by operating activities 327.0 326.5 303.8 227.5 302.3 Assets: Property, plant and equipment-net 2,313.9 2,239.6 2,175.1 2,202.1 2,200.1 Total assets 4,862.6 4,073.3 3,934.4 3,900.4 3,807.8 Capital: Borrowed capital-long-term debt 957.7 1,360.0 1,317.5 1,300.4 1,245.0 Equity capital 2,182.6 1,578.0 1,495.4 1,478.4 1,531.3 -------- -------- -------- -------- -------- Total capital $3,140.3 $2,938.0 $2,812.9 $2,778.8 $2,776.3 Borrowed capital as a percent of total capital 30.5% 46.3% 46.8% 46.8% 44.8% Cash dividends per common share $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ .97
13 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations REVIEW OF OPERATIONS -------------------- OVERVIEW OF 1994 - ---------------- Mead's earnings (excluding the effect of significant items) improved over 1993 and 1992 levels. Driving the continued earnings growth were significantly improved results from Mead's Northwood affiliates; the Fine Paper division's Chillicothe, Ohio, paper mill; the Coated Board, Containerboard, Specialty Paper, and School and Office Products divisions; and the positive effect of a change in depreciable lives of most paper mill equipment. Earnings from Mead's Packaging and Zellerbach divisions were lower than in 1993 and 1992. Sales increased on higher sales volumes in nearly all Mead's businesses. Pricing, which had remained at depressed levels in most businesses for several years, began to strengthen in 1994. For pulp and containerboard, prices began to improve by mid-year. In paper and coated board, price increases began to improve near year-end, with average prices for the year still below 1993 levels for most grades. Pulp prices recovered in 1994 for Mead's affiliate, Northwood Forest Industries, though a sharp increase in fiber costs delayed earnings increases from pulp operations until late in the year. Prices for wood products, which had been very strong in 1993, moderated somewhat during the year. Within Mead's paper operations, sales volumes increased modestly over 1993 and 1992 levels. Strong volume growth and further productivity improvements, especially at Chillicothe, drove earnings improvement. Price increases in coated paper began to be realized in the fourth quarter. Mead Coated Board continued sales volume growth over 1993 and 1992, increasing earnings through cost control despite lower average prices for coated board. Sales at Mead Packaging rebounded from a drop in 1993, but competitive pressures on pricing and generally weaker foreign markets for most of the year resulted in lower earnings. For the Containerboard division, demand and prices improved significantly. Strong converting volume and mill operations at the Stevenson, Alabama, mill led to an earnings improvement over 1993. Sales grew at Zellerbach in all three of its business units, printing paper, packaging and industrial supplies, as the market began to strengthen in the second half of the year. However, margins did not improve due to higher operating costs and restructuring charges which reduced results compared to 1993 and 1992. School and Office Products continued its growth in sales and earnings over 1993 and 1992 levels. Strong operating results were driven by growing sales in its fashion lines of school and office supplies and the successful introduction of new licensed products. 14 OPERATING RESULTS - ----------------- Sales from continuing operations increased to $4.558 billion in 1994, compared to $4.239 billion in 1993 and $4.208 billion in 1992. The gains in 1994 over 1993 came primarily from volume increases, with pricing improvements in most products coming after mid-year.
Earnings Per Share Analysis --------------------------- 1994 1993 1992 ---- ---- ---- Continuing operations before the following items $ 2.29 $1.73 $1.43 Significant items (.77) (.90) Sale of business (.30) Effect of tax rate change (.12) ------ ----- ----- Continuing operations 1.52 1.61 .23 Discontinued operations 9.87 .47 .40 Extraordinary item (.18) Cumulative effect of change in accounting principle .58 ------ ----- ----- Net earnings $11.21 $2.08 $1.21 ====== ===== ===== - ----------------------------------------------------------------------
In 1994, the Company realized a gain of $10.05 per share from the sale of Mead Data Central. Discontinued operations also included Mead Data Central's operating earnings through the sale date; adjustments affecting Mead's discontinued reinsurance business; and charges related to environmental matters at Mead's previously discontinued Industrial Manufacturing segment. The extraordinary item in 1994 was for losses associated with the extinguishment of debt. The company also recorded a number of other significant items totaling $.77 per share. Those items included charges for the estimated loss from the sale of the Kingsport, Tennessee, paper mill, facilities consolidation and related severance primarily at Zellerbach, the negative effect of an unusually large dollar amount of pension settlement payments and other smaller matters. Also included in significant items is the positive effect of an amount for Mead's share of Northwood's earnings due to refunds of countervailing duties on lumber exports from Canada in prior years. In 1994, effective January 1, the depreciable lives of certain paper mill equipment were changed to 20 years from 16 years to more closely reflect the current service lives of the assets. The change increased net earnings by $27 million or $.42 per share for the year. In 1992, earnings from continuing operations were reduced by a provision for a comprehensive performance improvement program which resulted in an after tax charge of $53 million or $.90 per share related to continuing operations, and by a $18 million after tax or $.30 per share charge on a loss on the sale of the Ampad office products business. 15 In 1992, Mead adopted Statement of Financial Accounting Standards (SFAS) No. 109, requiring the determination of all income tax liabilities at current rates. The effect of adopting the new standard was an increase in net earnings of $34 million, or $.58 a share. Depreciation, amortization and depletion of property, plant and equipment amounted to $188 million in 1994, compared with $222 million in 1993 and $211 million in 1992. PAPER
- -------------------------------------------------------------- Segment Summary (in millions) 1994 1993 1992 - --------------- --------- -------- -------- Sales $1,156.8 $1,111.4 $1,090.6 ======== ======== ======== Earnings before significant items and income taxes 137.9 101.9 85.6 Significant items (65.9) (22.3) -------- -------- Earnings before income taxes $ 72.0 $ 101.9 $ 63.3 ======== ======== ======== - --------------------------------------------------------------
Mead's paper segment earnings before significant items and income taxes improved 35% versus 1993, driven by increased volume and stronger operating results, especially at the Chillicothe and Specialty paper mills, and a $28.7 million reduction in depreciation expense due to a change in depreciable lives of most paper mill equipment. Sales increased by 4% in 1994 to $1.157 billion. Sales volume growth came from increases in both production and shipments from inventory. In 1993, earnings before significant items and income taxes improved 19% over 1992 on a 2% increase in sales and an 11% volume growth. Prices, which had been at depressed levels for several years, began to show improvement in the second half of the year as demand for paper strengthened rapidly. Prices began to improve after mid-year for uncoated paper, and near year-end in coated grades. Industry capacity for coated papers is expected to increase less than 2% annually from 1995-97. In 1995, continued economic strength in the United States and Europe is expected to keep demand for paper high. Segment earnings for 1994 also include a charge for the estimated loss on the sale of the Kingsport, Tennessee, mill and other smaller items. 16 Mead Publishing Paper - --------------------- The Publishing Paper division produces more than 500,000 tons of medium-weight coated paper annually for book and magazine publishers, and catalog and commercial printers. Sales volume ran slightly ahead of last year. However, prices, which had been falling since 1991, fell even further during the first half of 1994. Prices began to improve after mid-year, though average selling price for the year was below 1993. Continued productivity improvement partially offset the price decline, and earnings were ahead of 1993. Sales and earnings in 1993 increased over 1992. An overall strengthening of the domestic and European economies at mid-year began to firm demand for coated paper. Orders and backlogs grew, and, by the fourth quarter, paper was on allocation and prices began to recover. Strong demand is expected to continue in 1995 along with further strengthening of prices. Paper is expected to remain in tight supply as no major capacity additions have been announced in the marketplace. Substantial progress was made on two major capital programs. Following paper machine modifications completed in 1994, the division introduced a new coated paper product, Vision(TM), based on proprietary technology that improves the quality of the printing surface. Another capital project, to be completed in 1995, will improve grade mix by enabling the mill to produce double coated web and sheet grade paper of superior quality. These capital programs will be completed for less than $100 million. Mead Fine Paper - --------------- Mead Fine Paper produces both coated and uncoated papers for business and specialty uses and is a leading producer of carbonless paper. Division sales improved modestly, and operating earnings before significant items and income taxes improved as a result of strong operations at the Chillicothe, Ohio, mill. Continued productivity improvements that included improved mix of coated and carbonless grades, higher production volume and good cost control combined to offset weak pricing which existed for most of the year. In 1993, weak market conditions held sales growth to a modest increase over 1992, but earnings improved significantly over 1992 levels through improved productivity and cost controls. Weak market conditions and depressed prices during 1992 and 1993 continued through the first half of 1994. Demand and prices began to strengthen in the second half for uncoated paper and near year-end for coated paper. Continued market strength and further price improvement should drive sales and earnings growth in 1995. Increases in fiber costs are expected to be more than offset in 1995 by higher pricing, improved grade mix and volume as well as other cost reductions at the Chillicothe mill. 17 The $111 million capital investment project which is upgrading coated paper quality at Chillicothe is on schedule and will be completed early in 1995. During 1994, new carbonless paper products were introduced. Mead announced in October its plans to sell the Kingsport, Tennessee, mill which primarily produces uncoated papers and some coated label grades. The mill's sales have remained flat since 1992. Operating results in 1994 and 1993 were significantly below 1992 results. Mead Specialty Paper - -------------------- Mead Specialty Paper manufactures saturating papers for decorative laminates used in commercial and home construction, remodeling and furniture; and, specialty grades in various industrial applications, including automobiles. The division's earnings improved sharply in 1994 over 1993. The improvement was driven by increased volume in strengthening markets and significant productivity improvements. The U.S. housing market, both in housing starts and remodeling expenditures, which had begun to improve in 1993, strengthened further in 1994. The U.S. automotive market was strong, and European markets also recovered in 1994. Growth continued during the year for the division's products in low pressure laminates and in overlay used in flooring applications. With continued market strength, the division's current high volume is expected to remain in 1995. However, recent cost increases in market pulp and other raw materials may be only partially offset by expected productivity gains. 1993 sales increased over 1992, but earnings declined as a result of higher operating costs during the year. Gilbert Paper - ------------- The Gilbert Paper division produces high-quality communications papers, including cotton-content bonds, and specialty text and cover papers. Gilbert reported sales even with 1993, with lower earnings as a result of higher pulp costs, a less profitable product mix and some operating inefficiencies. Strengthening prices, along with planned improvements in operating efficiency, should offset higher pulp costs this year and lead to improved performance in 1995. A new line of super-premium ink jet papers introduced late in 1994 will be in retail markets early in 1995. Sales to catalog and export markets continue to grow. In 1993, the division reported a slight decline in sales and earnings compared to 1992. 18 PACKAGING AND PAPERBOARD
- --------------------------------------------------------------- Segment Summary (in millions) 1994 1993 1992 - --------------- -------- -------- -------- Sales $1,254.5 $1,156.9 $1,163.2 ======== ======== ======== Earnings before significant items and income taxes 130.7 132.8 140.9 Significant items (6.9) (23.8) -------- -------- -------- Earnings before income taxes $ 123.8 $ 132.8 $ 117.1 ======== ======== ======== - ---------------------------------------------------------------
Sales increased 8% in 1994 on higher volume in all businesses in the segment. However, pricing pressures continued on coated board and converted cartons most of the year, resulting in lower average pricing and reduced earnings for the segment, despite a $14.0 million reduction in depreciation expense due to a change in depreciable lives. In 1993, sales were flat with 1992, and earnings before significant items and income taxes decreased. Production volume and overall shipments increased at the Stevenson, Alabama, containerboard mill, and the Mahrt coated board mill in Alabama. Sales volume was also higher for packaging converting operations and container plants. While pricing improved in containerboard markets during the year, it remained at depressed levels for coated board and converted packaging. A strengthened world economy is expected to continue to drive demand for paperboard packaging in 1995. Mead Containerboard - ------------------- Mead's Containerboard division produces corrugating medium used in shipping containers and operates eight corrugated container plants. Sales and earnings improved sharply for the division. Markets improved significantly in 1994, leading to improved prices for medium and containers which had been depressed in 1993. Operating improvements led to further increases in annual production over 1993 and 1992. Converting volume grew faster than the overall market in 1994. Spending controls helped offset a sharp rise in recycled fiber costs during the year. 1993 sales were about even with 1992, though 1993 earnings fell below 1992 as cost controls and strong converting volume growth could not offset deteriorating prices. Four of the division's container plants obtained ISO 9001 certification by meeting a set of international standards designed to improve product quality and consistency. The medium mill obtained ISO 9002 certification in 1993. 19 Mead Coated Board - ----------------- Mead Coated Board manufactures coated paperboard for use in multiple packaging and folding cartons. Customers include folding carton manufacturers in North America and Europe, in addition to Mead Packaging's worldwide business. Division earnings continued to improve despite lower average prices for the year. Earnings were driven primarily by higher volume, an improving product mix, further cost reductions, and strong sawmill operations. Production continued to increase over previous years, moving up 3% over 1993; first quality coated board production increased 6%. Shipments outstripped production as inventories fell sharply during the year. A grade simplification program combined two folding carton grades into one, which will reduce overall costs. The division also introduced a new wet strength additive for the beverage carton grade, making it more recyclable. Results in 1995 are expected to be driven by improvements in product mix and by a recovery in prices for open market grades that began late in 1994. The effect of improved pricing will be offset somewhat by rising raw materials costs. Production volume is essentially sold out for 1995. Sales and earnings have continued to increase since the Mahrt mill expansion was completed in 1990. 1994 sales increased 11% over 1993; 1993 sales were up 6% over 1992. Mead Packaging - -------------- Mead Packaging is a leading supplier of multiple beverage packaging and packaging systems. It also provides multiple packaging for food and other products. Customers include large and small brewers, soft drink bottlers, food and other consumer products companies. Increased volume, especially in the North American soft drink market, and a strengthening economy in Europe late in the year led to an increase in worldwide sales. Earnings, however, were lower compared to 1993. Sales and earnings in 1993 were lower than in 1992. In the North American market, lower earnings in 1994 resulted from higher production and freight costs associated with meeting a surge in demand among beverage customers, continued pricing pressures and costs related to business growth. International sales were about even with last year. Weak economies in Japan and in Europe for much of the year increased pricing pressures, and costs of business growth in Latin America led to reduced earnings. As part of its growth strategy, Packaging acquired a leading paperboard packaging converter in Spain and began operations in Argentina, Chile and Poland. With further strengthening in world economies, packaging volume is expected to continue to grow at a significant rate worldwide in 1995, especially in the North 20 American market. Volume growth, firming prices and on-going cost reduction efforts should drive improved performance in 1995. DISTRIBUTION AND SCHOOL AND OFFICE PRODUCTS
- --------------------------------------------------------------- Segment Summary (in millions) 1994 1993 1992 -------- -------- -------- Sales $2,146.2 $1,970.7 $1,954.6 ======== ======== ======== Earnings before significant items and income taxes 37.8 38.4 45.6 Significant items (17.3) (16.3) -------- -------- Earnings before income taxes $ 20.5 $ 38.4 $ 29.3 ======== ======== ======== - ---------------------------------------------------------------
