-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, KIkaMtJb7LxT870vfJoOZUyX6pyA8FYGdDw0yHGDkrhmsfaaCNNNcgvrEqfsYIcw 9pqdmZ5UcPBWB58/ZZCUHg== 0000950109-96-001555.txt : 19960315 0000950109-96-001555.hdr.sgml : 19960315 ACCESSION NUMBER: 0000950109-96-001555 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 19951231 FILED AS OF DATE: 19960314 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: 96534874 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, 1995 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 _________________________ 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 26, 1996, the aggregate market value of the voting shares held by non-affiliates of the Registrant was approximately $2,655,722,788 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 27, 1996 was 52,746,913. DOCUMENTS INCORPORATED BY REFERENCE Portions of Registrant's Proxy Statement for the Annual Meeting of Shareholders scheduled to be held on April 25, 1996, are incorporated by reference in Part III; definitive copies of said Proxy Statement were filed with the Securities and Exchange Commission on March 14, 1996. ================================================================================ 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, and 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 R on page 54. 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 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, Great Lakes Pulp and Fibre, Inc. in Menominee, Michigan (startup expected in 1996), and Escanaba Paper Company. Mead 1 Pulp Sales also represents MODO Paper AB, a Swedish company, for the sale of its pulp in North America. Mead Pulp Sales also sells through its affiliates 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. 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 corrugated 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. 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 2 ("osb") (3/8-inch basis). With startup of a new dryer in early 1996, osb capacity is expected to increase 16% to 395 million square feet. 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 7,140,000 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 5,900,000 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, 1995, 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 centers. 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 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 3 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 other global systems-based multiple packaging suppliers, as well as suppliers of other non-boxboard packaging systems. The Containerboard division competes primarily with container producers, and corrugating and medium producers in several market areas in the United States. 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 15,200 persons, of whom approximately 6,800 are production, maintenance and clerical employees represented by labor unions. Mead's 50% owned company, Northwood, employs approximately 2,500 persons. Mead and Northwood together 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 1995 which have been concluded were accomplished without any strikes. The Chillicothe mill continues to operate while negotiations continue past the contract expiration date. 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," "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 and licenses 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, 1991 - December 31, 1995), Mead (including its share of Northwood expenditures) constructed air and water pollution control and other environmental facilities at a cost of approximately $85.5 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 $185 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") later this year. 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 proposed 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. However, Mead does not expect these regulations to be enacted as presently proposed. Mead has included in its capital spending plans amounts necessary to comply with the regulations in the form Mead expects them to be enacted. The USEPA issued proposed regulations implementing the Federal Great Lakes Critical Programs Act of 1990 ("GLI") 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 USEPA issued final regulations in 1995 which 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. Mead has 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 if Michigan implements regulations identical to the USEPA regulations under GLI starting in 1997. These costs are not included in Mead's anticipated environmental expenditures discussed above. Mead opposes these regulations because Mead believes they are unnecessary and most are unreasonable. 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 two 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 or by various 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 7 sites currently operated or used by Mead. Mead is also currently named as a potentially responsible party ("PRP"), or has received third party requests for contribution under federal, state or local laws with respect to at least 15 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 6 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 $42 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. Mead believes that it is reasonably possible that costs associated with these owned and unowned sites may exceed current reserves by amounts that may prove insignificant or by as much as approximately $45 million. This estimate of the range of reasonably possible additional costs is less certain than the estimate upon which reserves are based. Assumptions less favorable to Mead among the range of reasonably possible outcomes were used in order to establish this amount. 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 O on page 52. 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 Publishing Paper Escanaba, Michigan Pulp mill, coated paper mill Gilbert Paper Menasha, Wisconsin Cotton and recycled content and specialty paper mill Specialty Paper South Lee, Massachusetts Decorative laminating and specialty papers mills 7 Packaging Anniston, Alabama Paperboard packaging, multiple Atlanta, Georgia packaging systems for beverage Buena Park, California and food, packaging machinery Chicago, Illinois manufacturing or repair Godfrey, Illinois facilities and ink manufacture Fairless Hills, Pennsylvania Ajax, Ontario, Canada Chateauroux, France Trento, Italy Roosendaal, The Netherlands Trier-Ehrang, Germany Bristol, England Shimada, Japan Bilbao, Spain Containerboard 8 plants within the United Corrugated container States 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 School and Office 7 manufacturing and Home, office and school Products distribution locations products manufacturing throughout the United and distribution facilities States, one in Toronto, Ontario, Canada and one manufacturing location in Nuevo Laredo, Mexico Zellerbach 39 wholesale locations Paper, packaging equipment and throughout the United supplies distribution States; one converting facilities operation; 37 printer- supply centers; 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 has performed certain investigative and remedial work designed to control releases of hazardous substances from the Site. Mead has submitted and is awaiting USEPA approval of a final report and long-term operation and monitoring program for the site. Mead believed that the U.S. Navy was legally responsible for the groundwater contamination at the Storage Depot Site, including the costs of implementing the Consent Order, and, in 1992, filed a declaratory judgment action seeking to have the U.S. Navy take responsibility for any required remediation. Mead and the U.S. Navy recently reached an agreement settling the proceeding. Under the terms of the agreement, the U.S. Navy will pay 60% of the costs to be incurred under the consent order with USEPA, including the reimbursement of approximately $1.1 million for related past costs expended by Mead. 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 September 1995, the USEPA promulgated a final listing of the Tennessee Products Site. In December 1995, Mead filed a notice of appeal in the Court of Appeals for the District of Columbia challenging the USEPA's listing action. USEPA initiated a Remediation Investigation/Feasibility Study of the Site during 1995, which is expected to continue through 1996. 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. 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 alleged absence of a permit for the facility's chlorine unloading station and the delayed 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 L on page 47 and Note P on page 53. 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, 1996, 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 52 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. Elias M. Karter 55 Vice President, Operating Officer since July 1994; prior to that Vice President, Manufacturing & Technology. Raymond W. Lane 47 Vice President, Operating Officer since July 1994; prior to that President of Mead School and Office Products Division. Steven C. Mason 59 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 53 Vice President, Human Resources. Wallace O. Nugent 57 Vice President, Purchasing and Logistics since January 1993; prior to that Vice President, Marketing and Supply. Thomas E. Palmer 56 Vice President and General Counsel since September 1991; prior to that a partner with Squire, Sanders & Dempsey. Jerome F. Tatar 49 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 - ------------------------------ 1995 1994 ---------------- ---------------- High Low High Low ------- ------- ------- ------- First quarter $55.500 $48.625 $48.125 $39.750 Second quarter 59.750 48.625 46.250 39.125 Third quarter 64.125 57.250 52.875 42.000 Fourth quarter 59.500 50.500 53.250 43.375 DIVIDENDS PAID PER COMMON SHARE - ------------------------------- 1995 1994 ----- ----- First quarter $ .25 $ .25 Second quarter .28 .25 Third quarter .28 .25 Fourth quarter .28 .25 ----- ----- Year $1.09 $1.00 ===== ===== The number of Common shareowners of record as of February 27, 1996, was 15,624. See Note H on page 41 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)