Sales increased 9% to $2.146 billion for the Distribution and School and Office Products segment. Earnings before significant items and income taxes decreased slightly. In 1993 sales were up slightly, but earnings before significant items and income taxes were down 16% from 1992. The School and Office Products division had strong growth in sales and earnings. While sales increased in all three business units at the distribution division, Zellerbach, continued pressure on margins and costs associated with a major reorganization negatively impacted 1994 results. Zellerbach - ---------- Zellerbach is a distribution business with three units: printing papers; packaging materials and equipment; and, industrial/commercial supplies. It serves markets throughout much of the United States. Sales increased in all three business units over 1993, primarily in the second half of the year. Margins declined from 1993 and 1992 levels, and operating results were lower. The division's results were also reduced by costs for a major reorganization and facilities consolidation. These actions are intended to improve performance in 1995 by reducing operating expenses as consolidations and closures are made. Market strengthening which began late in 1994, is expected to continue in 1995, though at a lesser rate. Recent price increases in paper products passed through to customers are expected to result in higher sales and improved performance in 1995. School and Office Products - -------------------------- Mead's School and Office Products division is the nation's largest converter of paper-based school supplies. It also provides stationery products for home and office use, and is an industry leader in fashion and product design. 21 The division's sales grew approximately 7% in 1994 and 6% in 1993, excluding sales related to the liquidation of inventory purchased from Union Camp's school supply business in 1993. Growth in 1994 was driven by increased sales of Five Star(R), Five Star(R) First Gear(R) and Cambridge(R) product lines, as well as introduction of a new line of school supplies licensed through Nike, Inc. Earnings for School and Office Products increased over 1993 levels reflecting volume growth and controlled spending. Earnings growth was limited somewhat when the division was unable to pass along major increases in tablet paper prices late in the year. 1993 earnings increased over 1992 due to strong sales and operating performance. The division implemented a fully-integrated system for production planning, inventory control, purchasing and accounts payable that is expected to reduce costs over the long term. On November 30, 1994, the division acquired the assets of Hilroy (a division of Abitibi-Price Inc.), the leading converter of paper-based school supplies in Canada, providing Mead the opportunity to expand into the Canadian market. In 1995, continued growth is expected in value-added school supplies and the Cambridge line of office products. Introduction of new licensed products with the sports logos of NFL, NBA and NHL teams is planned for the back-to-school season. Investees - --------- Mead's primary investees are Northwood Forest Industries Ltd., a large producer of bleached softwood kraft pulp and wood products in British Columbia, Canada, and Northwood Panelboard Company, an oriented structural board (OSB) mill at Bemidji, Minnesota. Both are 50%-owned by Mead and Noranda Forest Inc. of Canada. Pulp from Northwood is sold throughout the world by Mead Pulp Sales. Wood products sales are handled by Noranda Forest Sales Inc. Northwood's 1994 sales were up 22% from 1993. Mead's share of 1994 earnings of all investees was $59.8 million, up from $18.4 million in 1993. Mead's share of 1992 results was $6.0 million. After declining for three straight years, pulp prices on a constant dollar basis ended 1993 at a record low level. Prices rebounded sharply in 1994 on stronger overseas demand for pulp and low producer and consumer inventories. Five announced increases during the year pushed prices up 59% from the beginning of the year. The average price for 1994 was up 54% from the prior year. Higher prices for pulp was offset somewhat by higher wood chip costs. Improving paper markets should keep pulp demand strong in 1995. Continued strong demand and tight supply, from low pulp inventories and minimal capacity increases for northern softwood pulp, could result in further price improvement. Chip costs are expected to continue to increase, partially offsetting gains from pulp price increases. Full realization of pulp price increases announced in 1994 should generate higher sales in 1995. 22 In wood products, prices remained strong for a second consecutive year. Lumber prices were up modestly from 1993, and OSB prices increased 15% from the prior year. Higher log costs and lower prices in 1995, are expected to lead to reduced earnings from wood products. In addition to stronger operations and improving prices, Northwood, like similarly situated Canadian companies, was advised that a refund was to be made of export duties related to lumber shipments into the United States and it was booked in the fourth quarter. Of the refund, $14.5 million ($9.1 million after tax) of Mead's share related to years prior to 1994. Selling, Administrative and Research Expenses - --------------------------------------------- Selling, administrative and research expenses rose by 16% in 1994 compared to a 13% decrease from the prior year in 1993. Both 1992 and 1994 contained significant items affecting selling, administrative and research expenses. These charges include costs of a comprehensive performance improvement program in 1992, and, in 1994, facilities consolidation and related severance, primarily related to Zellerbach, the negative impact of an unusually large dollar amount of pension settlements, and other smaller matters. Excluding the effect of these significant items in those years, selling, administrative and research expenses increased by 11% in 1994, while 1993 expenses were essentially even with 1992 levels. Most of the 1994 increase came from higher sales-related expenses at Zellerbach and Mead Packaging; start-up expenses at Mead Packaging in new markets, particularly in Latin America and the Pacific Rim; and restructuring costs at several divisions. In 1993, administrative expenses decreased from 1992 levels as a result of Mead's performance improvement program announced in 1992. Selling expenses in 1993 were up slightly over 1992 levels. Interest and Debt Expense - ------------------------- Interest and debt expense rose to $101 million in 1994 from $95 million in 1993. Although long-term debt levels were lower at year-end 1994 than at year-end 1993, $958 million compared with $1,360 million, average debt levels during 1994 were higher than average debt levels in 1993. That, coupled with higher interest rates in 1994, caused the increase in interest and debt expense. The 1993 reduction from the 1992 levels of $100 million reflected lower average interest rates in 1993 than in 1992. 23 FINANCIAL REVIEW ---------------- Cash provided by operations was $327 million in 1994 and 1993, and $304 million in 1992. Working capital at year-end 1994 amounted to $807 million, compared with $380 million at the end of 1993 and $375 million at the end of 1992. The 1994 increase resulted primarily from the sale of Mead's Electronic Publishing segment, Mead Data Central. The current ratio was 1.7 at the end of 1994 compared with 1.6 at the end of 1993 and 1992. Inventory levels declined to $382 million in 1994, compared with $439 million in 1993 and $421 million in 1992. At the end of 1994, the replacement value of inventories exceeded their LIFO value by $184 million. Adjusted for LIFO, Mead's current ratio would be 1.8 at year-end. Some of the proceeds from the sale of Mead's electronic publishing division, Mead Data Central, were used to reduce debt levels in the fourth quarter of 1994 by approximately $480 million, with an additional reduction of $130 million taking place in early 1995. At the end of 1994, Mead's long-term debt stood at $958 million, compared with $1,360 million and $1,318 million at the end of 1993 and 1992, respectively. The Company's ratio of long-term debt to total capital was 30.5% at the end of 1994, compared with 46% at the end of 1993 and 47% at the end of 1992. The 1994 ratio is in the Company's target ratio range of 30% to 40%. As Mead completes its Board-authorized repurchase of $350 million of common stock ($44 million of which was repurchased in December of 1994), the ratio will rise. The ratio would also rise further as warranted by borrowings for strategic opportunities. During 1993, Mead issued $150 million ($148.8 million net of discount) of 8-1/8% debentures due February 1, 2023, and $150.0 million ($148.3 million net of discount) of 7-1/8% debentures due August 1, 2025. The proceeds of both issues were used to retire short-term borrowings previously classified as long-term. Also, during 1993, Mead reduced the amount of its bank credit agreements from $750 million to $550 million. That action was taken to reflect debenture issues which lowered the size of the credit line needed and to reduce expense. The $550 million bank credit agreement was extended in 1994 to May 1998. At the end of 1994, the Company paid a fixed rate or a capped rate on 78% of its debt and paid a floating rate of interest on the remainder. A change of 1% in the floating interest rate, on an annual basis, would result in a $.04 change in net earnings per share for the year. The estimated market value of long-term debt, excluding capital leases, was $27.6 million less than the book value at the end of 1994. In the fourth quarter of 1994, Mead recorded a number of significant items affecting continuing operations, reducing the carrying value of certain assets, accruing for certain expenses and reflecting actual cash payments. Of the significant items, approximately $74 million relates to asset writedowns, $14 million was accrued with payments expected to be made over the next year, and $5 24 million of cash payments were made in 1994. Neither the cash payments made in 1994 nor those expected to be made in later years are expected to have a materially adverse affect on Mead's liquidity. Mead has filed shelf registration statements with the Securities and Exchange Commission that would permit the Company to offer up to $300 million of debt securities. Up to $154 million of medium-term notes are currently authorized to be issued as part of this registered debt offering. Mead common stock has paid a quarterly dividend of $.25 a share since June 1990. Annual dividends have totaled $1.00 a share since that date. CAPITAL EXPENDITURES ANALYSIS - -----------------------------
(All dollar amounts in millions) 1994 1993 1992 1991 1990 ------ ------ ------ ------ ------ Growth (including related environmental expenditures) $ 18.1 $ 29.2 $ 63.6 $ 75.6 $252.6 Maintenance 91.9 136.8 85.9 74.7 84.3 Cost-effectiveness 189.1 126.4 44.5 68.6 74.9 Environmental projects 16.5 13.7 24.0 12.3 11.3 ------ ------ ------ ------ ------ Total $315.6 $306.1 $218.0 $231.2 $423.1 ====== ====== ====== ====== ======
CAPITAL SPENDING - ---------------- Capital spending totaled $316 million in 1994, compared to $306 million in 1993 and $218 million in 1992. The $211 million investment in the coated paper operations at Chillicothe, Ohio, and Escanaba, Michigan, will be completed in 1995. At Chillicothe, this investment totaled $111 million, of which $57 million was spent in 1994. At Escanaba, this investment totaled under $100 million, of which $44 million was spent in 1994. These projects will be completed in the first half of 1995. Mead plans capital spending in 1995 in the range of $325-375 million. It expects that funds to finance these projects will be internally generated. The Company announced in 1994 an $85 million investment in coated board operations at the Mahrt mill in Alabama. This project is expected to be completed in 1997. ENVIRONMENTAL PROCEEDINGS - ------------------------- Mead has been notified by the United States Environmental Protection Agency ("USEPA") and by several state or local governments that it may be liable under federal environmental laws or under applicable state or local laws with respect to the cleanup of hazardous substances at 13 sites currently operated or used by Mead. Mead is also currently named a potentially responsible party ("PRP"), or has received third party requests for contributions, in several superfund proceedings under federal, state and local laws with respect to at least 18 sites sold by Mead over many years or owned by contractors used by Mead for disposal purposes. There are other former Mead facilities and those of contractors which 25 may contain contamination or which may have contributed to potential superfund sites but for which Mead has not received any notice or claim. Mead's potential liability for all these sites will depend upon several factors, including the extent of contamination, the method of remediation, insurance coverage and contribution by other PRPs. Although the costs that Mead may be required to pay for remediation of all these owned and unowned sites are not certain at this time, Mead has established reserves of approximately $40 million relating to current environmental litigation and proceedings which it believes are probable and reasonably estimable. Expenditures in 1995 from this reserve are expected to be less than $5 million. In 1993, the USEPA issued proposed regulations under the Clean Air Act and Clean Water Act intended to reduce air and water discharges of specific substances from U.S. paper and pulp mills, and other proposed regulations implementing the Federal Great Lakes Critical Programs Act. At present, these regulations are in the proposal stage, and are not expected to be finalized until early 1996. However, if enacted in their present form, these regulations would significantly increase Mead's capital spending and operating costs over the next five years. EFFECTS OF INFLATION - -------------------- Inflation remained at a moderate level in 1994 and is not expected to have a significant effect over the long term. While it is true that inflation increases the replacement cost of long-lived facilities and equipment, higher selling prices and the repayment of borrowings with cheaper dollars would work to maintain satisfactory cash flow. 26 Item 8. Financial Statements and Supplementary Data
Financial Statements Page ---- Financial Statements: Independent Auditors' Report........................................ 28 Statements of earnings.............................................. 29 Balance sheets...................................................... 30-31 Statements of shareowners' equity................................... 32 Statements of cash flows............................................ 33 Notes to financial statements....................................... 34-57 Supplementary Data Selected quarterly financial data..................................... 58
27 INDEPENDENT AUDITORS' REPORT Board of Directors The Mead Corporation Dayton, Ohio We have audited the accompanying balance sheets of The Mead Corporation and consolidated subsidiaries as of December 31, 1994 and 1993, and the related statements of earnings, shareowners' equity and cash flows for each of the three years in the period ended December 31, 1994. Our audits also included the financial statement schedule listed in the Index at Item 14(a)2. These financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and financial statement schedule 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, such financial statements present fairly, in all material respects, the financial position of The Mead Corporation and consolidated subsidiaries at December 31, 1994 and 1993, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1994, in conformity with generally accepted accounting principles. Also, in our opinion, such financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein. The Company changed its method of accounting for income taxes in 1992 (Note L). DELOITTE & TOUCHE LLP Dayton, Ohio January 26, 1995 28 THE MEAD CORPORATION AND CONSOLIDATED SUBSIDIARIES STATEMENTS OF EARNINGS (All dollar amounts in millions, except per share amounts)
Year Ended December 31 1994 1993 1992 - ------------------------------------------ --------- --------- --------- Net sales $4,557.5 $4,239.0 $4,208.4 Cost of products sold (Note E) 3,805.8 3,550.7 3,552.6 -------- -------- -------- Gross profit 751.7 688.3 655.8 Selling, administrative and research expenses (Note J) 543.1 467.7 539.0 -------- -------- -------- Earnings from operations 208.6 220.6 116.8 Other revenues (expenses) - net (Note K) (55.1) 9.0 (1.5) Interest and debt expense (101.1) (94.6) (99.5) -------- -------- -------- Earnings from continuing operations before income taxes 52.4 135.0 15.8 Income taxes (Note L) 22.6 57.7 8.1 -------- -------- -------- Earnings from continuing operations before equity in net earnings of investees 29.8 77.3 7.7 Equity in net earnings of investees (Note C) 59.8 18.4 6.0 -------- -------- -------- Earnings from continuing operations 89.6 95.7 13.7 Discontinued operations (Note M) 617.4 28.4 23.9 -------- -------- -------- Earnings before extraordinary item and cumulative effect of change in accounting principle 707.0 124.1 37.6 Extraordinary item (Note F) (11.3) Cumulative effect of change in accounting principle (Note L) 34.0 -------- -------- -------- Net earnings $ 695.7 $ 124.1 $ 71.6 ======== ======== ======== Per common and common equivalent share (Note A): Earnings from continuing operations $ 1.52 $ 1.61 $ .23 Discontinued operations 9.87 .47 .40 -------- -------- -------- Earnings before extraordinary item and cumulative effect of change in accounting principle 11.39 2.08 .63 Extraordinary item (.18) Cumulative effect of change in accounting principle .58 -------- -------- -------- Net earnings $ 11.21 $ 2.08 $ 1.21 ======== ======== ========
See notes to financial statements 29 THE MEAD CORPORATION AND CONSOLIDATED SUBSIDIARIES BALANCE SHEETS (All dollar amounts in millions)
ASSETS December 31 1994 1993 - ------------------------------------------------- --------- --------- Current assets: Cash and cash equivalents $ 484.0 $ 9.3 Accounts receivable, less allowance for doubtful accounts of $23.9 in 1994 and $22.5 in 1993 606.6 489.3 Inventories (Note B) 382.4 439.4 Deferred tax asset (Note L) 64.4 43.5 Other current assets (Note L) 356.6 28.4 --------- --------- Total current assets 1,894.0 1,009.9 Investments and other assets: Investments in investees (Note C) 108.2 65.1 Other assets (Note D) 546.5 390.5 --------- --------- 654.7 455.6 Property, plant and equipment, at cost (Notes E, F and P): Land and land improvements 130.1 128.0 Buildings 539.1 528.5 Machinery and equipment 3,130.5 3,041.4 Construction in progress 138.8 126.1 --------- --------- 3,938.5 3,824.0 Less accumulated amortization and depreciation (1,849.3) (1,803.7) --------- --------- 2,089.2 2,020.3 Timber and timberlands, net of timber depletion 224.7 219.3 --------- --------- Property, plant and equipment, net 2,313.9 2,239.6 Net assets of Electronic Publishing segment (Note M) 368.2 --------- --------- Total assets $ 4,862.6 $ 4,073.3 ========= =========
See notes to financial statements 30 LIABILITIES AND SHAREOWNERS' EQUITY
December 31 1994 1993 - ----------------------------------------------- --------- --------- Current liabilities: Accounts payable: Trade $ 245.6 $ 214.7 Affiliated companies 43.9 34.7 Outstanding checks 84.0 77.0 Accrued wages 84.6 73.7 Income taxes payable 324.7 3.9 Taxes, other than income 53.2 53.5 Other current liabilities 235.4 165.7 Current maturities of long-term debt 16.1 6.4 -------- -------- Total current liabilities 1,087.5 629.6 Long-term debt (Note F) 957.7 1,360.0 Commitments and contingent liabilities (Notes P and Q) Deferred items: Income tax liability (Note L) 393.3 310.7 Postretirement benefits (Note O) 114.7 108.4 Other 126.8 86.6 -------- -------- Total deferred items 634.8 505.7 Shareowners' equity (Notes H and I): Common shares 174.9 176.5 Additional paid-in capital 26.3 Foreign currency translation adjustment (4.8) (7.7) Net unrealized gain on securities 3.7 9.1 Retained earnings 2,008.8 1,373.8 -------- -------- 2,182.6 1,578.0 -------- -------- Total liabilities and shareowners' equity $4,862.6 $4,073.3 ======== ========
31 THE MEAD CORPORATION AND CONSOLIDATED SUBSIDIARIES STATEMENTS OF SHAREOWNERS' EQUITY (All dollar amounts in millions, except per share amounts; all share amounts in thousands)
Foreign Net Common Shares Additional Currency Unrealized ----------------- Paid-In Translation Gain on Retained Shares Amount Capital Adjustment Securities Earnings ------- -------- ------------ ----------- ---------- --------- December 31, 1991 58,337 $174.0 $ 1.5 $ 7.2 $ $1,295.7 Net earnings 71.6 Stock option activity - net 390 1.1 10.6 Shares issued 7 .1 .2 Cash dividends - $1.00 a common share (58.6) Foreign currency translation adjustment (8.0) ------ ----- ----- ----- ----- ------- December 31, 1992 58,734 175.2 12.3 (.8) 1,308.7 Net earnings 124.1 Stock option activity - net 440 1.2 13.6 Shares issued 11 .1 .4 Cash dividends - $1.00 a common share (59.0) Net unrealized gain on securities 9.1 Foreign currency translation adjustment (6.9) ------ ----- ----- ----- ----- ------- December 31, 1993 59,185 176.5 26.3 (7.7) 9.1 1,373.8 Net earnings 695.7 Stock option activity - net 363 1.1 12.8 Shares issued 28 .1 1.2 Shares purchased (927) (2.8) (40.3) (1.3) Cash dividends - $1.00 a common share (59.4) Change in net unrealized gain on securities (5.4) Foreign currency translation adjustment 2.9 ------ ----- ----- ----- ----- ------- December 31, 1994 58,649 $174.9 $ -- $(4.8) $ 3.7 $2,008.8 ====== ===== ===== ===== ===== =======
See notes to financial statements 32 THE MEAD CORPORATION AND CONSOLIDATED SUBSIDIARIES STATEMENTS OF CASH FLOWS (All dollar amounts in millions) INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
Year Ended December 31 1994 1993 1992 - ------------------------------------------------------ -------- -------- -------- Cash flows from operating activities: Net earnings $ 695.7 $ 124.1 $ 71.6 Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation, amortization and depletion of property, plant and equipment 188.1 221.7 210.9 Depreciation and amortization of other assets 37.4 32.0 30.9 Deferred income taxes (7.3) 37.5 11.1 Investees - earnings and dividends (46.8) (7.9) 3.9 Discontinued operations (617.4) (28.4) (23.9) Extraordinary item 11.3 Cumulative effect of change in accounting principle (34.0) Other 47.5 (30.6) 13.7 Change in assets and liabilities, excluding effects of acquisitions and dispositions: Accounts receivable (109.4) (1.5) (20.6) Inventories 65.0 (18.6) 4.6 Other current assets 3.7 19.2 (29.6) Accounts payable and accrued liabilities 62.1 (41.3) 24.5 Cash provided by (used in) discontinued operations (2.9) 20.3 40.7 -------- -------- -------- Net cash provided by operating activities 327.0 326.5 303.8 -------- -------- -------- Cash flows from investing activities: Capital expenditures (315.6) (306.1) (218.0) Additions to equipment rented to others (49.0) (48.0) (40.5) Payments for acquired businesses (22.0) (7.9) Proceeds from sale of Electronic Publishing segment 1,500.0 Proceeds from sale of subsidiaries 31.5 Restricted funds (461.0) Other (18.8) 19.8 6.8 -------- -------- -------- Net cash provided by (used in) investing activities 633.6 (334.3) (228.1) -------- -------- -------- Cash flows from financing activities: Additional borrowings 175.6 396.6 49.7 Payments on borrowings (572.9) (354.2) (40.0) Notes payable (45.0) Cash dividends paid (59.4) (59.0) (58.6) Common shares issued 15.2 15.3 12.0 Common shares purchased (44.4) -------- -------- -------- Net cash (used in) financing activities (485.9) (1.3) (81.9) -------- -------- -------- Increase (decrease) in cash and cash equivalents 474.7 (9.1) (6.2) Cash and cash equivalents at beginning of year 9.3 18.4 24.6 -------- -------- -------- Cash and cash equivalents at end of year $ 484.0 $ 9.3 $ 18.4 ======== ======== ========
See notes to financial statements 33 THE MEAD CORPORATION AND CONSOLIDATED SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992 A - Accounting Policies CONSOLIDATION. The accompanying statements include the accounts of the Company and all significant wholly-owned subsidiaries. Investments in investees are stated at cost plus the Company's equity in their undistributed net earnings (loss) since acquisition. All significant intercompany transactions are eliminated. CASH AND CASH EQUIVALENTS. The Company considers all highly liquid investments with an original maturity of three months or less when purchased to be cash equivalents. INVENTORIES. The inventories of finished and semi-finished products and raw materials are stated at the lower of cost or market, determined on the last-in, first-out (LIFO) basis. Stores and supplies are stated at cost determined on the first-in, first-out (FIFO) basis. OTHER ASSETS. Included in other assets are goodwill and other intangibles which are being amortized using the straight-line method over their estimated useful lives of ten to 40 years. DEPRECIATION AND DEPLETION. For financial reporting purposes, depreciation, including amortization of capital leases and land improvements, is calculated using the straight-line method over the estimated useful lives of the properties. The rates used to determine timber depletion are based on projected quantities of timber available for cutting. INTEREST RATE AND FOREIGN EXCHANGE FINANCIAL INSTRUMENTS. Amounts currently due to or from interest rate swap counterparties are recorded in interest expense in the period in which they accrue. The premiums paid to purchase interest rate caps, as well as gains or losses on terminated interest rate swap and cap agreements, are included in long-term liabilities or assets and amortized to interest expense over the shorter of the original term of the agreements or the life of the financial instruments to which they are matched. Gains or losses on foreign currency forward contracts are recognized currently through income and generally offset the transaction losses or gains on the foreign currency cash flows which they are intended to hedge. ENVIRONMENTAL LIABILITIES. The Company records accruals for environmental costs based on estimates developed in consultation with environmental consultants and legal counsel in accordance with the requirements of Statement of Financial Accounting Standards No. 5. The estimated costs to be incurred in closing existing landfills, based on current environmental requirements and technologies, are accrued over the expected useful lives of the landfills. 34 NET EARNINGS PER COMMON AND COMMON EQUIVALENT SHARE. Net earnings per common and common equivalent share are computed by dividing net earnings by the weighted average number of common shares and the dilutive effect, if any, of common share equivalents (convertible subordinated debentures and stock options) outstanding during each year. Net earnings have been adjusted by adding back interest expense (net of tax) on the debentures when dilutive. Fully diluted net earnings per share data are substantially the same. B - Inventories (All dollar amounts in millions)
December 31 1994 1993 - ------------------------------------------- ------ ------ Finished and semi-finished products $241.0 $295.5 Raw materials 78.9 79.4 Stores and supplies 62.5 64.5 ------ ------ $382.4 $439.4 ====== ======
For purposes of comparison to non-LIFO companies, inventories valued at current replacement cost would have been $183.8 million and $194.0 million higher than reported at December 31, 1994 and 1993, respectively. C - Investees The Company's principal investee is the 50%-owned Northwood Forest Industries Ltd., which manufactures bleached softwood kraft pulp, lumber and plywood. Under an agreement with Northwood, Mead is entitled to purchase the pulp it requires. Total investments in investees are as follows: (All dollar amounts in millions)
December 31 1994 1993 - ------------------------------------------- ------- ------- Investments, at cost $ 26.1 $24.8 Foreign currency translation adjustment (13.2) (8.1) Equity in undistributed net earnings 95.3 48.4 ------ ----- Total investments in investees (equal to Mead's share of investees' equity) $108.2 $65.1 ====== =====
35 The summarized operating data for all investees is presented in the following table: (All dollar amounts in millions)
Year Ended December 31 1994 1993 1992 - ---------------------------------------------------- ------ ------- ------- Revenues: Sales to Mead $ 38.6 $ 18.2 $ 26.9 Sales to other customers 692.6 547.9 481.0 ------ ------- ------- $731.2 $ 566.1 $ 507.9 ====== ======= ======= Gross profit $215.6 $ 86.5 $ 51.9 ====== ======= ======= Net earnings $131.1 $ 47.0 $ 20.5 ====== ======= ======= Mead's share of net earnings, after elimination of intercompany transactions and reduction for Mead's income taxes on partnership earnings $ 59.8 $ 18.4 $ 6.0 ====== ======= ======= Dividends and partnership distributions received $ 18.9 $ 15.7 $ 14.2 ====== ======= =======
The summarized balance sheet data for all investees is as follows: (All dollar amounts in millions)
December 31 1994 1993 - ------------------------------------------------------------ ------- ------- Current assets $ 226.5 $ 171.6 Noncurrent assets 611.5 631.6 Current liabilities (180.8) (169.9) Long-term debt and deferred items (440.8) (503.1) ------- ------- Shareholders' equity $ 216.4 $ 130.2 ======= =======
36 D - Other Assets (All dollar amounts in millions)
December 31 1994 1993 - -------------------------------------------------- ------ ------ Pension asset $153.4 $141.4 Cash restricted for retirement of long-term borrowings (Note F) 130.0 Rental equipment (net of accumulated amortization of $178.7 in 1994 and $146.2 in 1993) 93.3 73.9 Goodwill and other intangibles (net of accumulated amortization of $34.0 in 1994 and $31.0 in 1993) 80.0 74.8 Cash surrender value of life insurance, less policy loans of $26.1 in 1994 and $21.4 in 1993 45.1 39.6 Miscellaneous 44.7 60.8 ------ ------ $546.5 $390.5 ====== ======
E - Property, Plant and Equipment The Company changed the remaining estimated useful lives of certain machinery and equipment as of January 1, 1994 to more closely reflect the current service lives of the assets. The useful lives of this machinery and equipment increased from 16 years to 20 years. The effect of the change was to increase earnings before extraordinary item and cumulative effect of change in accounting principle and net earnings for 1994 by $26.5 million ($.42 per share). 37 F - Long-Term Debt (All dollar amounts in millions)
December 31 1994 1993 - ---------------------------------------------------- ------- -------- Capital lease obligations: Industrial Development Revenue Bonds and Notes, average effective rate approximately 3.4% $ 133.2 $ 134.3 Other, average effective rate 8.5% 14.9 15.7 ------- -------- 148.1 150.0 Medium-term notes, 5-2/3% to 9-7/8%, face amount of $180.5 in 1994 and $186.0 in 1993, due from 1996 through 2020 (effective rate approximately 9.2%) 173.4 177.7 8-1/8% debentures, face amount of $150.0, due 2023 (effective rate approximately 8.4%) 147.5 147.5 7-1/8% debentures, face amount of $150.0, due 2025 (effective rate approximately 7.4%) 146.7 146.6 9% debentures 130.0 130.0 Variable-rate Escanaba tax-exempt bonds, $10.0 due in 2013 and $83.5 due in 2023, average effective rate approximately 2.7% 93.5 93.5 Variable-rate Industrial Development Revenue Bonds, due from 2001 through 2023, average effective rate approximately 2.8% 78.6 78.6 Purchase Note, 6-3/4% convertible subordinated debentures and other (retired in 1994) 384.7 Other 39.9 51.4 ------- -------- $ 957.7 $1,360.0 ======= ========
The variable-rate Industrial Development Revenue Bonds and the variable-rate Escanaba tax-exempt bonds are supported by letters of credit. The interest rates on the variable-rate tax-exempt bonds closely follow the tax-exempt commercial paper rate. In January 1994, the Company prepaid the $165.5 million Purchase Note, due in 1998. In December 1994, the Company prepaid the 6-3/4% convertible subordinated debentures and called the 9% debentures. The loss on extinguishment of debt, net of $6.9 million income tax benefit, is included in the statement of earnings as an extraordinary item and represents call premiums on these debentures and the write-off of related financing expenses. As of December 31, 1994, the Board of Directors has restricted cash balances for use in the retirement of the 9% debentures, which were paid January 9, 1995. The 8-1/8% and 7-1/8% debentures are callable by the Company at approximately 103% beginning in 2003. 38 The Company has an unused $550 million bank credit agreement that extends until May 1, 1998. This agreement contains restrictive covenants and requires commitment fees in accordance with standard banking practice. Maturities of long-term debt for the next five years are $16.1 million in 1995, $101.8 million in 1996, $15.9 million in 1997, $7.3 million in 1998 and $8.5 million in 1999. Property, plant and equipment carried at $98.5 million is pledged as collateral under the above debt (principally capital leases). The Company has guaranteed obligations of certain affiliated operations and others totaling approximately $43.8 million at December 31, 1994. In addition, the Company has a 50% interest in a partnership with Scott Paper Company which has borrowed $300 million under a loan agreement with The Sumitomo Bank, Limited, New York Branch, which matures in 1998. The loan, one-half of which has been guaranteed by the Company, may be prepaid at any time either in cash or by delivery of notes receivable from Georgia-Pacific Corporation held by the partnership as part of the consideration from the 1988 sale of Brunswick Pulp and Paper Company, a former affiliate. It is not practicable to estimate the fair value of the above guarantees, however, the Company does not expect to incur losses as a result of these guarantees. G - Financial Instruments The Company uses various derivative financial instruments as part of an overall strategy to manage the Company's exposure to market risks associated with interest rate and foreign currency exchange rate fluctuations. The Company uses foreign currency forward contracts to manage the foreign currency exchange rate risks primarily associated with its international operations. The Company is exposed to interest rate risks on its debt instruments, including the reset of interest rates on variable rate debt, and utilizes interest rate swap and cap agreements to diversify its portfolio. The Company does not hold or issue derivative financial instruments for trading purposes. The risk of loss to the Company in the event of nonperformance by any counterparty under the derivative financial instrument agreements is not significant. All counterparties are rated A or higher by Moody's and Standard and Poor's with the majority of the contracts executed with counterparties rated AA or higher by both agencies. Although the derivative financial instruments expose the Company to market risk, fluctuations in the value of the derivatives are mitigated by expected offsetting fluctuations in the matched instruments. As part of an overall strategy to maintain an acceptable level of exposure to the risk of interest rate fluctuation, the Company has developed a targeted mix of fixed-rate and cap-protected debt versus variable-rate debt. To efficiently manage this mix, the Company utilizes interest rate swap, cap and option agreements to effectively convert the debt portfolio into an acceptable fixed- rate, capped rate and variable-rate mix. 39 Under interest rate swap agreements, the Company agrees with other parties to exchange, at specified intervals, the difference between fixed-rate and variable-rate interest amounts calculated by reference to an agreed-upon notional principal amount. The fair value of the interest rate swap agreements is estimated using quotes from brokers and represents the cash requirement if the existing agreements had been settled at year end. Selected information related to the Company's interest rate swap agreements is as follows: (All dollar amounts in millions)
December 31 1994 1993 - ------------------------------ ------ ------ Notional amount $130.0 $375.0 ====== ====== Fair value $(23.0) $ (.7) Carrying amount (12.2) 1.7 ------ ------ Net unrecognized gain (loss) $(10.8) $ (2.4) ====== ======
The Company utilizes interest rate cap agreements to reduce the impact of increases in interest rates on its floating rate debt. The interest rate cap agreements require premium payments to counterparties based upon a notional principal amount. Interest rate cap agreements entitle the Company to receive from the counterparties the amounts, if any, by which the selected market interest rates exceed the strike rates stated in the agreements. The fair value of the interest rate cap agreements is estimated by obtaining quotes from brokers and represents the cash requirement if the existing contracts had been settled at year end. Selected information related to the Company's interest rate cap agreements is as follows: (All dollar amounts in millions)
December 31 1994 1993 - ------------------------------ ------ ------ Notional amount $250.0 $400.0 ====== ====== Fair value $ 1.7 $ 1.2 Carrying amount 1.7 5.3 ------ ------ Net unrecognized gain (loss) $ - $ (4.1) ====== ======