- ------------------------------------------------------------------------------------------------------ Year Ended December 31 1995 1994 1993 1992 1991 - ------------------------------------------------------------------------------------------------------ Operations: Net sales $5,179.4 $4,557.5 $4,239.0 $4,208.4 $4,109.7 Earnings from continuing operations 342.5 89.6 95.7 13.7 26.2 Earnings from continuing operations per common and common equivalent share 6.19 1.52 1.61 .23 .45 Liquidity: Working capital 545.5 806.5 380.3 375.2 284.5 Current ratio 1.7 1.7 1.6 1.6 1.4 Net cash provided by operating activities 186.9 327.0 326.5 303.8 227.5 Assets: Property, plant and equipment-net 2,364.1 2,313.9 2,239.6 2,175.1 2,202.1 Total assets 4,372.8 4,862.6 4,073.3 3,934.4 3,900.4 Capital: Borrowed capital-long-term debt 694.8 957.7 1,360.0 1,317.5 1,300.4 Equity capital 2,160.2 2,182.6 1,578.0 1,495.4 1,478.4 Total capital $2,855.0 $3,140.3 $2,938.0 $2,812.9 $2,778.8 Borrowed capital as a percent of total capital 24.3% 30.5% 46.3% 46.8% 46.8% Cash dividends per common share $ 1.09 $ 1.00 $ 1.00 $ 1.00 $ 1.00
13 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS REVIEW OF OPERATIONS -------------------- OVERVIEW OF 1995 Mead's earnings improved over 1994 and 1993 levels, excluding the effect of significant items in those years. The company's continued earnings growth was driven by higher selling prices for pulp, paper and paperboard, and productivity gains throughout Mead in 1995. The earnings improvement was especially significant at Publishing Paper's Escanaba, Michigan paper mill and Containerboard's Stevenson, Alabama paperboard mill. Earnings were higher at Coated Board, Packaging, Fine Paper, Specialty Paper, School and Office Products and Zellerbach. Earnings declined slightly at Gilbert Paper and were lower at Mead's Northwood affiliates. Sales revenue increased on higher prices, while overall sales volume declined slightly from the high level of 1994. Pricing strengthened during 1994 in most grades and continued to improve during most of 1995, especially for pulp, coated paper, corrugating medium and coated paperboard. However, in the fourth quarter of 1995, prices for many grades started to weaken as market demand softened. Pulp prices improved in 1995 for Mead's affiliate, Northwood Forest Industries Ltd., before declining slightly late in the fourth quarter. However, earnings were lower as higher selling prices for pulp were offset by increases in wood costs and lower prices for lumber and wood products during much of the year. Within Mead's paper operations, earnings improved significantly as prices for coated paper continued to strengthen in 1995, with prices for publishing grades increasing through the third quarter of the year. Productivity improvements also contributed to earnings improvement for the paper segment. For the Containerboard division, earnings grew significantly as demand and prices for corrugating medium increased from 1994 through the third quarter of 1995 before declining somewhat near year end. For Coated Board, strong market demand in 1994 led to improved prices in 1995. Sales at Packaging continued to grow worldwide, and earnings which had declined in 1994 were much improved in 1995. For School and Office Products, sales and earnings grew over 1994 and 1993 levels. The strong performance in 1995 resulted from sales mix improvement, the successful introduction of new products, and a Canadian acquisition made in late 1994. Sales at Zellerbach increased, and earnings improved significantly in 1995 over 1994 and 1993. Sales grew in all three business units: printing, packaging and industrial. Strong markets, improved selling prices and reduced operating expenses from facility consolidations drove the earnings improvement. 14 OPERATING RESULTS - ----------------- Sales increased to $5.179 billion in 1995 from $4.558 billion in 1994 and $4.239 billion in 1993. The gains in 1995 over 1994 came primarily from higher selling prices. Overall volume for the year was lower than in 1994, as demand for many products began to weaken late in the year. Earnings Per Share Analysis ---------------------------------------------------------- 1995 1994 1993 ----- ----- ----- Continuing operations before the following items $6.19 $ 2.29 $1.73 Significant items (.77) Effect of tax rate change (.12) ----- ------ ----- Continuing operations 6.19 1.52 1.61 Discontinued operations .14 9.87 .47 Extraordinary item (.18) ----- ------ ----- Net earnings $6.33 $11.21 $2.08 ===== ====== ===== ---------------------------------------------------------- In 1995, the company realized a gain of $7.5 million ($.14 per share) resulting from adjustments related to the sale of its Electronic Publishing segment in 1994. In 1994, the company realized $9.87 per share from discontinued operations which consisted of a gain on the sale of the Electronic Publishing segment, that segment's operating earnings through the sale date, adjustments affecting Mead's reinsurance business and charges related to environmental matters at the company's discontinued Industrial Manufacturing segment. The extraordinary item in 1994 was for losses associated with the prepayment of debt. The company also recorded significant items totaling $.77 per share. Those items included charges for the estimated loss from the sale of the Kingsport, Tennessee, paper mill, facilities consolidations 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, Mead changed the depreciable lives of certain paper mill equipment 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. Depreciation, amortization and depletion of property, plant and equipment amounted to $191 million in 1995, compared to $188 million in 1994 and $222 million in 1993. 15 PAPER -------------------------------------------------------------- Segment Summary (in millions) 1995 1994 1993 ----------------------------- -------- -------- -------- Sales $1,243.3 $1,156.8 $1,111.4 ======== ======== ======== Earnings before significant items and income taxes 330.8 137.9 101.9 Significant items (65.9) -------- -------- -------- Earnings before income taxes $ 330.8 $ 72.0 $ 101.9 ======== ======== ======== -------------------------------------------------------------- Mead's paper segment sales improved 7% over 1994, driven by higher selling prices for paper. Earnings before significant items improved 140% as a result of higher prices and productivity gains from cost reductions and improved product mix. Sales revenue increased in 1995, although sales volume overall declined somewhat from the prior year's high level as the mills sold down existing inventories. Production volume in 1995 was ahead of 1994. As a result, mill inventory levels grew in 1995 and are expected to be reduced in 1996. In 1994, paper segment earnings before significant items improved 35% over 1993, driven by increased volume and strong operating results. Prices for coated paper, particularly for publishing grades which began to improve in the second half of 1994, continued to strengthen through the third quarter of 1995 as demand for paper grew rapidly. The average price for coated publishing paper was about 40% higher in 1995 than in 1994. Demand slowed in the third quarter of the year as customers began working down their inventories. Prices had weakened somewhat in many grades by year end. MEAD PUBLISHING PAPER - --------------------- The Publishing Paper division produces coated papers for book and magazine publishers, and catalog and commercial printers. Sales revenue grew in 1995 on higher market prices for coated paper. A rapid strengthening in market demand for coated paper, which began in the second half of 1994, continued through the first half of 1995. Prices ended the year significantly ahead of 1994. Earnings for the year were significantly above 1994 and 1993 at the Escanaba, Michigan, mill on the strength of improved prices, excellent operating performance and continued productivity gains from cost reductions and improved product mix. Demand subsided in the second half of 1995, and mill backlogs and new orders declined as customers began to work down their inventories. 