The Company has no written interest rate options outstanding at December 31, 1994. For written options outstanding at December 31, 1993, the Company received a premium at the outset and then bore the market risk, beyond the premium received, of an unfavorable change in the value of the financial instruments 40 underlying the options. Written options were used to increase the Company's exposure to fixed- or variable-rate debt, within defined limitations, as part of the Company's overall interest rate risk management strategy. Included in written options were options which would have allowed counterparties to enter into interest rate swap agreements at terms unfavorable to the Company. There were $175.0 million notional amount of written options outstanding at December 31, 1993, with a fair value and carrying amount of $(8.3) million. The Company utilizes foreign currency forward contracts to reduce exposure to exchange rate risks primarily associated with transactions in the regular course of the Company's international operations. The forward contracts establish the exchange rates at which the Company will purchase or sell the contracted amount of local currencies for specified foreign currencies at a future date. The Company utilizes forward contracts which are short-term in duration (generally one month) and receives or pays the difference between the contracted forward rate and the exchange rate at the settlement date. The major currency exposures hedged by the Company include the German mark, Canadian dollar, Dutch guilder, French franc and British pound. The contract amount of foreign currency forwards at December 31, 1994 and 1993, is $133.2 million and $114.4 million, respectively. The carrying amount and fair value of these contracts are not significant. Foreign currency options were used by the Company as part of an overall strategy to collar the Company's exposure to specific foreign currency exchange rate fluctuations. The Company has no purchased or written foreign currency options outstanding at December 31, 1994. At December 31, 1993, the notional amounts of purchased and written foreign currency options were $56.5 million and $36.2 million, respectively. The fair values for the purchased and written foreign currency options at December 31, 1993 were an unrealized gain of $2.5 million and an unrealized loss of $(.2) million, respectively. No carrying amounts were recorded for these options. The fair value of the Company's long-term debt is estimated based on quoted market prices for the same or similar issues or on current rates offered to the Company for debt of the same remaining maturities. The fair value of long-term debt, excluding capital leases, was $782.0 million and $1,253.8 million at December 31, 1994 and 1993, respectively, and the related carrying amounts were $809.6 million and $1,210.0 million, respectively. At December 31, 1994, the Company held short-term investments which are included in cash and cash equivalents and restricted cash. The carrying amount of these short-term investments is a reasonable estimate of fair value. 41 H - Shareowners' Equity The Company has authorized 300 million no par common shares. There were 58,649,495 and 59,184,894 common shares outstanding at December 31, 1994 and 1993, respectively. In 1994, the Board of Directors authorized the Company to purchase up to $350 million of common shares on the open market, of which $44.4 million of common shares were purchased through December 31, 1994. The Company also has outstanding authorization from the Board of Directors to purchase up to an additional 1,594,708 common shares for corporate purposes. A total of 6,334,852 and 5,405,292 common shares were held in treasury at December 31, 1994 and 1993, respectively. Each outstanding common share presently has one right attached which trades with the common share. Generally, the rights become exercisable and trade separately ten days after a third party acquires 20% or more of the common shares or commences a tender offer for a specified percentage of the common shares. In addition, the rights become exercisable if any party becomes the beneficial owner of 10% or more of the outstanding common shares and is determined by the Board of Directors to be an adverse party. Upon the occurrence of certain additional triggering events specified in the Rights Agreement, each right would entitle its holder (other than, in certain instances, the holder of 20% or more of the common shares) to purchase common shares of the Company (or, in some cases, a potential acquiring company) or other property having a value of $180 for $90, the initial exercise price. The rights expire in 1996 and are presently redeemable at $.025 per right. At December 31, 1994, there were 73,376,392 common shares reserved for issuance under this plan. The Board of Directors has approved termination benefits for certain key executives and a severance plan for all other salaried employees and established a Benefit Trust in connection with the Company's unfunded supplemental retirement plan, deferred compensation plan, directors retirement plan and excess benefits plan to preserve the benefits earned thereunder in the event of a change in control of the Company. A Restricted Stock Plan provides for the issuance of restricted common shares to certain selected employees and to directors who are not officers or employees of the Company. As of December 31, 1994, 41,358 common shares are issued and outstanding under the plan. There were 413,069 common shares reserved for issuance under this plan at December 31, 1994. The Company has preferred shares authorized but unissued as follows: 61,500 undesignated cumulative preferred, par value $100; 20,000,000 undesignated voting cumulative preferred, without par value; 20,000,000 cumulative preferred, without par value; and 295,540 cumulative second preferred, par value $50. At December 31, 1994, undistributed net earnings of investees and partially- owned foreign affiliates of $96.3 million are included in retained earnings. At December 31, 1994, there is $1,311.6 million available for common dividends which represents the maximum amount of additional indebtedness that can be incurred solely to pay common dividends while remaining in compliance with certain debt covenants. 42 I - Stock Options and Rights Officers and key employees have been granted stock options under various plans. Options as to 1,256,818 shares are accompanied by limited rights which may be exercised in lieu of the option under certain circumstances. The exercise price of all options equals the market price of the Company's stock on the date of the grant. The options and rights have a maximum term of ten years and vest after one year. There are 5,158,443 common shares reserved for issuance under these plans. The following summarizes the Company's stock option plans and the status of the plans:
Shares Option Price - ------------------------------------ ---------- -------------- Outstanding as of December 31, 1991 2,557,780 $ 9.25 -$46.50 Granted 696,050 36.63 Exercised (393,720) 9.25 - 35.00 Canceled (97,725) 23.94 - 41.50 --------- -------------- Outstanding as of December 31, 1992 2,762,385 16.94 - 46.50 Granted 721,305 41.63 - 43.56 Exercised (459,412) 16.94 - 41.50 Canceled (33,075) 26.63 - 43.50 --------- -------------- Outstanding as of December 31, 1993 2,991,203 16.94 - 46.50 Granted 935,075 44.00 - 49.69 Exercised (377,918) 16.94 - 43.50 Canceled (32,487) 36.63 - 44.69 --------- -------------- Outstanding as of December 31, 1994 3,515,873 $21.75 -$49.69 ========= ============== Exercisable as of December 31, 1994 2,607,935 $21.75 -$46.50 ========= ==============
J - Comprehensive Performance Improvement Program In 1992, the Company recorded a $95.0 million provision in connection with a comprehensive performance improvement program, of which $85.8 million is included primarily in selling, administrative and research expenses and $9.2 million is included in discontinued operations. The provision was principally comprised of employee severance and related benefits. The Company expended $24.0 million in 1992, $58.0 million in 1993, and the remainder in 1994. 43 K - Other Revenues (Expenses) - Net (All dollar amounts in millions)
Year Ended December 31 1994 1993 1992 - ------------------------------------------------ ------- ----- ------- Investment income $ 6.5 $ 1.8 $ 1.5 Provision for (loss) on sale of facility (60.0) (Loss) on sale of subsidiary (22.5) (Loss) on interest rate option transactions (12.1) Other 10.5 7.2 19.5 ------ ----- ------ $(55.1) $ 9.0 $ (1.5) ====== ===== ======
In 1994, the Company recorded a charge to earnings to reflect the estimated loss on sale of its Kingsport, Tennessee, facility. The Company incurred a loss in 1994 on derivatives used to manage the Company's exposure to interest rate risks, including the termination of certain leveraged interest rate options entered into in conjunction with swap transactions. Results of operations of the subsidiary sold in 1992 were not material. L - Income Taxes Effective January 1, 1992, the Company adopted Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" and recognized a cumulative effect to that date of the change of $34.0 million ($.58 per share). The effect of adopting Statement No. 109 for the year ended December 31, 1992 was not material. 44 The principal current and non-current deferred tax assets and (liabilities) are as follows: (All dollar amounts in millions)
December 31 1994 1993 - -------------------------------------------------- -------- -------- Deferred tax liabilities: Accelerated depreciation for tax purposes $(333.6) $(342.2) Nontaxable pension asset (58.7) (50.7) Deferred installment gain (47.5) (47.6) Other (89.6) (68.9) ------- ------- (529.4) (509.4) ------- ------- Deferred tax assets: Alternative minimum tax carryforward 73.6 Compensation and fringe benefits accruals 48.5 41.2 Postretirement benefit accrual 42.0 39.9 Loss provisions and other expenses not currently deductible 74.7 39.6 Other 35.3 47.9 ------- ------- 200.5 242.2 ------- ------- Net deferred liability $(328.9) $(267.2) ======= ======= Included in the balance sheets: Current assets - deferred tax asset $ 64.4 $ 43.5 Deferred items - income tax liability (393.3) (310.7) ------- ------- Net deferred liability $(328.9) $(267.2) ======= =======
45 The significant components of income tax expense are as follows: (All dollar amounts in millions)
Year Ended December 31 1994 1993 1992 - --------------------------------------- -------- ------- ------- Currently payable: Federal $ 358.0 $ 46.1 $ 12.9 State and local 17.0 3.3 2.9 Foreign 5.2 3.2 3.3 ------- ------ ------ 380.2 52.6 19.1 Change in deferred income taxes 61.7 30.6 9.1 ------- ------ ------ 441.9 83.2 28.2 Allocation to partnership earnings (5.9) (5.1) (4.3) Allocation to discontinued operations (420.3) (20.4) (15.8) Allocation to extraordinary item 6.9 ------- ------ ------ $ 22.6 $ 57.7 $ 8.1 ======= ====== ======
The following table summarizes the major differences between the actual income tax provision attributable to continuing operations and taxes computed at the federal statutory rates: (All dollar amounts in millions)
Year Ended December 31 1994 1993 1992 - ---------------------------------------------- -------- ------ ------ Taxes computed at statutory rate of 35% (34% for 1992) $18.4 $47.2 $ 5.4 State and local income taxes, net of federal benefit .2 1.1 (4.4) Impact of loss on sale of subsidiary 2.9 Effect of increase in federal income tax rate as of January 1, 1993 7.3 Impact of additional taxes related to foreign operations 3.8 1.0 4.8 Other .2 1.1 (.6) ----- ----- ----- Income taxes $22.6 $57.7 $ 8.1 ===== ===== ===== Effective tax rate 43.1% 42.7% 51.3% ===== ===== =====
At December 31, 1994, no domestic income taxes have been provided on Mead's share of the undistributed net earnings of corporate investees and overseas operations. Those earnings totaled $200.5 million, including foreign currency translation adjustments. The aggregate amount of unrecognized deferred tax liability is approximately $10.0 million at December 31, 1994. 46 As of December 31, 1994, the Board of Directors has restricted cash balances of $331.0 million, included in other current assets, for use in the payment of current tax liabilities related to the gain on the sale of the Electronic Publishing segment and other matters. M - Discontinued Operations Discontinued operations consist of the following: (All dollar amounts in millions)
Year Ended December 31 1994 1993 1992 - ---------------------------------------- ------ ------ ------ Earnings from operations of Electronic Publishing segment, net of income taxes of $27.8, $20.4 and $15.8, respectively $ 37.9 $28.4 $23.9 Gain on sale of Electronic Publishing segment, net of income tax of $420.2 628.8 Provision for loss in Insurance operations, net of income tax benefit of $18.2 (33.8) Provision for losses in Industrial Manufacturing segment, net of income tax benefit of $9.5 (15.5) ------ ------ ------ Discontinued operations $617.4 $28.4 $23.9 ====== ====== ======
In December 1994, the Company sold its Electronic Publishing segment (Mead Data Central) for $1.5 billion in cash. The financial statements and notes have been reclassified for all periods presented to reflect this segment as a discontinued operation. Revenues of the Electronic Publishing segment were $565.2 million for the period January 1, 1994 through November 30, 1994, and $551.3 million and $494.8 million for the years ended December 31, 1993 and 1992, respectively. In 1986, the Company adopted a plan to discontinue the insurance business which had been conducted through its wholly-owned insurance subsidiaries and wrote off its investment. These subsidiaries were put in a "runoff" position whereby they ceased underwriting activities but continued to settle claims. The remaining unsettled insurance claims are long term in nature. During the fourth quarter of 1994, the Company revised its runoff strategy in view of the long-term nature of the payout for claim settlements and sold one subsidiary and settled a significant portion of the outstanding claims liability. The revised strategy includes the disposition of the remaining insurance operations in the near term. As a result, an additional provision for loss on the disposition of the remaining insurance operations has been provided in the statement of earnings. The net liabilities of the insurance operations at December 31, 1994, include total assets of $92.9 million and claims and other reserves of $143.3 million. 47 The provision for losses in the previously discontinued Industrial Manufacturing segment is a result of environmental liabilities. Late in 1994, the U.S. Court of Appeals for the Third Circuit reversed the opinion of a District Court which had found the Company not responsible to the current owners for environmental liabilities at a former plant. At another former plant, the Company was named, in the fourth quarter, a potentially responsible party with regard to alleged contamination of a nearby creek. As a result of these two factors, an additional provision for losses for these estimated liabilities has been provided in the statement of earnings. In 1990, the Board of Directors approved a plan to curtail further development of the Company's imaging products. The remaining assets and liabilities of these operations are not material. 48 N - Pension Plans The Company has pension plans that cover substantially all employees. Pension benefits for bargaining employees are primarily based upon years of credited service. Benefits for salaried and other non-bargaining employees are based upon years of service and the employee's average final earnings. Mead's funding policy is to contribute amounts to the plans sufficient to meet or exceed the minimum requirements of the Employee Retirement Income Security Act. Summary information on the Company's funded plans is as follows: (All dollar amounts in millions)
December 31 1994 1993 - --------------------------------------------------- -------- -------- Financial status of plans: Plan assets at fair value (primarily common stocks, fixed income securities and real estate) $ 695.5 $ 780.1 Actuarial present value of accumulated benefit obligation: Vested (468.6) (543.3) Non-vested (40.2) (46.1) Estimated effect of future salary increases at 1% over expected inflation (47.2) (66.4) ------- ------- Projected benefit obligation (556.0) (655.8) ------- ------- Plan assets in excess of projected benefit obligation 139.5 124.3 Reconciliation of financial status of plans to amounts recorded in Mead's balance sheets: Unamortized plan assets in excess of plan liabilities (overfunding) at January 1, 1986 - to be recognized as a reduction of future years' pension expense (57.1) (69.8) Unrecorded effect of net loss arising from differences between actuarial assumptions used to determine periodic pension expense and actual experience 58.3 76.7 Unamortized prior service cost 12.7 10.2 ------- ------- Pension asset recorded in the balance sheets $ 153.4 $ 141.4 ======= ======= Benefit obligation discount rate 8.5% 7.5% ======= =======
The projected benefit obligation for the Company's two unfunded plans was $16.8 million and $20.4 million at December 31, 1994 and 1993, respectively, of which $13.1 million and $15.6 million represent the accumulated benefit obligation. Of the projected benefit obligation, $9.2 million and $14.2 million at December 31, 1994 and 1993, respectively, is subject to later amortization. Unfunded 49 accrued pension cost is $7.6 million and $6.2 million at December 31, 1994 and 1993, respectively. The components of net pension (income) expense for all plans are as follows: (All dollar amounts in millions)
Year Ended December 31 1994 1993 1992 - -------------------------------------------- ------- -------- ------- Service cost, benefits earned during the year $ 22.7 $ 19.8 $ 20.1 Interest cost on projected benefit obligation 48.7 46.8 43.5 Actual return on plan assets (10.0) (103.8) (39.8) Net amortization and deferral (52.0) 23.9 (42.6) ------ ------- ------ Net pension (income) expense 9.4 (13.3) (18.8) Less - net pension (income) expense allocated to discontinued operations 3.9 3.2 3.4 ------ ------- ------ Net pension (income) expense - continuing operations $ 5.5 $ (16.5) $(22.2) ====== ======= ======
Included in net pension (income) expense for 1994 is a charge of $11.5 million, recorded in accordance with SFAS No. 88, as a result of significant settlements of pension liabilities. The expected long-term rate of return on plan assets used in determining net pension income was 9.5% in 1994 and 10% in 1993 and 1992. The net impact of the change in the long-term rate of return was to increase net pension expense by approximately $4.0 million in 1994. The Company's pension plans require the allocation of excess plan assets to plan members if the plans are terminated, merged or consolidated following a change in control (as defined) of the Company opposed by the Board of Directors of the Company. Amendment of these provisions after such a change in control would require approval of plan participants. O - Postretirement Benefits Other than Pensions The Company funds certain health care benefit costs principally on a pay-as-you- go basis, with the retiree paying a portion of the costs. Certain retired employees of businesses acquired by the Company are covered under other health care plans that differ from current plans in coverage, deductibles and retiree contributions. 50 Summary information on the Company's plans is as follows: (All dollar amounts in millions)
December 31 1994 1993 - -------------------------------------------------- -------- -------- Financial status of plans: Accumulated postretirement benefit obligation: Retirees $ (69.2) $ (69.2) Fully eligible, active plan participants (30.0) (25.1) Other active plan participants (41.4) (41.1) ------- ------- (140.6) (135.4) Less plan assets at fair value 8.0 8.3 ------- ------- Accumulated postretirement benefit obligation in excess of plan assets (132.6) (127.1) Reconciliation of financial status of plans to amounts recorded in Mead's balance sheets - Unrecorded effect of net loss arising from differences between actuarial assumptions used to determine periodic postretirement benefit expense and actual experience 17.9 18.7 ------- ------- Accrued postretirement benefit cost $(114.7) $(108.4) ======= ======= Benefit obligation discount rate 8.5% 7.5% ======= =======
51 The components of net periodic postretirement benefit cost are as follows: (All dollar amounts in millions)
Year Ended December 31 1994 1993 1992 - ------------------------------------------------ ------ ------ ------ Service cost, benefits attributed to employee service during the year $ 3.9 $ 3.1 $ 2.4 Interest cost on accumulated postretirement benefit obligation 11.2 9.5 9.4 Actual return on plan assets (.7) (1.1) (1.5) Net amortization and deferral 1.7 .1 .4 ----- ----- ----- Net periodic postretirement benefit cost 16.1 11.6 10.7 Less - net periodic postretirement benefit cost allocated to discontinued operations .8 .7 .7 ----- ----- ----- Net periodic postretirement benefit cost - continuing operations $15.3 $10.9 $10.0 ===== ===== =====
The expected long-term rate of return on plan assets used in determining the net periodic postretirement benefit cost was 8% in each year. The assumed health care cost trend rate used in measuring the accumulated postretirement benefit obligation was 13% in 1994 and 14% in 1993, declining by 1% per year to an ultimate rate of 6%. If the health care cost trend rate assumptions were increased by 1%, the accumulated postretirement benefit obligation as of December 31, 1994, would be increased by 11%. The effect of this change on the sum of the service cost and interest cost components of net periodic postretirement benefit cost for 1994 would be an increase of 10%. 52 P - Leases At December 31, 1994, future minimum annual rental commitments under noncancelable lease obligations are as follows: (All dollar amounts in millions)
Capital Operating Leases Leases -------- --------- Year Ending December 31: 1995 $ 8.1 $ 27.2 1996 7.9 18.9 1997 7.8 14.2 1998 7.7 11.7 1999 7.8 8.6 Later years through 2026 228.0 35.3 ------ ------ Total minimum lease payments 267.3 $115.9 ====== Less amount representing interest and other (118.4) ------ Present value of net minimum lease payments 148.9 Less current maturities of capital lease obligations (.8) ------ Capital lease obligations $148.1 ======
Capital leases are for manufacturing facilities, equipment and warehouse and office space. Capital lease property included in property, plant and equipment is as follows: (All dollar amounts in millions)
December 31 1994 1993 - ------------------------------ ------ ------ Land and buildings $ 34.8 $ 34.8 Machinery and equipment 140.7 141.9 ------ ------ 175.5 176.7 Less accumulated amortization (84.6) (79.0) ------ ------ $ 90.9 $ 97.7 ====== ======
The majority of rent expense is for operating leases having terms of up to 25 years which are for office, warehouse and manufacturing facilities and delivery, manufacturing and computer equipment. A number of these leases have renewal 53 options. Rent expense was $52.8 million, $48.5 million and $51.9 million in 1994, 1993 and 1992, respectively. The Company has additional subleases of property recorded under capital leases. Total additional rentals to be received in future years are approximately $16.8 million at December 31, 1994. Q - Litigation and Other Proceedings The Company is involved in various litigation generally incidental to normal operations, as well as proceedings regarding equal employment opportunity matters, among others. The Company has also been identified as a potentially responsible party in 31 environmental proceedings. It is not possible to determine the ultimate liability, if any, in all these matters. The Company has established reserves of approximately $40 million relating to environmental matters, including those related to discontinued operations, which it believes are probable and reasonably estimable. Expenditures in 1995 relating to these environmental liabilities are expected to be less than $5 million. In the opinion of management, after consultation with legal counsel and after considering established reserves, the resolution of pending litigation and proceedings is not expected to have a material effect on the financial condition or results of operations of the Company. R - Additional Information on Cash Flows (All dollar amounts in millions)
Year Ended December 31 1994 1993 1992 - ---------------------------------------------- ------- ------- ------- Cash paid during the year for: Interest $98.4 $87.8 $101.6 Less amount capitalized (5.7) (2.6) (2.3) ----- ----- ------ Interest, net of amount capitalized 92.7 85.2 99.3 Income taxes 59.5 33.6 39.5
S - Reclassifications Certain reclassifications have been made in the 1993 and 1992 financial statements to conform to the classifications used in 1994. These reclassifications had no impact on net earnings or shareowners' equity as previously reported. 54 T - Industry Segments The company operates in a number of industry segments. The PAPER segment includes the manufacture and sale of printing, writing, carbonless copy, publishing and specialty paper and pulp. The PACKAGING AND PAPERBOARD segment includes the manufacture and marketing of beverage and food packaging materials, corrugated shipping containers and paperboard. The DISTRIBUTION AND SCHOOL AND OFFICE PRODUCTS segment includes the distribution of a full line of paper products and the manufacture and distribution of school and office products. (All dollar amounts in millions)
Sales (1) ----------------------------------------------------------- Year Ended December 31 1994 1993 1992 - ---------------------- ------------------- ------------------ ----------------- Unaffil- Inter- Unaffil- Inter- Unaffil- Inter- iated segment iated segment iated segment -------- ------- -------- ------- -------- ------- Industry segments: Paper $1,156.8 $ 206.4 $1,111.4 $ 169.0 $1,090.6 $ 162.6 Packaging and Paperboard 1,254.5 8.3 1,156.9 9.2 1,163.2 8.3 Distribution and School and Office Products 2,146.2 10.3 1,970.7 9.1 1,954.6 10.0 Intersegment elimination (225.0) (187.3) (180.9) -------- ------- ------- Total $4,557.5 $4,239.0 $4,208.4 ======== ======== ========
Earnings from Continuing Operations Depreciation, Before Income Taxes (2)(3)(4) Depletion and Amortization ------------------------------ -------------------------- Year Ended December 31 1994 1993 1992 1994 1993 1992 - ---------------------- -------- -------- -------- ------- -------- ------- Industry segments: Paper $ 72.0 $ 101.9 $ 63.3 $ 69.6 $ 94.2 $ 88.1 Packaging and Paperboard 123.8 132.8 117.1 131.9 134.4 125.9 Distribution and School and Office Products 20.5 38.4 29.3 12.9 12.0 13.6 Corporate and other (163.9) (138.1) (193.9) 11.1 13.1 14.2 -------- -------- -------- ------- -------- ------- Total $ 52.4 $ 135.0 $ 15.8 $ 225.5 $ 253.7 $ 241.8 ======== ======== ======== ======= ======== =======
Capital Expenditures Identifiable Assets (5) (Including Capital Leases) ------------------------------- ---------------------------- Year Ended December 31 1994 1993 1992 1994 1993 1992 - ---------------------- -------- -------- -------- ------- -------- -------- Industry segments: Paper $1,432.1 $1,345.7 $1,295.2 $ 175.7 $ 158.6 $ 92.2 Packaging and Paperboard 1,457.9 1,405.7 1,379.9 111.8 114.6 102.5 Distribution and School and Office Products 541.9 510.2 482.8 8.0 22.6 13.0 Intersegment elimination (29.5) (17.8) (17.3) Corporate and other 1,460.2 829.5 793.8 20.1 10.3 10.3 -------- -------- -------- ------ ------ ------- Total $4,862.6 $4,073.3 $3,934.4 $315.6 $306.1 $ 218.0 ======== ======== ======== ====== ====== =======
55 (1) Intersegment sales are made at substantially the same prices and on the same terms as to unaffiliated customers. (2) The earnings from continuing operations before income taxes includes the effect of the change in the depreciable lives of certain paper mill equipment (Paper - $28.7, Packaging and Paperboard - $14.0) in 1994. (3) Earnings from continuing operations before income taxes in 1994 include the provision for loss on the sale of a facility, costs of severance and closing costs for certain warehouses and office facilities and costs of pension settlements. The effect of the above charges by segment is Paper - $65.9, Packaging and Paperboard - $6.9, Distribution and School and Office Products -$17.3 and Corporate and other - $2.7. Included in 1992 are costs of a performance improvement program and a loss on the sale of a subsidiary. The effect of these charges by segment is Paper - $22.3, Packaging and Paperboard -$23.8, Distribution and School and Office Products - $16.3 and Corporate and other - $45.9. (4) Earnings from continuing operations before income taxes for "Corporate and other" includes the following:
Year Ended December 31 1994 1993 1992 - ---------------------- -------- -------- -------- Other revenues: (Loss) on sale of subsidiary $ $ $ (22.5) Other (2.5) 3.7 7.7 Interest expense (101.1) (94.6) (99.5) Comprehensive performance improvement program (23.4) Other expenses (60.3) (47.2) (56.2) ------- ------- ------- $(163.9) $(138.1) $(193.9) ======= ======= =======
(5) The assets of "Corporate and other" consist primarily of cash and cash equivalents, property, plant and equipment, investments in investees and net assets of discontinued operations. 56 U - Fourth Quarter Operations (Unaudited) During the fourth quarter of 1994, the Company recorded several significant transactions, including the sale of the Electronic Publishing segment, a charge for additional losses in its discontinued insurance operations and a provision for environmental remediation costs at two sites formerly part of Mead's previously discontinued Industrial Manufacturing segment (Note M). The Company recorded a charge to earnings of $60.0 million to reflect the estimated loss on sale of its Kingsport, Tennessee, facility. The Company announced its intent to sell the facility in October 1994. In addition, the Company recorded charges to earnings of $21.3 million, principally for severance and closing costs for certain warehouses and office facilities at its Coated Board and Zellerbach operations; a charge for settlements of pension liabilities of $11.5 million and an extraordinary loss on the extinguishment of debt of $11.3 million (after tax). Reflected in earnings of equity investees is $9.1 million (after-tax) of refunds from duties levied on lumber exported from Canada by Northwood Forest Industries Ltd. in prior years. 57 Selected Quarterly Financial Data (unaudited) (All dollar amounts in millions, except per share data)
1st Qtr. 2nd Qtr. 3rd Qtr. 4th Qtr. Year -------- ---------- --------- --------- -------- Net sales: 1994 $1,007.6 $1,165.9 $1,208.2 $1,175.8 $4,557.5 1993 1,005.5 1,130.8 1,120.9 981.8 4,239.0 1992 967.4 1,105.8 1,128.7 1,006.5 4,208.4 Gross profit: 1994 162.5 204.3 201.6 183.3 751.7 1993 164.4 196.7 175.2 152.0 688.3 1992 145.3 173.8 184.4 152.3 655.8 Earnings (loss) from continuing operations: 1994 15.9 44.7 41.6 (12.6) 89.6 1993 22.3 42.3 19.1 12.0 95.7 1992 10.4 (36.5) 28.5 11.3 13.7 Earnings (loss) before extraordinary item and cumulative effect of change in accounting principle: 1994 27.6 52.4 53.2 573.8 707.0 1993 25.6 47.2 30.0 21.3 124.1 1992 17.7 (34.7) 37.5 17.1 37.6 Net earnings (loss): 1994 27.6 52.4 53.2 562.5 695.7 1993 25.6 47.2 30.0 21.3 124.1 1992 51.7 (34.7) 37.5 17.1 71.6 Per common and common equivalent share:(1) Earnings (loss) from continuing operations: 1994 .27 .74 .68 (.18) 1.52 1993 .38 .70 .32 .20 1.61 1992 .19 (.62) .48 .19 .23 Earnings (loss) before extraordinary item and cumulative effect of change in accounting principle: 1994 .46 .86 .87 9.18 11.39 1993 .43 .78 .50 .36 2.08 1992 .31 (.59) .63 .29 .63 Net earnings (loss): 1994 .46 .86 .87 9.00 (2) 11.21 1993 .43 .78 .50 (3) .36 2.08 1992 .86 (.59) (4) .63 .29 1.21 Cash dividends per common share: 1994 .25 .25 .25 .25 1.00 1993 .25 .25 .25 .25 1.00 1992 .25 .25 .25 .25 1.00
(1) The number of shares used in the calculation of per share data varies from period to period since stock options and convertible debentures are included in the calculations only for the periods in which they are dilutive; therefore, the sum of individual quarterly earnings per share may not equal the annual computation. (2) Includes a charge of $.92 per share related to asset impairments, restructuring and related severance charges and pension settlement charges; a $.15 per share gain on refund of countervailing duties; a gain of $10.04 per share on sale of Mead Data Central division; a $.79 per share charge related to discontinued insurance operations and environmental matters; and, a charge of $.18 per share for extinguishment of debt. (3) Includes $.12 per share charge related to the revaluation of deferred income taxes at January 1, 1993, resulting from 1993 income tax legislation. (4) Includes a charge of $.90 per share for other expenses related to a comprehensive performance improvement program and a charge of $.30 per share related to the sale of a subsidiary. 58 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. Not applicable. PART III Item 10. Directors and Executive Officers of the Registrant Information pursuant to this item is incorporated herein by reference to pages 3 through 5, 22 and 23 of the Company's Proxy Statement, definitive copies of which were filed with the Securities and Exchange Commission ("Commission") on March 16, 1995. Information concerning executive officers is also included in Part I of this report following Item 4. Item 11. Executive Compensation Information pursuant to this item is incorporated herein by reference to pages 9 through 23 of the Company's Proxy Statement (excluding the "Report of Compensation Committee on Executive Compensation" on pages 10 through 14 and the "Performance Graph" on page 20), definitive copies of which were filed with the Commission on March 16, 1995. Item 12. Security Ownership of Certain Beneficial Owners and Management Information pursuant to this item is incorporated herein by reference to pages 9 and 10 of the Company's Proxy Statement, definitive copies of which were filed with the Commission on March 16, 1995. Item 13. Certain Relationships and Related Transactions Information pursuant to this item is incorporated herein by reference to pages 22 and 23 of the Company's Proxy Statement, definitive copies of which were filed with the Commission on March 16, 1995. PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K (a) 1. Financial Statements The financial statements of The Mead Corporation and consolidated subsidiaries are included in Part II, Item 8. 59 Investee The consolidated financial statements and financial statement schedules of Northwood Forest Industries Ltd. are included herein. This investee meets the conditions for filing separate financial statements for the year ended December 31, 1994. Financial statement schedules not listed in the following index have either been shown in the related financial statements or notes thereto or are not applicable and have therefore been omitted.
Northwood Forest Industries Ltd.: Page ---- Financial Statements: Auditors' report to the shareholders 71 Consolidated balance sheets 72 Consolidated statements of operations and retained earnings 73 Consolidated statements of changes in financial position 74 Notes to consolidated financial statements 75-85
2. Financial Statement Schedules
Page ---- Schedule II--Valuation and Qualified Accounts 69