16 During the year, the mill completed a major capital program to upgrade its coated paper operations. With additional coating capability, the mill now double coats certain of its printing papers to enhance quality. It has improved product mix by shifting a portion of its production from medium weight web grades to the production of #1 grade coated sheet and web papers for the commercial printing market. In 1996, overall mill production volume is expected to grow modestly as the result of this upgrade. MEAD FINE PAPER - --------------- Mead Fine Paper produces coated and uncoated papers for business and specialty uses and is a leading producer of carbonless copy papers. Division sales increased in 1995. Operating earnings also improved over 1994 as a result of higher paper prices and continued productivity improvements, primarily in cost control, at the Chillicothe, Ohio mill. Market demand and selling prices, which had been weak in 1993, began to strengthen in the second half of 1994. By the beginning of 1995, demand was strong and, with many paper grades in short supply, customers were placed on allocation. Then, after mid-year, market demand began to ease and, by year end, customer order rates had declined. For the year, production and sales volumes of coated and carbonless were about even with 1994. The carbonless manufacturing operation received certification for ISO 9002 during the year. In May of 1995, Mead completed the sale of the division's mill in Kingsport, Tennessee. This facility mainly produced uncoated paper, which is no longer a primary growth area for Mead. As a result, sales and production volumes of uncoated paper were behind 1994. In 1994, the division's sales improved modestly over 1993, and operating earnings improved significantly on a comparable basis as a result of strong operations and productivity improvements at the Chillicothe mill. During 1995, the mill completed a $110 million capital project to upgrade its coated paper facilities. Improvements were made in the areas of stock preparation, double coating, automated roll storage, finishing and distribution. When tied to changes made at the Publishing Paper mill, these improvements led to the introduction of an enhanced coated paper grade line. MEAD SPECIALTY PAPER - -------------------- Mead Specialty Paper manufactures a variety of decorative papers, both high and low pressure laminates, used in furniture, flooring, countertops and cabinets, and specialty grades used in various industrial applications, including automotive. The division's earnings improved in 1995 over 1994, driven by higher selling prices, a stronger sales mix, new product introductions and productivity improvements. Product growth continued in wear-resistant overlay papers used in flooring applications, especially in Europe. Strong demand in the automotive market and in the housing and remodeling markets in Europe and the U.S. continued from 1994 into the first half of 17 1995. But, by the second half of the year, markets slowed and orders declined as customers began working down their inventories. Costs increased during the year, especially for purchased pulp. In 1994, earnings improved over 1993, based on increased volume from stronger markets and on productivity improvements. GILBERT PAPER - ------------- The Gilbert Paper division produces high-quality communications papers, including cotton-content bonds, specialty text and cover papers, and papers for ink-jet and laser printers. Sales increased over 1994 based on higher selling prices and increased volume. Earnings declined slightly from 1994 as a result of higher costs for purchased pulp and expenses related to capital improvements and market growth strategies. The growth in sales volume was driven by an increase in retail sales from ink-jet and laser printer papers, which more than offset a decline in sales in export and other markets. During the year, the mill set a record for production volume, made significant gains in productivity from operating efficiencies, and received ISO 9001 certification. In 1994, the division reported sales even with 1993, but earnings were lower as a result of higher pulp costs, less profitable product mix and some operating inefficiencies. PACKAGING AND PAPERBOARD -------------------------------------------------------------- Segment Summary (in millions) 1995 1994 1993 ----------------------------- -------- -------- -------- Sales $1,428.8 $1,254.5 $1,156.9 ======== ======== ======== Earnings before significant items and income taxes 184.9 130.7 132.8 Significant items (6.9) -------- -------- -------- Earnings before income taxes $ 184.9 $ 123.8 $ 132.8 ======== ======== ======== -------------------------------------------------------------- Sales increased 14% in 1995, driven by higher selling prices for corrugating medium and coated paperboard. Earnings improved on the strength of higher pricing and continued productivity improvements. Prices for corrugating medium improved in 1994 and throughout much of 1995 before declining somewhat in the fourth quarter of 1995. Market prices for medium averaged about 40% higher in 1995 than in 1994. Pricing for coated paperboard, which remained at depressed levels during 1994, strengthened in 1995. Prices for converted beverage packaging varied by market. 18 1994 sales increased over 1993, however, pricing pressures on coated board and converted cartons for most of the year led to lower average pricing and reduced earnings for the segment. MEAD CONTAINERBOARD - ------------------- Mead's Containerboard division produces corrugating medium used in shipping containers and operates eight corrugated container plants. Sales and earnings improved significantly on strong market demand and higher selling prices. Markets, which had been depressed in 1993, improved significantly in 1994, leading to improved prices for medium and containers. As a result, 1994 sales and earnings improved over 1993. Market strength continued into 1995, before weakening in the last quarter. For the full year, sales volume of medium was slightly behind last year, while converting volume was slightly ahead of last year. In February, Mead announced plans to expand corrugating medium capacity by 225,000 tons per year with the addition of a second paperboard machine at its Stevenson, Alabama, mill. The expansion, estimated at $185 million, is designed to improve product mix at the mill, providing the manufacturing flexibility to produce efficiently both lightweight and heavyweight corrugating medium. Construction began in June, and startup is expected in early 1997. Operating improvements led to further increases in the mill's production rate in 1995, although production volume for the year was about even with 1994 as a result of downtime related to capital improvement projects. The cost of recycled fiber, a portion of the mill's furnish, increased sharply during the year before falling by year end. During the year, two of the division's container plants obtained ISO 9001 certification, bringing to six the number of Mead container plants with the certification. The medium mill obtained ISO 9002 certification in 1993. MEAD COATED BOARD - ----------------- Mead Coated Board manufactures coated unbleached kraft paperboard for use in multiple beverage 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 as a result of higher selling prices for paperboard and productivity improvements that included the effects of cost control, higher production volume and a favorable sales mix. A major improvement in earnings from coated board operations, however, was offset in part by much weaker earnings from the division's sawmill operations as a result of higher wood costs and weaker market prices for lumber. Production continued to increase over previous years, moving up 4% over 1994. Virtually all mill capacity is now directed to production of coated paperboard, known as Coated Natural Kraft. The percentage of CNK(R) paperboard output has increased steadily since the startup of the mill's second coated 19 paperboard machine in late 1990. Sales and earnings growth from coated board sold to European carton manufacturers was especially strong in 1995. Overall sales volume in 1995 was lower than in 1994 when the division reduced its board inventory. Market demand exceeded supply in late 1994. By early 1995, folding carton customers were placed on allocation, and selling prices increased. Near year end, market demand softened. During the year, the division began a capital investment program, estimated at $60 million, to rebuild the #1 and #2 paperboard machines at the Mahrt mill in Alabama to enhance product quality. The investment will also result in about a 10% increase in mill production capacity after the project is completed in 1997. 