The information required to be submitted in Schedules I and III through V for The Mead Corporation and consolidated subsidiaries has either been shown in the financial statements or notes thereto, or is not applicable or required under rules of Regulation S-X, and, therefore, those schedules have been omitted. 3. Exhibits (3) Articles of Incorporation and Bylaws: (i) Amended Articles of Incorporation of the Registrant adopted May 28, 1987 (incorporated by reference to Exhibit (3)(i) of Registrant's Annual Report on Form 1O-K for the year ended December 31, 1987). (ii) Regulations of the Registrant, as amended April 23, 1987 (incorporated by reference to Exhibit (3)(ii) of Registrant's Annual Report on Form 1O-K for the year ended December 31, 1987). (4) Instruments defining the rights of security holders, including indentures: (i) Credit Agreement dated as of November 15, 1989 with Bankers Trust Company, The First National Bank of Chicago, Morgan Guaranty Trust Company of New York and fifteen other banks (incorporated by 60 reference to Exhibit (4)(i) of Registrant's Annual Report on Form 10-K for the year ended December 31, 1989); Amendment No. 1 thereto dated as of November 30, 1991 (incorporated by reference to Exhibit (4)(i) to Registrant's Annual Report on Form 10-K for the year ended December 31, 1991), and Amendment No. 2 thereto dated as of May 1, 1994 (incorporated by reference to Exhibit (10)(1) to Registrant's Quarterly Report on Form 10-Q for the Quarterly Period ended July 3, 1994). (ii) Indenture dated as of July 15, 1982 between the Registrant and Bankers Trust Company, as Trustee, First Supplemental Indenture dated as of March 1, 1987 (incorporated by reference to Exhibit (4)(iv) of Registrant's Annual Report on Form 1O-K for the year ended December 31, 1987), Second Supplemental Indenture dated as of October 15, 1989 (incorporated by reference to Exhibit (4) to Registrant's Current Report on Form 8-K dated October 11, 1989) and Third Supplemental Indenture dated as of November 15, 1991 (incorporated by reference to Exhibit (4)(ii) to Registrant's Annual Report on Form 10-K for the year ended December 31, 1991). (iii) Indenture dated as of February 1, 1993 between Registrant and The First National Bank of Chicago, as Trustee (incorporated by reference to Exhibit (4)(iii) to Registrant's Annual Report on Form 10-K for the year ended December 31, 1992). The total amount of securities authorized under other long-term debt instruments does not exceed 10% of the total assets of the Registrant and its subsidiaries on a consolidated basis. A copy of each such instrument will be furnished to the Commission upon request. (10) Material Contracts: (i) Agreement dated as of April 24, 1964 between Northwood Mills Limited, Canamead, Inc., the Registrant and Noranda Mines, Limited and Supplemental Agreements relating thereto dated as of July 2, 1964, April 5, 1965, March 15, 1966, February 1, 1967, December 15, 1970 and April 1, 1974 (incorporated by reference to Exhibit (10)(v) of Registrant's Annual Report on Form 1O-K for the year ended December 31, 1980 included in File No. 1-2267 in the Public Reference Room of the Securities and Exchange Commission in Washington, D.C.). (ii) Pulp Purchase Agreement dated as of April 1, 1965 among Northwood Pulp Limited, the Registrant, Northwood Mills Ltd. and Noranda Mines Limited (incorporated by reference to Exhibit (10)(vi) of Registrant's Annual Report on Form 1O-K for the year ended December 31, 1980 included in File No. 1-2267 in the Public Reference Room of the Securities and Exchange Commission in Washington, D.C.). (iii) Rights Agreement dated as of November 1, 1986 between Registrant and The First National Bank of Cincinnati, as Rights Agent, as amended December 29, 1987 and December 9, 1988 (incorporated herein by reference to Registrant's Amendment No. 1 on Form 8, dated 61 November 28, 1986 and Exhibits 28(a) and 28(b) to Registrant's Current Report on Form 8-K dated December 9, 1988). (iv) Amended Board Purchase Agreement dated as of January 4, 1988 among the Registrant, Georgia Kraft Company and Inland Container Corporation (incorporated by reference to Exhibit (1O)(xviii) of Registrant's Annual Report on Form 1O-K for the year ended December 31, 1987). (v) Indemnification Agreement dated as of January 4, 1988 among the Registrant, Mead Coated Board, Inc., Temple-Inland Inc., Inland Container Corporation I, Inland Container Corporation, GK Texas Holding Company and Georgia Kraft Company (incorporated by reference to Exhibit (1O)(xix) of Registrant's Annual Report on Form 1O-K for the year ended December 31, 1987). (vi) Lease Agreement between The Industrial Development Board of the City of Phenix City, Alabama and Mead Coated Board, Inc., dated as of December 1, 1988, as amended (incorporated by reference to Exhibit (10)(xviii) to Registrant's Annual Report on Form 10-K for the year ended December 31, 1989 and Exhibit (10)(xviii) to Registrant's Annual Report on Form 10-K for the year ended December 31, 1991). (vii) Lease Agreement between The Industrial Development Board of the City of Phenix City, Alabama and Mead Coated Board, Inc., dated as of June 1, 1993 (incorporated by reference to Exhibit (10)(3) to Registrant's Quarterly Report on Form 10-Q for the Quarterly Period ended April 3, 1994). (viii) Purchase Agreement dated October 4, 1994 between The Mead Corporation and Reed Elsevier plc. (incorporated by reference to exhibit (10)(1) to the Registrant's Quarterly Report on Form 10- Q filed for the Quarterly Period ended October 2, 1994), as amended (incorporated by reference to Exhibit (2) to the Registrant's Current Report on Form 8-K dated December 2, 1994). The following are compensatory plans and arrangements in which directors or executive officers participate: (ix) 1984 Stock Option Plan of the Registrant, as amended and restated as of January 25, 1990 (incorporated by reference to Exhibit (10)(v) to Registrant's Annual Report on Form 10-K for the year ended December 31, 1989), and Amendment dated January 23, 1992 (incorporated by reference to Exhibit 10(iv) to Registrant's Annual Report on Form 10-K for the year ended December 31, 1991). (x) 1991 Stock Option Plan of the Registrant (incorporated by reference to Exhibit (10)(xxi) to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1990). 62 (xi) Incentive Compensation Election Plan of the Registrant as amended November 17, 1987 (incorporated by reference to Exhibit (10)(viii) to Registrant's Annual Report on Form 10-K for the year ended December 31, 1987), as amended October 29, 1988 (incorporated by reference to Exhibit (10)(vi) to Registrant's Annual Report on Form 10-K for the year ended December 31, 1988). (xii) 1985 Supplement to Registrant's Incentive Compensation Election Plan, as amended November 17, 1987 (incorporated by reference to Exhibit (1O)(xi) to Registrant's Annual Report on Form 10-K for the year ended December 31, 1985 and Exhibit (10)(ix) of Registrant's Annual Report on Form 10-K for the year ended December 31, 1987), and as further amended October 29, 1988 (incorporated by reference to Exhibit (10)(vii) to Registrant's Annual Report on Form 10-K for the year ended December 31, 1988). (xiii) Excess Benefit Plan of the Registrant (1988 Restatement), dated October 29, 1988 (incorporated by reference to Exhibit (10)(vii) to Registrant's Annual Report on Form 10-K for the year ended December 31, 1990). (xiv) Supplemental Executive Retirement Plan (formerly The Mead Management Income Parity Plan) effective January 1, 1985, as amended and restated as of July 1, 1992 (incorporated by reference to Exhibit (10)(xiii) to Registrant's Annual Report on Form 10-K for the year ended December 31, 1992). (xv) Form of Indemnification Agreement between Registrant and each of John C. Bogle, John G. Breen, William E. Hoglund, Barbara C. Jordan, John A. Krol, Steven C. Mason, Charles S. Mechem, Jr., Paul F. Miller, Jr., William S. Shanahan, Thomas B. Stanley, Jr. and Lee J. Styslinger, Jr. (incorporated herein by reference to Exhibit (10)(xiv) of Registrant's Annual Report on Form 10-K for the year ended December 31, 1986). (xvi) Form of Severance Agreement between Registrant and Steven C. Mason (incorporated herein by reference to Exhibit (10)(xvi) of Registrant's Annual Report on Form 10-K for the year ended December 31, 1986 and Exhibit (10)(xii) of Registrant's Annual Report on Form 10-K for the year ended December 31, 1988). (xvii) Form of Severance Agreement between Registrant and each of William R. Graber, Elias M. Karter, Raymond W. Lane, Charles J. Mazza, Wallace 0. Nugent, Thomas E. Palmer, Jerome F. Tatar and other key employees (incorporated by reference to Exhibit (10)(xiii) of Registrant's Annual Report on Form 10-K for the year ended December 31, 1988). (xviii) Benefit Trust Agreement dated January 9, 1987 between Registrant and Society Bank, National Association (incorporated herein by reference to Exhibit (1O)(xviii) to Registrant's Annual Report on Form 1O-K for the year ended December 31, 1986), as amended October 29, 63 1988 (incorporated by reference to Exhibit (10)(xiv) of Registrant's Annual Report on Form 10-K for the year ended December 31, 1988) and January 24, 1991 (incorporated by reference to Exhibit (10)(xiii) to Registrant's Annual Report on Form 10-K for the year ended December 31, 1990). (xix) Restricted Stock Plan effective December 10, 1987, as amended through July 23, 1992 (incorporated by reference to Exhibit (10)(xviii) to Registrant's Annual Report on Form 10-K for the year ended December 31, 1992), as amended through April 28, 1994 (incorporated by reference to Exhibit (10)(2) of Registrant's Quarterly Report on Form 10-Q for the Quarterly Period ended April 3, 1994). (xx) Deferred Compensation Plan for Directors of the Registrant, as amended through October 29, 1988 (incorporated by reference to Exhibit (10)(xix) of Registrant's Annual Report on Form 10-K for the year ended December 31, 1989). (xxi) 1985 Supplement to Registrant's Deferred Compensation Plan for Directors, as amended through October 29, 1988 (incorporated by reference to Exhibit (10)(xx) of Registrant's Annual Report on Form 10-K for the year ended December 31, 1989). (xxii) Directors Retirement Plan, effective October 27, 1990 (incorporated by reference to Exhibit (10)(xx) of Registrant's Annual Report on Form 10-K for the year ended December 31, 1990). (xxiii) Form of Executive Life Insurance Policy for Key Executives (incorporated by reference to Exhibit (10) of Registrant's Quarterly Report on Form 10-Q for the Quarterly Period Ended March 31, 1991). (xxiv) The "Direction 2000" Executive Incentive Plan, dated April 21, 1993 (incorporated by reference to Exhibit 10(i) of Registrant's Quarterly Report on Form 10-Q for the Quarterly Period Ended April 4, 1993), amended for 1994 (incorporated by reference to Exhibit (10)(2) of Registrant's Quarterly Report on Form 10-Q for the Quarterly Period ended July 3, 1994). (xxv) Mead Management Incentive Plan for 1994 (incorporated by reference to Exhibit (10)(i) of Registrant's Quarterly Report on Form 10-Q for the Quarterly Period Ended April 3, 1994). (11) Calculation of Earnings per Share. (12) Ratio of Earnings to Fixed Charges. (21) List of significant subsidiaries of the Registrant. (23) Consent of Independent Auditors. (27) Financial Data Schedule 64 (b) Reports on Form 8-K A Form 8-K was filed on December 14, 1994 reporting under Item 2 Registrant's consummation of the sale of its Mead Data Central division and the related subsidiaries and assets to Reed Elsevier plc. Unaudited pro forma condensed statements of earnings for the three quarters ended October 2, 1994, and the year ended December 31, 1993, were filed. Also filed was an unaudited pro forma condensed balance sheet as of October 2, 1994. 65 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. THE MEAD CORPORATION Date: February 23, 1995 By /s/ Steven C. Mason ---------------------------------- Steven C. Mason Chairman of the Board, President and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. Date: February 23, 1995 By /s/ Steven C. Mason ---------------------------------- Steven C. Mason Director, Chairman of the Board, President and Chief Executive Officer Date: February 23, 1995 By /s/ William R. Graber ---------------------------------- William R. Graber Vice President and Chief Financial Officer (principal financial and accounting officer) Date: February 23, 1995 By /s/ John C. Bogle ---------------------------------- John C. Bogle Director Date: February 23, 1995 By /s/ John G. Breen ---------------------------------- John G. Breen Director 66 Date: February 23, 1995 By /s/ William E. Hoglund ---------------------------------- William E. Hoglund Director Date: February 23, 1995 By /s/ Barbara C. Jordan ---------------------------------- Barbara C. Jordan Director Date: February 23, 1995 By /s/ John A. Krol ---------------------------------- John A. Krol Director Date: February 23, 1995 By /s/ Charles S. Mechem, Jr. ---------------------------------- Charles S. Mechem, Jr. Director Date: February 23, 1995 By /s/ Paul F. Miller, Jr. ---------------------------------- Paul F. Miller, Jr. Director Date: February 23, 1995 By /s/ William S. Shanahan ---------------------------------- William S. Shanahan Director Date: February 23, 1995 By /s/ Thomas B. Stanley, Jr. ---------------------------------- Thomas B. Stanley, Jr. Director Date: February 23, 1995 By /s/ Lee J. Styslinger ---------------------------------- Lee J. Styslinger Director 67 THE MEAD CORPORATION AND CONSOLIDATED SUBSIDIARIES SCHEDULE FURNISHED PURSUANT TO REQUIREMENTS OF FORM 10-K Years Ended December 31, 1994, 1993 and 1992 68 THE MEAD CORPORATION AND CONSOLIDATED SUBSIDIARIES SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS (All dollar amounts in millions)
Column A Column B Column C Column D Column E - ----------------------------- ---------- --------------------- ----------- -------- Additions --------------------- Charged Charged Balance Balance at to to Other at Beginning Costs & Accounts- Deductions- End of Description of Period Expenses Describe Describe Period - ----------------------------- ---------- -------- --------- ----------- -------- Year Ended December 31, 1994: Allowance for doubtful accounts $ 22.5 $ 8.9 $ -0- $ 7.5* $ 23.9 ====== ====== ====== ====== ====== Accumulated amortization of goodwill and other intangibles $ 31.0 $ 3.0 $ -0- $ -0- $ 34.0 ====== ====== ====== ====== ====== Reserve for asset impairment $ -0- $ 60.0 $ -0- $ -0- $ 60.0 ====== ====== ====== ====== ====== Year Ended December 31, 1993: Allowance for doubtful accounts $ 22.6 $ 10.8 $ -0- $ 10.9* $ 22.5 ====== ====== ====== ====== ====== Accumulated amortization of goodwill and other intangibles $ 28.1 $ 2.9 $ -0- $ -0- $ 31.0 ====== ====== ====== ====== ====== Year Ended December 31, 1992: Allowance for doubtful accounts $ 25.9 $ 10.4 $ -0- $ 13.7* $ 22.6 ====== ====== ====== ====== ====== Accumulated amortization of goodwill and other intangibles $ 24.8 $ 3.3 $ -0- $ -0- $ 28.1 ====== ====== ====== ====== ======
*Accounts charged off, net of recoveries. 69 Consolidated Financial Statements of NORTHWOOD FOREST INDUSTRIES LTD. Years Ended December 31, 1994, 1993 and 1992 70 AUDITORS' REPORT TO THE SHAREHOLDERS We have audited the consolidated balance sheets of Northwood Forest Industries Ltd. as at December 31, 1993 and 1994 and the consolidated statements of operations and retained earnings and changes in financial position for each of the years in the three year period ended December 31, 1994. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated 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 an audit to obtain reasonable assurance whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated 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. In our opinion, these consolidated financial statements present fairly, in all material respects, the financial position of the Company as at December 31, 1993 and 1994 and the results of its operations and the changes in its financial position for each of the years in the three year period ended December 31, 1994 in accordance with accounting principles generally accepted in Canada. KPMG PEAT MARWICK THORNE Chartered Accountants Vancouver, Canada January 10, 1995 71 NORTHWOOD FOREST INDUSTRIES LTD. Consolidated Balance Sheets (in thousands of Canadian dollars)
December 31, 1993 and 1994 1994 1993 ------------ ------------ Assets Current assets: Trade accounts receivable from affiliated companies $ 100,746 $ 85,854 Other receivables 48,082 7,891 Inventories (note 2) 150,001 115,357 Prepaid expenses 5,370 6,510 --------- --------- 304,199 215,612 Investments and other assets (note 3) 16,119 11,393 Property, plant, equipment and timber (note 4) 405,949 413,228 --------- --------- $ 726,267 $ 640,233 ========= ========= Liabilities and Shareholders' Equity Current liabilities: Bank indebtedness (note 5) $ 9,953 $ 87,491 Due to affiliated company 45,000 3,000 Accounts payable and accruals 105,653 89,800 Income tax payable 67,383 19,766 Current portion of long-term debt (note 5) 13,857 15,501 --------- --------- 241,846 215,558 Accrued liabilities not due within one year 20,988 16,789 Long-term debt (note 5) 88,625 159,306 Deferred income taxes 59,394 66,240 Shareholders' equity: Share capital (note 6) 22,000 22,000 Retained earnings 293,414 160,340 --------- --------- 315,414 182,340 Commitments and contingencies (notes 5 and 7) $ 726,267 $ 640,233 ========= =========
See accompanying notes to consolidated financial statements 72 NORTHWOOD FOREST INDUSTRIES LTD. Consolidated Statements of Operations and Retained Earnings (in thousands of Canadian dollars)
Years ended December 31, 1992, 1993 and 1994 1994 1993 1992 -------- -------- --------- Revenue: Net sales $831,197 $636,352 $530,147 Cost and expenses: Cost of products sold 593,847 512,970 454,339 Depreciation and amortization 49,236 49,023 49,051 General and administrative 14,875 16,133 14,525 Interest, net (note 8) 12,350 16,940 20,727 -------- -------- -------- 670,308 595,066 538,642 -------- -------- -------- Earnings (loss) before countervailing duty refund and income taxes 160,889 41,286 (8,495) Countervailing duty refund (note 9) 53,964 -------- -------- -------- Earnings before income taxes 214,853 41,286 (8,495) Income taxes (recoverable) (note 10) 81,779 17,880 (2,442) -------- -------- -------- Earnings (loss) for the year 133,074 23,406 (6,053) Retained earnings, beginning of year 160,340 136,934 142,987 -------- -------- -------- Retained earnings, end of year $293,414 $160,340 $136,934 ======== ======== ========
See accompanying notes to consolidated financial statements. 73 NORTHWOOD FOREST INDUSTRIES LTD. Consolidated Statements of Changes in Financial Position (in thousands of Canadian dollars)
Years ended December 31, 1992, 1993 and 1994 1994 1993 1992 --------- --------- --------- Cash provided by (used in): Operations: Earnings (loss) for the year $133,074 $ 23,406 $ (6,053) Items not affecting working capital: Depreciation and amortization 49,236 49,023 49,051 Deferred income taxes (6,846) (7,636) (18,425) Other (589) (79) 1,509 -------- -------- -------- 174,875 64,714 26,082 Changes in non-cash operating working capital (28,341) (32,585) 39,973 Accrued liabilities not due within one year 4,199 (990) 2,227 -------- -------- -------- 150,733 31,139 68,282 Financing: Repayment of long-term debt, net (72,325) (13,883) (13,644) Advances from affiliated company 42,000 (1,000) (1,000) -------- -------- -------- (30,325) (14,883) (14,644) Investments: Additions to property, plant, equipment and timber (38,915) (22,363) (17,704) Proceeds on sale of property, plant, equipment and timber 771 1,103 461 Investments: B.C. Chemicals Ltd. and BC Chemicals Company (3,220) (3,516) (2,877) Other (1,506) (155) 3 -------- -------- -------- (42,870) (24,931) (20,117) -------- -------- -------- Increase (decrease) in cash during the year 77,538 (8,675) 33,521 Bank indebtedness, beginning of year 87,491 78,816 112,337 -------- -------- -------- Bank indebtedness, end of year $ 9,953 $ 87,491 $ 78,816 ======== ======== ========
See accompanying notes to consolidated financial statements. 74 NORTHWOOD FOREST INDUSTRIES LTD. Notes to Consolidated Financial Statements Years ended December 31, 1992, 1993 and 1994 1. Accounting policies: The accompanying consolidated financial statements are prepared on the historical cost basis in accordance with accounting principles generally accepted in Canada. A summary of significant accounting policies of the Company is set out below: (a) Principles of consolidation: The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries, Northwood Pulp and Timber Limited, Northwood Waferboard Limited, Northwood Properties Limited, Rustad Bros. & Co. Ltd., Bond Brothers Sawmill Ltd., Blackwater Construction Co. Ltd. and Gang-Nail Truss (P.G.) Ltd. All material intercompany transactions have been eliminated. (b) Inventories: Logs, seedlings and operating and maintenance supplies are carried at the lower of average cost and replacement cost. Chips, goods in process and finished goods are valued at the lower of average cost and net realizable value. (c) Investments: The Company's 50% investment in B.C. Chemicals Ltd. and BC Chemicals Company, a joint venture, which, on a combined basis, supply chemical to the pulp mill, and 30% investment in Vernon Seed Orchard Company, a joint venture, which will supply seed to the nursery centre, are accounted for by the equity method. The Company's share of the net earnings is included in the consolidated statement of operations as an adjustment to cost of products sold. (d) Property, plant, equipment and timber: The costs of additions, betterments and renewals are capitalized and expenditures for maintenance and repairs are charged to expense. Government grants received in connection with the construction or expansion of production facilities are credited to the cost of such assets. On retirement or disposal of property, plant and equipment, the cost thereof and the related accumulated depreciation are removed from the accounts and any gain or loss is included in the consolidated statement of operations. 75 Buildings and equipment are depreciated, principally on a straight-line basis, at rates which will reduce the cost of each asset to estimated residual value over its economic life. The economic lives of the assets are estimated as follows: Timber cutting rights 40 years Buildings 10 to 50 years Production machinery 5 to 16 years Automotive and woods equipment 5 years Timber and logging roads are amortized on the units of production basis. (e) Foreign currency: A substantial portion of the Company's sales is denominated in foreign currency. Transactions which are covered by forward exchange contracts are translated at contracted rates. In other cases, current assets and current liabilities are translated at the rate of exchange in effect at the balance sheet date and income and expense items are translated at average rates for the month in which they are earned or incurred. (f) Interest: Interest identifiable with major capital expenditures is capitalized during the construction period. All other interest is expensed as incurred. (g) Pension costs: The Company has various pension and post-retirement benefit plans which cover substantially all employees. The Company uses an accrued benefit actuarial method and best estimate assumptions to value benefit obligations. Adjustments arising from plan amendments, experience gains and losses and changes in assumptions are amortized over the estimated average remaining service lives of the employee groups. Current service costs are expensed in the period. Market related asset values are determined on a five year average basis. (h) Reforestation obligation: The Company harvests timber under various provincial tenures. Estimated future reforestation and silviculture obligations are accrued and charged to earnings based on the volume of timber removed. 76 2. Inventories:
1994 1993 -------- -------- (in thousands of Canadian dollars) Pulp $ 13,032 $ 9,347 Lumber 29,346 15,175 Plywood 3,889 1,598 Sawlogs 60,649 45,756 Chips 8,905 9,877 Pulpwood 4,063 5,680 Seedlings 4,460 4,890 Operating and maintenance supplies 25,657 23,034 -------- -------- $150,001 $115,357 ======== ========
3. Investments and other assets:
1994 1993 -------- -------- (in thousands of Canadian dollars) Investment and advances to B.C. Chemicals Ltd. and BC Chemicals Company, carried on an equity basis $ 13,456 $ 10,236 Timber deposits and other 2,458 922 Mortgages, agreements and property held for resale, at estimated realizable value 205 235 -------- -------- $ 16,119 $ 11,393 ======== ========
77 4. Property, plant, equipment and timber:
1994 1993 --------- --------- (in thousands of Canadian dollars) Buildings and equipment, at cost $ 856,359 $ 827,840 Less accumulated depreciation 513,422 468,767 --------- --------- 342,937 359,073 Roads and bridges, at cost less amortization 7,634 8,281 Timber and timber cutting rights, at cost less amortization 35,578 36,954 Land, at cost 4,265 4,230 Construction in progress, at cost 15,535 4,690 --------- --------- $ 405,949 $ 413,228 ========= =========
5. Long-term debt:
1994 1993 --------- --------- (in thousands of Canadian dollars) Revolving term loans $ 63,000 $ 120,000 Term loan, repayable in quarterly installments of $3,400,000 39,200 52,800 Western Diversification Fund loan 1,308 Obligation under capital leases 282 699 --------- --------- 102,482 174,807 Amount due within one year 13,857 15,501 --------- --------- $ 88,625 $ 159,306 ========= =========
The revolving term loans and the bank indebtedness are unsecured except for a letter of comfort from the shareholders that they will retain beneficial ownership of the Company and a negative pledge over all assets of the Company, excluding its investment in B.C. Chemicals Ltd. and BC Chemicals Company. 78 The term loan of $39,200,000 is secured by mortgages of certain properties of a subsidiary. The revolving term loans and term loan are currently represented by banker's acceptances which bear interest at a weighted average rate of 7.24%. Aggregate maturities of long-term debt are as follows:
(in thousands of Canadian dollars) 1995 $ 13,857 1996 13,625 1997 75,000 -------- $102,482 ========
6. Share capital:
1994 1993 ------- ------- (in thousands of Canadian dollars) Class "A" shares of no par value Authorized and issued 4,000,000 shares $ 4,000 $ 4,000 Class "B" shares of no par value Authorized and issued 4,000,000 shares 4,000 4,000 Class "C" non-cumulative non-voting shares of no par value Authorized and issued 14,000,000 shares 14,000 14,000 ------- ------- $22,000 $22,000 ======= =======
The Class "C" shares rank ahead of the Class "A" and Class "B" shares as to a fixed non-cumulative dividend of 5% per annum on the amount paid up on the Class "C" shares and are redeemable at their paid-up value together with any dividends declared thereon and unpaid. 7. Commitments and contingencies: (a) In 1990 an action was commenced in the Supreme Court of British Columbia by the Fort George Indian Band against the Company and another unrelated forest products company. The claim is that both companies have discharged waste products and noxious effluent into the Fraser River and as a result the lands and environment of the Band have been damaged. 79 The plaintiff is claiming a full range of legal remedies and damages (including punitive damages) and injunctive relief. No specific amount of damage has been indicated. Many of the legal issues raised in this action are before the Courts of British Columbia in other actions and thus at this time the outcome of the above action cannot be anticipated. (b) The Company is the defendant in various other legal actions but in the opinion of management the outcome of these actions will not have a material effect on the financial position of the Company. (c) Foreign currency exchange contracts: Subsequent to year end the Company has entered into forward foreign exchange contracts, which require the Company to buy a specific amount of Canadian currency at a fixed price on a specific future date to hedge expected U.S. dollar denominated receivables over the next twelve months. In particular, the Company had various forward foreign exchange contracts with respect to U.S. $20,000,000 at exchange rates varying between Cdn. $1.4093 to $1.4133 for each U.S. $1.00. (d) The Company estimates that it will need approximately $50,000,000 to $60,000,000 of capital expenditures during the period 1995 to 1999 to comply with environmental regulations. 8. Interest, net:
1994 1993 1992 ------- ------- ------- (in thousands of Canadian dollars) Interest for the year comprises the following: Long-term debt $ 9,599 $11,119 $14,731 Short-term debt and other 2,795 5,870 6,950 Interest income (44) (49) (954) ------- ------- ------- $12,350 $16,940 $20,727 ======= ======= =======
9. Countervailing duty refund: During the period March 12, 1992 to August 17, 1994, the Government of the United States imposed a countervailing duty ("CVD") on all softwood lumber imported into the United States from Canada. The Company posted bonds for $5,634,000 (U.S. $4,303,000) and paid $44,902,000 (U.S. $32,427,000) on its shipments of softwood lumber in respect of the CVD imposed during this period. 80 Pursuant to the provisions of the Canada-United States Free Trade Agreement, throughout the period various appeal processes were pursued by the Government of Canada, provincial governments and the Canadian forest industry. As it was uncertain the appeal processes would be successful, the Company deducted the CVD from sales in the amount of $13,362,000 (U.S. $9,824,000) in 1992, $21,420,000 (U.S. $16,073,000) in 1993 and $15,754,000 (U.S. $10,833,000) in 1994. In December 1994, the appeal processes resulted in a final decision from the U.S. Department of Commerce to release the bonds posted and to refund the CVD paid with interest. Accordingly, the Company has recorded $53,964,000 (U.S. $38,253,000) as an unusual item being the refund of the duty plus interest less related expenses. Of this amount $38,226,000 (U.S. $27,250,000) is included in other receivables at December 31, 1994. 10. Income taxes: The expected rate of income taxes is calculated as follows:
1994 1993 1992 ----- ----- ----- Federal: Basic tax net of provincial abatement 28.0% 28.0% 28.0% Manufacturing and processing reduction (7.0) (6.0) (5.0) Logging tax abatement (4.3) (2.3) (2.3) Surtax .7 .8 .8 ---- ---- ---- 17.4 20.5 21.5 Provincial, net of logging tax abatement 14.3 15.0 14.8 Logging taxes 6.5 3.5 3.5 ---- ---- ---- 38.2% 39.0% 39.8% ==== ==== ====
81 The actual income tax differs from that obtained by applying the expected income tax rate to the income before tax for the following reasons:
1994 1993 1992 ------- ------- ------- (in thousands of Canadian dollars) Taxes at expected rate $82,074 $16,102 $(3,381) Tax effect of: Deferred tax drawdown accumulated at higher tax rates (963) (329) (1,556) Amortization of purchase differences on acquisition of subsidiary 1,220 1,254 1,412 Large corporation tax (220) 815 1,021 Equity in earnings of B.C. Chemicals Ltd. (264) (106) (77) Other (68) 144 139 ------- ------- ------- Income taxes (recoverable) $81,779 $17,880 $(2,442) ======= ======= =======
11. Related party transactions: The Company is owned 50% by Noranda Forest Inc. ("Noranda") and indirectly 50% by The Mead Corporation ("Mead"). Sales to Mead, Noranda and their respective subsidiary and affiliated companies are at competitive prices. By agreements, a commission is paid to a subsidiary of Mead to act as exclusive agent for soliciting and servicing of certain pulp sales and to a subsidiary of Noranda for certain lumber and plywood sales. The Company purchases raw materials from B.C. Chemicals Ltd. and BC Chemicals Company. The aggregate of all related party transactions, including the purchase of a number of services from Noranda and affiliated companies, which is not disclosed elsewhere in the financial statements, is summarized as follows:
1994 1993 1992 ------- ------- ------- (in thousands of Canadian dollars) Net sales before commissions $97,995 $55,539 $96,185 ======= ======= ======= Commissions $22,118 $16,023 $13,083 ======= ======= ======= Net costs and expenses $16,306 $13,103 $11,404 ======= ======= ======= Accounts payable and accruals $ 2,530 $ 1,239 $ 1,243 ======= ======= =======
82 12. Pension plans: Salaried employees of the Company and hourly employees of Rustad Bros. & Co. Ltd. are members of defined benefit pension plans. As at December 31, 1994 the market value of the plans' assets amounted to $45,429,000 (1993 - $37,957,000) while the actuarial present value of the plans' accrued pension benefits was $51,649,000 (1993 - $43,865,000). Hourly employees, except those of Rustad Bros. & Co. Ltd., are members of negotiated plans to which the Company contributes amounts specified by collective agreements. The Company has implemented a post-retirement benefit plan for certain employees. Based on an actuarial valuation dated January 1, 1992 the actuarial present value of the plan's accumulated post-retirement benefit obligations is $890,000 (1993 - $940,000). The plan is funded on a current basis and the liability is being accrued over the estimated average remaining service life of the employee group. The current year's pension expense includes the required contribution to the union plans and the actuarially calculated cost to the Company of its obligations to the defined benefit plans attributable to the services rendered by the employees during the year and the actuarially calculated cost to the Company of its obligations to the post-retirement benefit plan. 13. United States generally accepted accounting principles: The financial statements have been prepared in accordance with generally accepted accounting principles in Canada ("Canadian GAAP") which, in the case of the Company, conform in all material respects with those in the United States ("United States GAAP"), with the following exceptions: (i) The Company follows the Canadian method of accounting for income taxes, described as the deferral method, focusing on differences arising between financial statement income and taxable income. The method followed under United States GAAP, described as the liability method, focuses on differences between the book and tax value of assets and liabilities. In Canada, income taxes are recorded using tax rates and regulations applicable in the current year and are not changed in future years even though tax rates and regulations may change. In the United States, the tax liability is calculated using enacted tax rates and regulations and is adjusted in future years if those tax rates and regulations are changed. (ii) United States GAAP requires recognition in the balance sheet of a liability that is at least equal to the unfunded accumulated benefit obligation if the unfunded benefit obligation exceeds the fair value of plan assets. Where a liability is recognized, an intangible asset of an equal amount is also recorded. Canadian GAAP only requires disclosure of the actuarial present value of accrued pension benefits attributed to services rendered up to the reporting date and the value pension fund assets. 83 A further difference between Canadian GAAP and United States GAAP in accounting for pension costs is in the choice of discount rate used for computing the benefit obligation and the service and interest cost components of net periodic pension expense. Under Canadian GAAP, the discount rate used represents management's best estimate of the long-term rate of return on pension fund assets, whereas under United States GAAP the discount rate reflects the rate at which pension benefits can effectively be settled at the date of the financial statements. The impact of the differences on the Company's pension expense is not material. The impact of the differences on the funded status is included in the table below (note 13(vi)). (iii) United States GAAP requires disclosure of changes during the year in non-cash working capital balances pertaining to operating activities. The following table reflects such changes in the years ended December 31, 1994, 1993 and 1992:
1994 1993 1992 --------- --------- --------- (in thousands of Canadian dollars) Decrease (increase) in current assets: Trade accounts receivable from affiliated companies $(14,892) $(26,495) $ (3,700) Other receivables (40,191) (1,691) 782 Inventories (34,644) (11,901) (15,893) Prepaid expenses 1,140 (2,242) (2,169) Increase (decrease) in current liabilities: Accounts payable and accruals, net 12,629 (4,746) 27,976 Income tax payable 47,617 14,490 32,977 -------- -------- -------- $(28,341) $(32,585) $ 39,973 ======== ======== ========
(iv) Other differences between Canadian GAAP and United States GAAP do not have a material effect, either collectively or individually, on net income. 84 (v) The following table reconciles earnings (loss) for the year as reported in the accompanying consolidated statements of operations and retained earnings to earnings (loss) that would have been reported had the financial statements been prepared in accordance with United States GAAP:
1994 1993 1992 --------- -------- -------- (in thousands of Canadian dollars) Earnings (loss) in accordance with Canadian GAAP $133,074 $23,406 $(6,053) Adjustments: Deferred income taxes 389 13,575 41 Amortization of goodwill (706) (706) (706) -------- ------- ------- (317) 12,869 (665) -------- ------- ------- Earnings (loss) in accordance with United States GAAP $132,757 $36,275 $(6,718) ======== ======= =======
(vi) The following table indicates the items in the consolidated balance sheet that would be affected had the financial statements been prepared in accordance with United States GAAP. The revised amounts would be as follows:
1994 1993 -------- -------- Property, plant, equipment and timber $406,949 $414,228 Goodwill 19,083 19,769 Investments and other assets 19,339 14,301 Accrued liabilities not due within one year 24,208 19,697 Deferred income taxes 69,028 76,273 Retained earnings 303,833 171,076