1994 sales and earnings increased over 1993 on higher volume, improved product mix and cost reductions. MEAD PACKAGING - -------------- Mead Packaging is a leading worldwide 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, and food and other consumer products companies. Earnings improved substantially over 1994 on increased sales volume, overall cost reductions and productivity improvements in converting operations. Selling prices for beverage cartons varied by market. Sales volume increased worldwide as a result of strong markets in most countries and the placement of new packaging systems in Europe, North America, South America, Australia and other markets targeted for growth. International sales and earnings were ahead of last year. The division integrated into its European operations a packaging converter in Spain which it acquired in 1994. In 1995, the division completed the development of and launched a new packaging system for a major soft drink customer and began construction of a new offset packaging printing plant in Lanett, Alabama. In 1994, sales volume increased over 1993 worldwide as the economy strengthened in many markets, but earnings were lower on higher production and freight costs, continued pricing pressures and costs related to business growth. 20 DISTRIBUTION AND SCHOOL AND OFFICE PRODUCTS ------------------------------------------------------------------- Segment Summary (in millions) 1995 1994 1993 -------- --------- -------- Sales $2,507.3 $2,146.2 $1,970.7 ======== ======== ======== Earnings before significant items and income taxes 77.3 37.8 38.4 Significant items (17.3) -------- --------- -------- Earnings before income taxes $ 77.3 $ 20.5 $ 38.4 ======== ======== ======== ------------------------------------------------------------------- Sales increased 17% in 1995 in the Distribution and School and Office Products segment. Earnings increased significantly on improved operations at both Zellerbach and School and Office Products. In 1994, sales increased over 1993, although earnings decreased as a result of costs related to a reorganization at Zellerbach. The School and Office Products division had strong growth in sales and expanded its presence in Canada following the acquisition of Hilroy in late 1994. Earnings increased through an improved mix of value-added products. Sales increased in all three business units of Zellerbach. Earnings improved significantly over 1994 as a result of stronger markets, improved product prices and reduced operating expenses from facilities consolidation and reorganization. ZELLERBACH - ---------- Zellerbach is a sales and marketing organization distributing value-added solutions and services for businesses through its three business units: printing papers; packaging systems including equipment and supplies; and, industrial/commercial supplies. Sales revenue increased over 1994 in all three business units as a result of stronger markets and improved prices. Higher prices for printing paper, up about 15%, drove revenue improvement, though margin percentage declined slightly as a result of higher product costs. Operating earnings in 1995 improved significantly over 1994 and 1993 as a result of stronger markets and reduced operating expenses. Lower operating expenses were driven by facility consolidations, which reduced the size of sales office and warehouse space by about 20%, and other improvements. Cash flow improved through efficient receivables management and significant reductions in inventory levels. A weakening in market demand and pricing for printing paper began in the fourth quarter of 1995. In 1994, sales improved over 1993, but operating earnings declined due to higher operating costs and expenses associated with divisional reorganization. 21 MEAD SCHOOL AND OFFICE PRODUCTS - ------------------------------- Mead's School and Office Products division is the nation's largest converter and distributor of paper-based school supplies. It also provides stationery products for home and office use, and is the industry leader in fashion and product design. Division sales and earnings increased over 1994 as a result of higher selling prices, continued improvement in the mix of value-added products and the addition of sales of Hilroy, the leading converter of paper-based school supplies in Canada, which Mead acquired in November 1994. Excluding Hilroy, sales were 18% ahead of 1994. The continued growth in 1995 of value-added products was driven by increased sales of licensed products, the Five Star(R) and Cambridge(R) lines, and by the successful introduction of a school products line featuring team logos from the NHL, NBA and NFL. The overall volume of value-added products increased, while volume in commodity products decreased somewhat. 1995 results also reflect the successful integration of Hilroy into division operations and the expansion of Mead's product lines into the Canadian market. 1994 sales and operating earnings improved over 1993, reflecting volume growth and controlled spending. In 1996, continued growth is expected in value-added school supplies. The division will introduce a line targeted to the young female student market, introduce licensed products with college logos, and expand the school line to include team logos from Major League Baseball. Continued growth is also expected in the Cambridge line of office products with the introduction of a financial organizer and new items for the day planner program. 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 in 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 managed by Noranda Forest Sales Inc. Northwood's 1995 sales were up 10% from 1994 as higher pulp prices offset lower prices for wood products. However, Mead's share of all investees' earnings in 1995 of $39.0 million was below 1994 earnings of $59.8 million. This was primarily a result of 1994 refunds of lumber export duties related to prior years and increased wood costs in 1995. Mead's share of 1993 earnings was $18.4 million. The increase in pulp prices which began in 1994 continued into 1995 as a result of strong worldwide economies and high demand for paper, particularly in overseas markets. Four pulp price increases in 1995 pushed prices to record high levels, up 41% from the beginning of the year, before declining in 22 December. Pulp demand weakened late in the fourth quarter in response to slower paper markets. World pulp markets are expected to remain soft through the first half of 1996. Wood chip costs increased 83% in 1995 due to tight supply. After reaching record pricing and consumption levels in 1993 and 1994, lumber demand weakened during 1995, with prices declining 26% on average from the prior year. Plywood and OSB markets were very volatile. While average plywood prices were up 3% in 1995 from the prior year, OSB prices declined by 8%. Log costs also continued to escalate in 1995, increasing 28% from the prior year. SELLING, ADMINISTRATIVE AND RESEARCH EXPENSES - --------------------------------------------- Selling, administrative and research expenses rose by 2% in 1995 compared with a 16% increase in 1994. As percentages of sales, the costs were 10.7% in 1995, 11.9% in 1994 and 11.0% in 1993. The 1995 dollar increase was primarily the result of general inflationary pressures, however, prices for Mead's products rose at a much higher rate. Also, expenses in 1994 included significant items related to costs associated with facilities consolidations and related severance, primarily at Zellerbach, the negative impact of an unusually large dollar amount of pension settlements, and other smaller matters. Excluding the effects of these significant items in 1994, selling, administrative and research expenses increased by 6% in 1995 and by 11% in 1994. Most of the 1995 increase was attributable to higher sales-related expenses at Packaging and School and Office Products, and expenses related to new markets at those two divisions. Apart from the more significant items impacting 1994, higher sales-related expenses at Zellerbach and Packaging, startup expenses related to new markets for Packaging, and restructuring costs at several divisions were additional reasons for the 1994 expense increase over 1993. INTEREST AND DEBT EXPENSE - ------------------------- Due to significantly lower average interest rates and debt levels, interest and debt expense in 1995 decreased to $69 million compared with $101 million in 1994. The combination of higher average debt levels and higher interest rates in 1994 caused the increase in interest and debt expense from the 1993 level of $95 million. 23 FINANCIAL REVIEW ---------------- In 1995 Mead generated strong cash flows. Additionally, proceeds from the 1994 sale of Mead's Electronic Publishing segment, Mead Data Central, were used to pay $130 million of 9% debentures and $84 million of other debt obligations and to permit the purchase of $306 million (5.8 million shares) of the company's stock in the first four months of 1995. Later in the year Mead purchased an additional $49 million (0.9 million shares) of its stock. Mead's total debt at year-end 1995 stands at $768 million, down from $974 million at the end of 1994 and $1,366 million at the end of 1993. Mead's ratio of total debt to total capital stood at 26.2% at the end of 1995 versus 30.9% and 46.4% ratios at the end of 1994 and 1993, respectively. That ratio may change as Mead continues its 1995 announced stock buyback program and, 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 in 2023 and $150 million ($148.3 million net of discount) of 7-1/8% debentures due in 2025. The proceeds were used to retire short-term borrowings previously classified as long term. Mead has a $550 million bank credit agreement which extends until August 2000. At the end of 1995, Mead paid a fixed or capped rate on 86% 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. The estimated market value of long-term debt, excluding capitalized leases, was $36.7 million higher than the book value at the end of 1995. Working capital at the end of 1995 amounted to $546 million compared with $807 million and $380 million, respectively, at the end of 1994 and 1993. The 1995 reduction resulted from using cash to fund the stock buyback program of early 1995. Mead's current ratios at the end of 1995, 1994 and 1993 were 1.7, 1.7 and 1.6, respectively. Reflecting a combination of strong manufacturing operations throughout 1995 and reduced demand late in the year, Mead's inventory levels rose to $411 million in 1995, compared with $382 million in 1994 and $439 million in 1993. The 1994 reduction was due to strong product demand, especially at the end of that year. At the end of 1995, the replacement value of inventories exceeded their LIFO value by $229 million. Adjusted for LIFO, Mead's current ratio would be 1.8 at year end. Mead has filed a shelf registration 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 a part of that registered debt offering. Mead common stock has paid a quarterly dividend of $.28 per share since June 1995; the rate had been $.25 per share since June 1990. 24 CAPITAL SPENDING - ---------------- Capital spending for 1995 amounted to $263 million, compared with $316 million and $306 million in 1994 and 1993, respectively. Spending in 1995 was below that of 1994. Some of the spending, originally planned for 1995, has been shifted to 1996. During 1995, the major upgrades of Mead's coated paper facilities at Escanaba, Michigan, and Chillicothe, Ohio, were completed. Most of the spending for these projects was made in 1994. Late in the second quarter of 1995, ground was broken for the $185 million expansion at Mead's Stevenson, Alabama, corrugating medium mill, with the majority of the spending expected in 1996. Also, during 1995, Mead commenced the $60 million project to rebuild the two paper machines at its Mahrt coated paperboard mill in Alabama. Completion is expected in 1997. Mead plans capital spending in 1996 in the range of $450-550 million, including approximately $50 million for timber and timberland. Funds to finance these projects are expected to come from cash on hand at the end of 1995 and from 1996 operations, although some external borrowing may be needed. ENVIRONMENTAL PROCEEDINGS - ------------------------- Mead has been notified by the United States Environmental Protection Agency ("USEPA") or by various 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 seven 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 under federal, state or local laws with respect to at least 15 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 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 reserves of $42 million relating to current environmental litigation and proceedings which it believes are probable and reasonably estimable. Expenditures in 1996 from this reserve are expected to be less than $5 million. Expenditures in 1995 from this reserve were less than $5 million. Mead believes that it is reasonably possible that costs associated with these sites may exceed current reserves by an amount that could range from an insignificant amount to as much as $45 million. The estimate of this range is less certain than the estimates upon which reserves are based. In order to establish this range, assumptions were used that were less favorable to Mead among those outcomes that are considered reasonably possible. In 1993, the USEPA issued proposed regulations under the Clean Air Act and Clean Water Act (the "Cluster Rules") intended to reduce air and water discharges of specific substances from U.S. paper and pulp mills. At present, 25 these Cluster Rules are in the proposal stage, and are not expected to be finalized until later this year. In 1995, the USEPA issued final regulations implementing the Federal Great Lakes Critical Programs Act (the "GLI"). The GLI regulations require the Great Lakes States to develop regulatory programs for the protection and enhancement of the water quality of the Great Lakes, consistent with USEPA's promulgated guidelines. Implementation of the GLI regulations by the affected States is not expected until 1997. If the Cluster Rules are enacted in their present form and if the States implement regulations identical to the USEPA regulations under GLI, these regulations would significantly increase Mead's capital spending and operating costs over the next five years. However, Mead does not expect the Cluster Rules to be enacted as proposed in their present form. Mead has included in its capital spending plans amounts necessary to comply with the Cluster Rules in the form that Mead expects to be enacted. EFFECTS OF INFLATION - -------------------- Inflation remained at a moderate level during 1995 and is not expected to have a significant effect in the near term. 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................................ 34-56 SUPPLEMENTARY DATA Selected quarterly financial data.................................. 57 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, 1995 and 1994, and the related statements of earnings, shareowners' equity and cash flows for each of the three years in the period ended December 31, 1995. 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, 1995 and 1994, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1995, 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. DELOITTE & TOUCHE LLP DELOITTE & TOUCHE LLP Dayton, Ohio January 25, 1996 28 THE MEAD CORPORATION AND CONSOLIDATED SUBSIDIARIES STATEMENTS OF EARNINGS (All dollar amounts in millions, except per share amounts)
Year Ended December 31 1995 1994 1993 - ---------------------- --------- --------- --------- Net sales $5,179.4 $4,557.5 $4,239.0 Cost of products sold (Note E) 4,104.0 3,805.8 3,550.7 -------- -------- -------- Gross profit 1,075.4 751.7 688.3 Selling, administrative and research expenses 552.0 543.1 467.7 -------- -------- -------- Earnings from operations 523.4 208.6 220.6 Other revenues (expenses) - net (Note J) 33.7 (55.1) 9.0 Interest and debt expense (69.4) (101.1) (94.6) -------- -------- -------- Earnings from continuing operations before income taxes 487.7 52.4 135.0 Income taxes (Note K) 184.2 22.6 57.7 -------- -------- -------- Earnings from continuing operations before equity in net earnings of investees 303.5 29.8 77.3 Equity in net earnings of investees (Note C) 39.0 59.8 18.4 -------- -------- -------- Earnings from continuing operations 342.5 89.6 95.7 Discontinued operations (Note L) 7.5 617.4 28.4 -------- -------- -------- Earnings before extraordinary item 350.0 707.0 124.1 Extraordinary item (Note F) (11.3) -------- -------- -------- Net earnings $ 350.0 $ 695.7 $ 124.1 ======== ======== ======== Per common and common equivalent share (Note A): Earnings from continuing operations $ 6.19 $ 1.52 $ 1.61 Discontinued operations .14 9.87 .47 -------- -------- -------- Earnings before extraordinary item 6.33 11.39 2.08 Extraordinary item (.18) -------- -------- -------- Net earnings $ 6.33 $ 11.21 $ 2.08 ======== ======== ========
See notes to financial statements. 29 THE MEAD CORPORATION AND CONSOLIDATED SUBSIDIARIES BALANCE SHEETS (All dollar amounts in millions) ASSETS
December 31 1995 1994 - --------------------------------------------- --------- --------- Current assets: Cash and cash equivalents $ 292.6 $ 484.0 Accounts receivable, less allowance for doubtful accounts of $26.8 in 1995 and $23.9 in 1994 585.7 606.6 Inventories (Note B) 410.5 382.4 Deferred tax asset (Note K) 29.5 64.4 Other current assets 49.0 356.6 --------- --------- Total current assets 1,367.3 1,894.0 Investments and other assets: Investments in investees (Note C) 141.0 108.2 Other assets (Note D) 500.4 546.5 --------- --------- 641.4 654.7 Property, plant and equipment, at cost (Notes E, F and O): Land and land improvements 130.5 130.1 Buildings 524.5 539.1 Machinery and equipment 3,309.3 3,130.5 Construction in progress 120.7 138.8 --------- --------- 4,085.0 3,938.5 Less accumulated amortization and depreciation (1,954.6) (1,849.3) --------- --------- 2,130.4 2,089.2 Timber and timberlands, net of timber depletion 233.7 224.7 --------- --------- Property, plant and equipment, net 2,364.1 2,313.9 --------- --------- Total assets $ 4,372.8 $ 4,862.6 ========= =========
See notes to financial statements. 30 LIABILITIES AND SHAREOWNERS' EQUITY