85 THE MEAD CORPORATION EXHIBITS TO FORM 10-K ANNUAL REPORT FOR THE YEAR ENDED DECEMBER 31, 1994 86 EXHIBIT INDEX (3) Articles of Incorporation and Bylaws: (i) Amended Articles of Incorporation of the Registrant adopted May 28, 1987 (incorporated by reference to Exhibit (3)(i) of Registrant's Annual Report on Form 1O-K for the year ended December 31, 1987). (ii) Regulations of the Registrant, as amended April 23, 1987 (incorporated by reference to Exhibit (3)(ii) of Registrant's Annual Report on Form 1O-K for the year ended December 31, 1987). (4) Instruments defining the rights of security holders, including indentures: (i) Credit Agreement dated as of November 15, 1989 with Bankers Trust Company, The First National Bank of Chicago, Morgan Guaranty Trust Company of New York and fifteen other banks (incorporated by reference to Exhibit (4)(i) of Registrant's Annual Report on Form 10-K for the year ended December 31, 1989); Amendment No. 1 thereto dated as of November 30, 1991 (incorporated by reference to Exhibit (4)(i) to Registrant's Annual Report on Form 10-K for the year ended December 31, 1991), and Amendment No. 2 thereto dated as of May 1, 1994 (incorporated by reference to Exhibit (10)(1) to Registrant's Quarterly Report on Form 10- Q for the Quarterly Period ended July 3, 1994). (ii) Indenture dated as of July 15, 1982 between the Registrant and Bankers Trust Company, as Trustee, First Supplemental Indenture dated as of March 1, 1987 (incorporated by reference to Exhibit (4)(iv) of Registrant's Annual Report on Form 1O-K for the year ended December 31, 1987), Second Supplemental Indenture dated as of October 15, 1989 (incorporated by reference to Exhibit (4) to Registrant's Current Report on Form 8-K dated October 11, 1989) and Third Supplemental Indenture dated as of November 15, 1991 (incorporated by reference to Exhibit (4)(ii) to Registrant's Annual Report on Form 10-K for the year ended December 31, 1991). (iii) Indenture dated as of February 1, 1993 between Registrant and The First National Bank of Chicago, as Trustee (incorporated by reference to Exhibit (4)(iii) to Registrant's Annual Report on Form 10-K for the year ended December 31, 1992). The total amount of securities authorized under other long-term debt instruments does not exceed 10% of the total assets of the Registrant and its subsidiaries on a consolidated basis. A copy of each such instrument will be furnished to the Commission upon request. 87 (10) Material Contracts: (i) Agreement dated as of April 24, 1964 between Northwood Mills Limited, Canamead, Inc., the Registrant and Noranda Mines, Limited and Supplemental Agreements relating thereto dated as of July 2, 1964, April 5, 1965, March 15, 1966, February 1, 1967, December 15, 1970 and April 1, 1974 (incorporated by reference to Exhibit (10)(v) of Registrant's Annual Report on Form 1O-K for the year ended December 31, 1980 included in File No. 1-2267 in the Public Reference Room of the Securities and Exchange Commission in Washington, D.C.). (ii) Pulp Purchase Agreement dated as of April 1, 1965 among Northwood Pulp Limited, the Registrant, Northwood Mills Ltd. and Noranda Mines Limited (incorporated by reference to Exhibit (10)(vi) of Registrant's Annual Report on Form 1O-K for the year ended December 31, 1980 included in File No. 1-2267 in the Public Reference Room of the Securities and Exchange Commission in Washington, D.C.). (iii) Rights Agreement dated as of November 1, 1986 between Registrant and The First National Bank of Cincinnati, as Rights Agent, as amended December 29, 1987 and December 9, 1988 (incorporated herein by reference to Registrant's Amendment No. 1 on Form 8, dated November 28, 1986 and Exhibits 28(a) and 28(b) to Registrant's Current Report on Form 8-K dated December 9, 1988). (iv) Amended Board Purchase Agreement dated as of January 4, 1988 among the Registrant, Georgia Kraft Company and Inland Container Corporation (incorporated by reference to Exhibit (1O)(xviii) of Registrant's Annual Report on Form 1O-K for the year ended December 31, 1987). (v) Indemnification Agreement dated as of January 4, 1988 among the Registrant, Mead Coated Board, Inc., Temple-Inland Inc., Inland Container Corporation I, Inland Container Corporation, GK Texas Holding Company and Georgia Kraft Company (incorporated by reference to Exhibit (1O)(xix) of Registrant's Annual Report on Form 1O-K for the year ended December 31, 1987). (vi) Lease Agreement between The Industrial Development Board of the City of Phenix City, Alabama and Mead Coated Board, Inc., dated as of December 1, 1988, as amended (incorporated by reference to Exhibit (10)(xviii) to Registrant's Annual Report on Form 10-K for the year ended December 31, 1989 and Exhibit (10)(xviii) to Registrant's Annual Report on Form 10-K for the year ended December 31, 1991). (vii) Lease Agreement between The Industrial Development Board of the City of Phenix City, Alabama and Mead Coated Board, Inc., dated as of June 1, 1993 (incorporated by reference to Exhibit (10)(3) to Registrant's Quarterly Report on Form 10-Q for the Quarterly Period ended April 3, 1994). 88 (viii) Purchase Agreement dated October 4, 1994 between The Mead Corporation and Reed Elsevier plc. (incorporated by reference to exhibit (10)(1) to the Registrant's Quarterly Report on Form 10-Q filed for the Quarterly Period ended October 2, 1994), as amended (incorporated by reference to Exhibit (2) to the Registrant's Current Report on Form 8-K dated December 2, 1994). The following are compensatory plans and arrangements in which directors or executive officers participate: (ix) 1984 Stock Option Plan of the Registrant, as amended and restated as of January 25, 1990 (incorporated by reference to Exhibit (10)(v) to Registrant's Annual Report on Form 10-K for the year ended December 31, 1989), and Amendment dated January 23, 1992 (incorporated by reference to Exhibit 10(iv) to Registrant's Annual Report on Form 10-K for the year ended December 31, 1991). (x) 1991 Stock Option Plan of the Registrant (incorporated by reference to Exhibit (10)(xxi) to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1990). (xi) Incentive Compensation Election Plan of the Registrant as amended November 17, 1987 (incorporated by reference to Exhibit (10)(viii) to Registrant's Annual Report on Form 10-K for the year ended December 31, 1987), as amended October 29, 1988 (incorporated by reference to Exhibit (10)(vi) to Registrant's Annual Report on Form 10-K for the year ended December 31, 1988). (xii) 1985 Supplement to Registrant's Incentive Compensation Election Plan, as amended November 17, 1987 (incorporated by reference to Exhibit (1O)(xi) to Registrant's Annual Report on Form 10-K for the year ended December 31, 1985 and Exhibit (10)(ix) of Registrant's Annual Report on Form 10-K for the year ended December 31, 1987), and as further amended October 29, 1988 (incorporated by reference to Exhibit (10)(vii) to Registrant's Annual Report on Form 10-K for the year ended December 31, 1988). (xiii) Excess Benefit Plan of the Registrant (1988 Restatement), dated October 29, 1988 (incorporated by reference to Exhibit (10)(vii) to Registrant's Annual Report on Form 10-K for the year ended December 31, 1990). (xiv) Supplemental Executive Retirement Plan (formerly The Mead Management Income Parity Plan) effective January 1, 1985, as amended and restated as of July 1, 1992 (incorporated by reference to Exhibit (10)(xiii) to Registrant's Annual Report on Form 10-K for the year ended December 31, 1992). (xv) Form of Indemnification Agreement between Registrant and each of John C. Bogle, John G. Breen, William E. Hoglund, Barbara C. Jordan, John A. Krol, Steven C. Mason, Charles S. Mechem, Jr., Paul F. Miller, Jr., William S. Shanahan, Thomas B. Stanley, Jr. and Lee J. 89 Styslinger, Jr. (incorporated herein by reference to Exhibit (10)(xiv) of Registrant's Annual Report on Form 10-K for the year ended December 31, 1986). (xvi) Form of Severance Agreement between Registrant and Steven C. Mason (incorporated herein by reference to Exhibit (10)(xvi) of Registrant's Annual Report on Form 10-K for the year ended December 31, 1986 and Exhibit (10)(xii) of Registrant's Annual Report on Form 10-K for the year ended December 31, 1988). (xvii) Form of Severance Agreement between Registrant and each of William R. Graber, Elias M. Karter, Raymond W. Lane, Charles J. Mazza, Wallace 0. Nugent, Thomas E. Palmer, Jerome F. Tatar and other key employees (incorporated by reference to Exhibit (10)(xiii) of Registrant's Annual Report on Form 10-K for the year ended December 31, 1988). (xviii) Benefit Trust Agreement dated January 9, 1987 between Registrant and Society Bank, National Association (incorporated herein by reference to Exhibit (1O)(xviii) to Registrant's Annual Report on Form 1O-K for the year ended December 31, 1986), as amended October 29, 1988 (incorporated by reference to Exhibit (10)(xiv) of Registrant's Annual Report on Form 10-K for the year ended December 31, 1988) and January 24, 1991 (incorporated by reference to Exhibit (10)(xiii) to Registrant's Annual Report on Form 10-K for the year ended December 31, 1990). (xix) Restricted Stock Plan effective December 10, 1987, as amended through July 23, 1992 (incorporated by reference to Exhibit (10)(xviii) to Registrant's Annual Report on Form 10-K for the year ended December 31, 1992), as amended through April 28, 1994 (incorporated by reference to Exhibit (10)(2) of Registrant's Quarterly Report on Form 10-Q for the Quarterly Period ended April 3, 1994). (xx) Deferred Compensation Plan for Directors of the Registrant, as amended through October 29, 1988 (incorporated by reference to Exhibit (10)(xix) of Registrant's Annual Report on Form 10-K for the year ended December 31, 1989). (xxi) 1985 Supplement to Registrant's Deferred Compensation Plan for Directors, as amended through October 29, 1988 (incorporated by reference to Exhibit (10)(xx) of Registrant's Annual Report on Form 10-K for the year ended December 31, 1989). (xxii) Directors Retirement Plan, effective October 27, 1990 (incorporated by reference to Exhibit (10)(xx) of Registrant's Annual Report on Form 10-K for the year ended December 31, 1990). (xxiii) Form of Executive Life Insurance Policy for Key Executives (incorporated by reference to Exhibit (10) of Registrant's Quarterly Report on Form 10-Q for the Quarterly Period Ended March 31, 1991). 90 (xxiv) The "Direction 2000" Executive Incentive Plan, dated April 21, 1993 (incorporated by reference to Exhibit 10(i) of Registrant's Quarterly Report on Form 10-Q for the Quarterly Period Ended April 4, 1993), amended for 1994 (incorporated by reference to Exhibit (10)(2) of Registrant's Quarterly Report on Form 10-Q for the Quarterly Period ended July 3, 1994). (xxv) Mead Management Incentive Plan for 1994 (incorporated by reference to Exhibit (10)(i) of Registrant's Quarterly Report on Form 10- Q for the Quarterly Period Ended April 3, 1994). 91 EX-11.1 2 CALC. OF PRIMARY NET EARNINGS EXHIBIT (11.1) THE MEAD CORPORATION AND CONSOLIDATED SUBSIDIARIES CALCULATION OF PRIMARY NET EARNINGS PER COMMON AND COMMON EQUIVALENT SHARE (All amounts in thousands, except per share amounts)
Year Ended December 31 --------------------------- 1994 1993 1992 -------- -------- ------- NET EARNINGS APPLICABLE TO COMMON AND COMMON EQUIVALENT SHARES $695,725 $124,166 $71,603 ADJUSTMENT FOR OTHER POTENTIALLY DILUTIVE SECURITIES - Interest Savings (net of tax) on Convertible Subordinated Debentures as if converted at the beginning of the period 5,661 -------- -------- ------- NET EARNINGS APPLICABLE TO COMMON AND COMMON EQUIVALENT SHARES $701,386 $124,166 $71,603 ======== ======== ======= AVERAGE NUMBER OF COMMON AND COMMON EQUIVALENT SHARES OUTSTANDING: Average number of common shares outstanding 59,333 59,021 58,606 Dilutive effect of stock options after application of treasury stock method 621 572 403 Adjustment of other potentially dilutive securities - Dilutive effect of Convertible Subordinated Debentures as if converted at the beginning of the year 2,601 -------- -------- ------- AVERAGE NUMBER OF COMMON AND COMMON EQUIVALENT SHARES OUTSTANDING 62,555 59,593 59,009 ======== ======== ======= PRIMARY NET EARNINGS PER COMMON AND COMMON EQUIVALENT SHARE $11.21 $2.08 $ 1.21 ======== ======== =======
92 EX-11.2 3 CALC. FULLY DILUTED NET EARNINGS EXHIBIT (11.2) THE MEAD CORPORATION AND CONSOLIDATED SUBSIDIARIES CALCULATION OF FULLY DILUTED NET EARNINGS PER COMMON AND COMMON EQUIVALENT SHARE (1) (All amounts in thousands, except per share amounts)
Year Ended December 31 --------------------------- 1994 1993 1992 -------- -------- ------- NET EARNINGS APPLICABLE TO COMMON AND COMMON EQUIVALENT SHARES $701,386 $124,166 $71,603 ======== ======== ======= AVERAGE NUMBER OF SHARES OUTSTANDING ON A FULLY DILUTED BASIS: Shares used in calculating primary earnings per share 62,555 59,593 59,009 Additional dilutive effect of stock options after application of treasury stock method 172 99 76 -------- -------- ------- AVERAGE NUMBER OF SHARES OUTSTANDING ON A FULLY DILUTED BASIS 62,727 59,692 59,085 ======== ======== ======= FULLY DILUTED NET EARNINGS PER COMMON AND COMMON EQUIVALENT SHARE $ 11.18 $ 2.08 $ 1.21 ======== ======== =======
(1) This calculation is submitted in accordance with 17 CFR 229.601(b)(11) although not required by APB Opinion No. 15 because it results in dilution of less than 3%. 93 EX-11.3 4 CALC. FULLY DILUTED EARNINGS EXHIBIT (11.3) THE MEAD CORPORATION AND CONSOLIDATED SUBSIDIARIES CALCULATION OF FULLY DILUTED NET EARNINGS PER COMMON AND COMMON EQUIVALENT SHARE (1) (All amounts in thousands, except per share amounts)
Year Ended December 31 --------------------------- 1994 1993 1992 -------- -------- ------- NET EARNINGS APPLICABLE TO COMMON AND COMMON EQUIVALENT SHARES $701,386 $124,166 $71,603 ADJUSTMENT FOR OTHER POTENTIALLY DILUTIVE SECURITIES - Interest savings (net of tax) on Convertible Subordinated Debentures as if converted at the beginning of the period 5,723 5,339 -------- -------- ------- NET EARNINGS APPLICABLE TO COMMON AND COMMON EQUIVALENT SHARES ON A FULLY DILUTED BASIS $701,386 $129,889 $76,942 ======== ======== ======= AVERAGE NUMBER OF SHARES OUTSTANDING ON A FULLY DILUTED BASIS Shares used in calculating primary earnings per share 62,555 59,593 59,009 Dilutive effect of stock options after application of treasury stock method 172 99 76 Adjustment for other potentially dilutive securities - Dilutive effect of Convertible Subordinated Debentures as if converted at the beginning of the period 2,630 2,630 -------- -------- ------- AVERAGE NUMBER OF SHARES OUTSTANDING ON A FULLY DILUTED BASIS 62,727 62,322 61,715 ======== ======== ======= FULLY DILUTED NET EARNINGS PER COMMON AND COMMON EQUIVALENT SHARE $11.18 $2.08 $ 1.25 ======== ======== =======
(1) This calculation is submitted in accordance with 17 CFR 229.601(b)(11) although it is contrary to paragraph 40 of APB Opinion No. 15 because it produces an antidilutive result. 94 EX-12 5 RATIO OF EARNINGS EXHIBIT (12) THE MEAD CORPORATION AND CONSOLIDATED SUBSIDIARIES RATIO OF EARNINGS TO FIXED CHARGES (All dollar amounts in millions)
Year Ended December 31 --------------------------------------- 1994 1993 1992 1991 1990 ------ ------ ------ ------- ------ Earnings: The Mead Corporation earnings from continuing operations before income taxes $ 52.4 $135.0 $ 15.8 $ 64.3 $124.4 Mead's share of earnings (loss) of investees before income taxes 95.7 30.3 9.4 (31.1) 17.9 Interest and debt expense 113.4 107.5 116.0 137.4 114.9 Amortization of capitalized interest: The Mead Corporation 4.6 6.5 4.9 4.9 3.1 Mead's share of investees 1.3 1.4 1.5 1.6 1.6 Portion of rental payments deemed to be interest 18.0 16.5 17.3 16.4 14.3 ------ ------ ------ ------ ------ $285.4 $297.2 $164.9 $193.5 $276.2 ====== ====== ====== ====== ====== Combined fixed charges: Interest and debt expense: The Mead Corporation $101.1 $ 94.6 $ 99.5 $112.9 $ 92.0 Mead's share of investees 12.3 12.9 16.5 24.5 22.9 ------ ------ ------ ------ ------ 113.4 107.5 116.0 137.4 114.9 ------ ------ ------ ------ ------ Capitalized interest: The Mead Corporation 5.7 2.6 2.3 4.5 20.1 Mead's share of investees ------ ------ ------ ------ ------ 5.7 2.6 2.3 4.5 20.1 ------ ------ ------ ------ ------ Portion of rental payments deemed to be interest: The Mead Corporation 17.6 16.2 17.3 16.3 14.2 Mead's share of investees .4 .3 .1 .1 ------ ------ ------ ------ ------ 18.0 16.5 17.3 16.4 14.3 ------ ------ ------ ------ ------ $137.1 $126.6 $135.6 $158.3 $149.3 ====== ====== ====== ====== ====== Ratio of earnings to fixed charges 2.08 2.35 1.22 1.22 1.85 ====== ====== ====== ====== ======
95 EX-21 6 SUBSIDIARIES OF REGISTRANT Exhibit (21) SUBSIDIARIES OF THE MEAD CORPORATION* State of Jurisdiction Name of Incorporation - ------------------------- --------------------- Escanaba Paper Company Michigan Forest Kraft Company Delaware M-B Pulp Company Delaware Mead Coated Board International, Inc. Delaware Mead Holdings B.V. The Netherlands Mead Holdings S.A. France Mead Packaging International, Inc. Ohio - -------------- * The names of additional subsidiaries have been omitted because the unnamed subsidiaries, considered in the aggregate as a single subsidiary, would not constitute a significant subsidiary. Subsidiaries which are consolidated into the above-listed subsidiaries are also omitted. 96 EX-23.1 7 CONSENT OF DELOITTE & TOUCHE LLP EXHIBIT (23.1) CONSENT OF DELOITTE & TOUCHE LLP We consent to the incorporation by reference in (i) the Form S-8 Registration Statement (No. 33-37960) pertaining to The Mead Corporation Employees Stock Purchase Plan, (ii) the Post-Effective Amendment No. 2 to Form S-8 Registration Statement (No. 2-90746) pertaining to the 1984 Stock Option Plan, (iii) the Form S-8 Registration Statements (Nos. 33-37961 and 33-47580) pertaining to the Mead Salaried Savings Plan, (iv) the Form S-3 Registration Statements (Nos. 33-14759 and 33-34009) pertaining to Common Shares of Selling Shareholders, (v) the Form S-3 Registration Statement (No. 33-51337) pertaining to $300,000,000 aggregate principal amount of Debt Securities, (vi) the Form S-8 Registration Statement (No. 33-40118) pertaining to the 1991 Stock Option Plan, and (vii) the Form S-8 Registration Statement (No. 33-53421) pertaining to the Mead Savings Plan for Bargaining Unit Employees, and Prospectus pertaining to Common Shares of Selling Shareholders, included in such Registration Statement, of our report dated January 26, 1995, appearing in the Annual Report on Form 10-K of The Mead Corporation for the year ended December 31, 1994. DELOITTE & TOUCHE LLP Dayton, Ohio March 13, 1995 97 EX-23.2 8 CON. OF KPMG PEAT MARWICK THORNE Exhibit (23.2) CONSENT OF KPMG PEAT MARWICK THORNE We consent to the incorporation by reference in (i) the Form S-8 Registration Statement (No. 33-37960) pertaining to The Mead Corporation Employees Stock Purchase Plan, (ii) the Post-Effective Amendent No. 2 to Form S-8 Registration Statement (No. 2-90746) pertaining to the 1984 Stock Option Plan, (iii) the Form S-8 Registration Statements (Nos. 33-37961 and 33-47580) pertaining to the Mead Salaried Savings Plan, (iv) the Form S-3 Registration Statements (Nos. 33-14759 and 33-34009) pertaining to Common Shares of Selling Shareholders, (v) the Form S-3 Registration Statement (No. 33-51337) pertaining to $300,000,000 aggregate principal amount of Debt Securities, (vi) the Form S-8 Registration Statement (No. 33-40118) pertaining to the 1991 Stock Option Plan, and (vii) the Form S-8 Registration Statement (No. 33-53421) pertaining to the Mead Savings Plan for Bargaining Unit Employees, and Prospectus pertaining to Common Shares of Selling Shareholders, included in such Registration Statement, of our report dated January 10, 1995, on the consolidated financial statements of Northwood Forest Industries Ltd. for the year ended December 31, 1994, included in The Mead Corporation's Annual Report on Form 10-K for the year ended December 31, 1994. KPMG Peat Marwick Thorne Chartered Accountants Vancouver, Canada March 13, 1995 98 EX-27 9 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE ANNUAL REPORT ON FORM 10-K OF THE MEAD CORPORATION FOR THE YEAR ENDED DECEMBER 31, 1994 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000,000 YEAR DEC-31-1994 DEC-31-1994 484 0 607 24 382 1,894 4,163 1,849 4,863 1,088 958 175 0 0 2,008 4,863 0 4,558 0 3,806 543 0 101 52 23 29 617 (11) 0 696 11.21 0.00
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