December 31 1995 1994 - ------------------------------------------- -------- -------- Current liabilities: Accounts payable: Trade $ 242.3 $ 245.6 Affiliated companies 52.1 43.9 Outstanding checks 86.1 84.0 Accrued wages 96.6 84.6 Income taxes payable 9.0 324.7 Taxes, other than income 44.1 53.2 Other current liabilities 218.6 235.4 Current maturities of long-term debt 73.0 16.1 -------- -------- Total current liabilities 821.8 1,087.5 Long-term debt (Note F) 694.8 957.7 Commitments and contingent liabilities (Notes O and P) Deferred items: Income tax liability (Note K) 449.7 393.3 Postretirement benefits (Note N) 117.0 114.7 Other 129.3 126.8 -------- -------- Total deferred items 696.0 634.8 Shareowners' equity (Notes H and I): Common shares 157.8 174.9 Foreign currency translation adjustment (.8) (4.8) Net unrealized gain on securities 3.7 Retained earnings 2,003.2 2,008.8 -------- -------- 2,160.2 2,182.6 -------- -------- Total liabilities and shareowners' equity $4,372.8 $4,862.6 ======== ========
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, 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 Net earnings 350.0 Stock option activity - net 936 2.8 38.3 Shares issued 9 .1 .4 Shares purchased (6,697) (20.0) (38.7) (296.0) Cash dividends - $1.09 a common share (59.6) Change in net unrealized gain on securities (3.7) Foreign currency translation adjustment 4.0 ------ ------ ------ ----- ---- -------- December 31, 1995 52,897 $157.8 $ - $ (.8) $ - $2,003.2 ====== ====== ====== ===== ==== ========
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 1995 1994 1993 - ---------------------------------------------------- -------- -------- -------- Cash flows from operating activities: Net earnings $ 350.0 $ 695.7 $ 124.1 Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation, amortization and depletion of property, plant and equipment 190.7 188.1 221.7 Depreciation and amortization of other assets 46.0 37.4 32.0 Deferred income taxes 89.1 (7.3) 37.5 Investees - earnings and dividends (29.5) (46.8) (7.9) Discontinued operations (7.5) (617.4) (28.4) Extraordinary item 11.3 Other (65.1) 47.5 (30.6) Change in assets and liabilities, excluding effects of acquisitions and dispositions: Accounts receivable 20.9 (109.4) (1.5) Inventories (52.7) 65.0 (18.6) Other current assets (23.4) 3.7 19.2 Accounts payable and accrued liabilities (325.8) 62.1 (41.3) Cash provided by (used in) discontinued operations (5.8) (2.9) 20.3 ------- ------- ------- Net cash provided by operating activities 186.9 327.0 326.5 ------- ------- ------- Cash flows from investing activities: Capital expenditures (263.0) (315.6) (306.1) Additions to equipment rented to others (56.0) (49.0) (48.0) Payments for acquired businesses (22.0) Proceeds from sale of businesses 39.8 1,500.0 Restricted funds 461.0 (461.0) Other 20.1 (18.8) 19.8 ------- ------- ------- Net cash provided by (used in) investing activities 201.9 633.6 (334.3) ------- ------- ------- Cash flows from financing activities: Additional borrowings 6.0 175.6 396.6 Payments on borrowings (213.5) (572.9) (354.2) Cash dividends paid (59.6) (59.4) (59.0) Common shares issued 41.6 15.2 15.3 Common shares purchased (354.7) (44.4) ------- ------- ------- Net cash (used in) financing activities (580.2) (485.9) (1.3) ------- ------- ------- Increase (decrease) in cash and cash equivalents (191.4) 474.7 (9.1) Cash and cash equivalents at beginning of year 484.0 9.3 18.4 ------- ------- ------- Cash and cash equivalents at end of year $ 292.6 $ 484.0 $ 9.3 ======= ======= =======
See notes to financial statements. 33 THE MEAD CORPORATION AND CONSOLIDATED SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993 A - SIGNIFICANT 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 10 to 40 years. The Company periodically reviews goodwill balances for impairment based on the expected future cash flows of the related businesses acquired. DEPRECIATION AND DEPLETION. 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 (SFAS) 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 ESTIMATES AND ASSUMPTIONS. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the reported revenues and expenses during a period. Estimates and assumptions are also used in the disclosures of contingent assets and liabilities at the date of the financial statements. Actual results could differ from those estimates. 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 as primary net earnings per share. B - INVENTORIES (All dollar amounts in millions) December 31 1995 1994 - -------------------------------------- ------ ------ Finished and semi-finished products $270.4 $241.0 Raw materials 86.9 78.9 Stores and supplies 53.2 62.5 ------ ------ $410.5 $382.4 ====== ====== For purposes of comparison to non-LIFO companies, inventories valued at current replacement cost would have been $229.3 million and $183.8 million higher than reported at December 31, 1995 and 1994, 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 1995 1994 - ---------------------------------------- ------ ------ Investments, at cost $ 25.5 $ 26.1 Foreign currency translation adjustment (10.0) (13.2) Equity in undistributed net earnings 125.5 95.3 ------ ------ Total investments in investees (equal to Mead's share of investees' equity) $141.0 $108.2 ====== ====== 35 The summarized operating data for all investees is presented in the following table: (All dollar amounts in millions) Year Ended December 31 1995 1994 1993 - -------------------------------------- ------ ------ ------ Revenues: Sales to Mead $ 45.8 $ 38.6 $ 18.2 Sales to other customers 730.2 692.6 547.9 ------ ------ ------ $776.0 $731.2 $566.1 ====== ====== ====== Gross profit $160.0 $215.6 $ 86.5 ====== ====== ====== Net earnings $ 86.8 $131.1 $ 47.0 ====== ====== ====== Mead's share of net earnings, after elimination of intercompany transactions and reduction for Mead's income taxes on partnership earnings $ 39.0 $ 59.8 $ 18.4 ====== ====== ====== Dividends and partnership distributions received $ 13.8 $ 18.9 $ 15.7 ====== ====== ====== The summarized balance sheet data for all investees is as follows: (All dollar amounts in millions) December 31 1995 1994 - -------------------------------------------- ------- ------- Current assets $ 268.0 $ 226.5 Noncurrent assets 650.0 611.5 Current liabilities (122.9) (180.8) Long-term debt and deferred items (513.1) (440.8) ------- ------- Shareholders' equity $ 282.0 $ 216.4 ======= ======= 36 D - OTHER ASSETS (All dollar amounts in millions) December 31 1995 1994 - ----------------------------------------------------- ------ ------ Pension asset $214.8 $153.4 Cash restricted for retirement of long-term borrowings 130.0 Rental equipment (net of accumulated amortization of $218.3 in 1995 and $178.7 in 1994) 106.7 93.3 Goodwill and other intangibles (net of accumulated amortization of $37.3 in 1995 and $34.0 in 1994) 77.1 80.0 Cash surrender value of life insurance, less policy loans of $30.4 in 1995 and $26.1 in 1994 57.9 45.1 Miscellaneous 43.9 44.7 ------ ------ $500.4 $546.5 ====== ====== E - PROPERTY, PLANT AND EQUIPMENT In 1994, the Company changed the remaining estimated useful lives of certain machinery and equipment 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 net earnings for the year ended December 31, 1994 by $26.5 million ($.42 per share). 37 F - LONG-TERM DEBT (All dollar amounts in millions) December 31 1995 1994 - ----------------------------------------------------- ------- ------- Capital lease obligations $131.4 $148.1 Medium-term notes, 5-2/3% to 9-7/8%, face amount of $86.0 in 1995 and $180.5 in 1994, due from 1996 through 2020 (effective rate approximately 9.4%) 80.1 173.4 8-1/8% debentures, face amount of $150.0, due 2023 (effective rate approximately 8.4%) 147.6 147.5 7-1/8% debentures, face amount of $150.0, due 2025 (effective rate approximately 7.4%) 146.8 146.7 Variable-rate Escanaba tax-exempt bonds, $10.0 due in 2013 and $83.5 due in 2023, average effective rate approximately 3.8% 93.5 93.5 Variable-rate Industrial Development Revenue Bonds, due from 2001 through 2023, average effective rate approximately 3.8% 69.9 78.6 9% debentures (retired in 1995) 130.0 Other 25.5 39.9 ------ ------ $694.8 $957.7 ====== ====== Capital lease obligations consist primarily of Industrial Revenue Bonds and Notes with an average effective rate of approximately 4.3%. 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. A loss on extinguishment of debt, net of $6.9 million income tax benefit, is included in the 1994 statement of earnings as an extraordinary item and represents call premiums on the early retirement of debentures and the write-off of the related financing expenses. The 8-1/8% and 7-1/8% debentures are callable by the Company at approximately 103% beginning in 2003. The Company has an unused $550 million bank credit agreement that extends until August 2000. 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 $73.0 million in 1996, $14.8 million in 1997, $1.2 million in 1998, $8.9 million in 1999 and $35.5 million in 2000. Property, plant and equipment carried at $75.9 million is pledged as collateral under the above debt (principally capital leases). 38 The Company has guaranteed obligations of certain affiliated operations and others totaling approximately $41.6 million at December 31, 1995. In addition, the Company has a 50% interest in a partnership with Scott Paper Company, its successors and assigns, 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. 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. 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. 39 Selected information related to the Company's interest rate swap agreements is as follows: (All dollar amounts in millions) December 31 1995 1994 - ----------------------------------- ------- ------- Notional amount $180.0 $130.0 ====== ====== Fair value $ (7.4) $(23.0) Carrying amount (6.6) (12.2) ------ ------ Net unrecognized (loss) $ (.8) $(10.8) ====== ====== The Company utilizes interest rate cap agreements to limit 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 1995 1994 - ----------------------------------- ------- ------- Notional amount $200.0 $250.0 ====== ====== Fair value $ .2 $ 1.7 Carrying amount .9 1.7 ------ ------ Net unrecognized (loss) $ (.7) $ - ====== ====== 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, 40 French franc and British pound. The contract amount of foreign currency forwards at December 31, 1995 and 1994, is $130.7 million and $133.2 million, respectively. The carrying amount and fair value of these contracts are not significant. 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 $600.1 million and $782.0 million at December 31, 1995 and 1994, respectively, and the related carrying amounts were $563.4 million and $809.6 million, respectively. At December 31, 1995 and 1994, the Company held short-term investments which are included in cash and cash equivalents. Short-term investments are also included in restricted cash at December 31, 1994. The carrying amount of these short-term investments is a reasonable estimate of fair value. H - SHAREOWNERS' EQUITY The Company has authorized 300 million no par common shares. There were 52.9 million and 58.6 million common shares outstanding at December 31, 1995 and 1994, respectively. During the second quarter of 1995, the Company completed the $350 million stock repurchase program announced in December 1994. A total of 6.7 million shares were repurchased under the program. The Company has outstanding authorization from the Board of Directors to repurchase up to an additional five million common shares of which .9 million have been repurchased as of December 31, 1995. A total of 13.0 million and 6.3 million common shares were held in treasury at December 31, 1995 and 1994, 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, 1995, there were 73.4 million 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. 41 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, 1995, 41,000 common shares are issued and outstanding under the plan. There were 404,000 common shares reserved for issuance under this plan at December 31, 1995. The Company has preferred shares authorized but unissued as follows: 61,500 undesignated cumulative preferred, par value $100; 20 million undesignated voting cumulative preferred, without par value; 20 million cumulative preferred, without par value; and 295,540 cumulative second preferred, par value $50. At December 31, 1995, undistributed net earnings of investees and partially-owned foreign affiliates of $126.5 million are included in retained earnings. At December 31, 1995, there is $1.4 billion 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. I - STOCK OPTIONS AND RIGHTS Officers and key employees have been granted stock options under various plans. Options as to 1.3 million 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 4.2 million common shares reserved for issuance under these plans. The following summarizes the Company's stock option plans and the status of the plans: (All share amounts in thousands) Shares Option Price - ------------------------------------ -------- -------------- Outstanding as of December 31, 1992 2,762.4 $16.94 -$46.50 Granted 721.3 41.63 - 43.56 Exercised (459.4) 16.94 - 41.50 Canceled (33.1) 26.63 - 43.50 ------- -------------- Outstanding as of December 31, 1993 2,991.2 16.94 - 46.50 Granted 935.1 44.00 - 49.69 Exercised (377.9) 16.94 - 43.50 Canceled (32.5) 36.63 - 44.69 ------- -------------- Outstanding as of December 31, 1994 3,515.9 21.75 - 49.69 Granted 720.9 54.38 - 56.50 Exercised (959.4) 21.75 - 46.50 Canceled (13.4) 43.50 - 54.38 ------- -------------- Outstanding as of December 31, 1995 3,264.0 $23.94 -$56.50 ======= ============== Exercisable as of December 31, 1995 2,565.6 $23.94 -$49.69 ======= ============== 42 The Company measures compensation cost for stock options issued to employees using the intrinsic value based method of accounting prescribed by Accounting Principles Board Opinion (APB) No. 25, "Accounting for Stock Issued to Employees." In October 1995, the Financial Accounting Standards Board issued SFAS No. 123, "Accounting for Stock-Based Compensation," which requires adoption no later than fiscal years beginning after December 15, 1995. Pursuant to the new standard, companies are encouraged, but not required, to adopt the fair value method of accounting for stock options and similar equity instruments. The Company has elected to continue measuring compensation cost in accordance with APB Opinion No. 25 and will adopt the additional disclosure requirements of SFAS No. 123 in 1996. J - OTHER REVENUES (EXPENSES) - NET (All dollar amounts in millions) Year Ended December 31 1995 1994 1993 - ---------------------------------------- ------ ------- ----- Investment income $18.1 $ 6.5 $ 1.8 Provision for (loss) on sale of facility (60.0) Other 15.6 (1.6) 7.2 ----- ------ ----- $33.7 $(55.1) $ 9.0 ===== ====== ===== In 1994, the Company recorded a charge to earnings to reflect the estimated loss on sale of its Kingsport, Tennessee, facility. The Company completed the sale of the facility in the second quarter of 1995 with no additional charges recorded. The Company incurred a $12.1 million 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. 43 K - INCOME TAXES The principal current and non-current deferred tax assets and (liabilities) are as follows: (All dollar amounts in millions) Year Ended December 31 1995 1994 - ----------------------------------------------- -------- -------- Deferred tax liabilities: Accelerated depreciation for tax purposes $(396.9) $(333.6) Nontaxable pension asset (81.1) (58.7) Deferred installment gain (47.5) (47.5) Other (63.2) (89.6) ------- ------- (588.7) (529.4) ------- ------- Deferred tax assets: Compensation and fringe benefits accruals 42.4 48.5 Postretirement benefit accrual 43.8 42.0 Loss provisions and other expenses not currently deductible 51.2 74.7 Other 31.1 35.3 ------- ------- 168.5 200.5 ------- ------- Net deferred liability $(420.2) $(328.9) ======= ======= Included in the balance sheets: Current assets - deferred tax asset $ 29.5 $ 64.4 Deferred items - income tax liability (449.7) (393.3) ------- ------- Net deferred liability $(420.2) $(328.9) ======= ======= 44 The significant components of income tax expense are as follows: (All dollar amounts in millions) Year Ended December 31 1995 1994 1993 - ------------------------------------ ------- -------- ------- Currently payable: Federal $86.3 $ 358.0 $ 46.1 State and local 6.9 17.0 3.3 Foreign 8.5 5.2 3.2 ----- ------- ------ 101.7 380.2 52.6 Change in deferred income taxes 91.3 61.7 30.6 ----- ------- ------ 193.0 441.9 83.2 Allocation to partnership earnings (4.3) (5.9) (5.1) Allocation to discontinued operations (4.5) (420.3) (20.4) Allocation to extraordinary item 6.9 ------ ------- ------ $184.2 $ 22.6 $ 57.7 ====== ======= ====== 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 1995 1994 1993 - -------------------------------------- ------- -------- ------- Federal taxes computed at statutory rate of 35% $170.7 $18.4 $47.2 State and local income taxes, net of federal benefit 12.9 .2 1.1 Effect of increase in federal income tax rate as of January 1, 1993 7.3 Impact of additional taxes related to foreign operations 3.2 3.8 1.0 Other (2.6) .2 1.1 ------ ----- ----- Income taxes $184.2 $22.6 $57.7 ====== ===== ===== Effective tax rate 37.8% 43.1% 42.7% ====== ===== ===== At December 31, 1995, 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 $247.2 million, including foreign currency translation adjustments. The aggregate amount of unrecognized deferred tax liability is approximately $20.0 million at December 31, 1995. 45 L - Discontinued Operations (All dollar amounts in millions) Year Ended December 31 1995 1994 1993 - --------------------------------------- ----- ------ ------ Earnings from operations of Electronic Publishing segment, net of income taxes of $27.8 and $20.4 $ $ 37.9 $28.4 Gain on sale of Electronic Publishing segment, net of income tax of $4.5 and $420.2 7.5 628.8 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 $ 7.5 $617.4 $28.4 ===== ====== ====== In December 1994, the Company sold its Electronic Publishing segment (Mead Data Central) for $1.5 billion in cash. The additional gain on sale recognized in the fourth quarter of 1995 resulted primarily from the adjustment of certain items related to this sale. Revenues of the Electronic Publishing segment were $565.2 million for the period January 1, 1994 through November 30, 1994, and $551.3 million for the year ended December 31, 1993. 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 and, as such, the amounts ultimately paid may vary significantly from current estimates. 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. In the event that the Company is unable to complete the disposition of such operations, it will continue the runoff strategy. Management believes adequate reserves have been established, however, upon final resolution, actual results may differ from that which has been recorded. The net liabilities of the insurance operations at December 31, 1995, include total assets of $78.2 million, primarily investments, and liabilities of $123.0 million, primarily claims reserves. 46 The provision for losses in 1994 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 of 1994, a potentially responsible party with regard to alleged contamination of a nearby creek. 47 M - 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 1995 1994 - ------------------------------------------------ -------- -------- Financial status of plans: Plan assets at fair value (primarily common stocks and fixed income securities) $ 874.1 $ 695.5 Actuarial present value of accumulated benefit obligation: Vested (563.6) (468.6) Non-vested (47.5) (40.2) Estimated effect of future salary increases at 1% over expected inflation (61.3) (47.2) ------- ------- Projected benefit obligation (672.4) (556.0) ------- ------- Plan assets in excess of projected benefit obligation 201.7 139.5 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 (48.9) (57.1) Unrecorded effect of net loss arising from differences between actuarial assumptions used to determine periodic pension expense and actual experience 50.2 58.3 Unamortized prior service cost 11.8 12.7 ------- ------- Pension asset $ 214.8 $ 153.4 ======= ======= Benefit obligation discount rate 7.25% 8.5% ======= ======= 48 The projected benefit obligation for the Company's two unfunded plans was $25.0 million and $16.8 million at December 31, 1995 and 1994, respectively, of which $17.3 million and $13.1 million represent the accumulated benefit obligation. Of the projected benefit obligation, $16.3 million and $9.2 million at December 31, 1995 and 1994, respectively, is subject to later amortization. Unfunded accrued pension cost is $8.7 million and $7.6 million at December 31, 1995 and 1994, respectively. The components of net pension (income) expense for all plans are as follows: (All dollar amounts in millions) Year Ended December 31 1995 1994 1993 - ------------------------------------ -------- ------- -------- Service cost, benefits earned during the year $ 15.5 $ 22.7 $ 19.8 Interest cost on projected benefit obligation 46.4 48.7 46.8 Actual return on plan assets (181.2) (10.0) (103.8) Net amortization and deferral 114.4 (52.0) 23.9 ------- ------ ------- Net pension (income) expense (4.9) 9.4 (13.3) Less - net pension expense allocated to discontinued operations 3.9 3.2 ------- ------ ------- Net pension (income) expense - continuing operations $ (4.9) $ 5.5 $ (16.5) ======= ====== ======= The expected long-term rate of return on plan assets used in determining net pension income was 9.0% in 1995, 9.5% in 1994 and 10.0% in 1993. 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 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. 49 N - 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. Summary information on the Company's plans is as follows: (All dollar amounts in millions) December 31 1995 1994 - ------------------------------------------------ -------- -------- Financial status of plans: Accumulated postretirement benefit obligation: Retirees $ (69.5) $ (69.2) Fully eligible, active plan participants (23.8) (30.0) Other active plan participants (39.8) (41.4) ------- ------- (133.1) (140.6) Less plan assets at fair value 8.5 8.0 ------- ------- Accumulated postretirement benefit obligation in excess of plan assets (124.6) (132.6) 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 7.6 17.9 ------- ------- Accrued postretirement benefit cost $(117.0) $(114.7) ======= ======= Benefit obligation discount rate 7.25% 8.5% ======= ======= 50 The components of net periodic postretirement benefit cost are as follows: (All dollar amounts in millions) Year Ended December 31 1995 1994 1993 - ------------------------------------------------ ------ ------ ------ Service cost, benefits attributed to employee service during the year $ 2.3 $ 3.9 $ 3.1 Interest cost on accumulated postretirement benefit obligation 9.6 11.2 9.5 Actual return on plan assets (1.1) (.7) (1.1) Net amortization and deferral .5 1.7 .1 ----- ----- ----- Net periodic postretirement benefit cost 11.3 16.1 11.6 Less - net periodic postretirement benefit cost allocated to discontinued operations .8 .7 ----- ----- ----- Net periodic postretirement benefit cost - continuing operations $11.3 $15.3 $10.9 ===== ===== ===== 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 12% in 1995, 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, 1995, would be increased by 9%. The effect of this change on the sum of the service cost and interest cost components of net periodic postretirement benefit cost for 1995 would be an increase of 11%. 51 O - LEASES At December 31, 1995, 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: 1996 $ 5.3 $ 31.1 1997 5.2 25.9 1998 5.2 20.2 1999 5.4 14.8 2000 5.4 12.0 Later years through 2028 205.0 62.1 ------ ------ Total minimum lease payments 231.5 $166.1 ====== Less amount representing interest (99.6) ------ Present value of net minimum lease payments 131.9 Less current maturities of capital lease obligations (.5) ------ Capital lease obligations $131.4 ====== 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 1995 1994 - --------------------------------------- ------- ------ Land and buildings $ 5.2 $ 34.8 Machinery and equipment 138.6 140.7 ------ ------ 143.8 175.5 Less accumulated amortization (68.3) (84.6) ------ ------ $ 75.5 $ 90.9 ====== ====== The majority of rent expense is for operating leases which are for office, warehouse and manufacturing facilities and delivery, manufacturing and computer equipment. A number of these leases have renewal options. Rent expense was $49.3 million, $52.8 million and $48.5 million in 1995, 1994 and 1993, respectively. 52 P - 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 at least 22 environmental proceedings. It is not possible to determine the ultimate liability, if any, in all these matters. The Company has established reserves of $42 million relating to environmental liabilities, including those related to discontinued operations, which it believes are probable and reasonably estimable. The Company believes that it is reasonably possible that costs associated with these sites may exceed current reserves by an amount that could range from an insignificant amount to as much as $45 million. The estimate of this range is less certain than the estimates upon which reserves are based. In order to establish this range, assumptions were used that were less favorable to the Company among those outcomes that are considered reasonably possible. Expenditures in 1996 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. Q - ADDITIONAL INFORMATION ON CASH FLOWS (All dollar amounts in millions) Year Ended December 31 1995 1994 1993 - ------------------------------------------- ------ ------ ------ Cash paid during the year for: Interest $ 69.4 $98.4 $87.8 Less amount capitalized (2.0) (5.7) (2.6) ------ ----- ----- Interest, net of amount capitalized $ 67.4 $92.7 $85.2 ====== ===== ===== Income taxes $417.4 $59.5 $33.6 ====== ===== ===== 53 R - INDUSTRY SEGMENTS The Company classifies its businesses into three industry segments. A comparison of the operations of the Company's businesses based on sales, earnings from continuing operations before income taxes and identifiable assets is shown below. The PAPER operations manufacture and sell printing, writing, carbonless copy, publishing and specialty paper primarily to domestic publishers, printers and converters. The PACKAGING AND PAPERBOARD operations manufacture and sell beverage and food packaging materials, corrugated shipping containers and paperboard to those markets primarily located in the United States with other operations conducted in Europe, Latin America and the Pacific Rim. The DISTRIBUTION AND SCHOOL AND OFFICE PRODUCTS operations are predominantly domestic and market a full line of paper products to users of printing papers, industrial supplies and packaging materials. These operations also manufacture and distribute school and office paper related products to retailers. (All dollar amounts in millions)
Sales (1) -------------------------------------------------------------- Year Ended December 31 1995 1994 1993 - -------------------------------- --------------------- ------------------- ------------------- Unaffil- Inter- Unaffil- Inter- Unaffil- Inter- iated segment iated segment iated segment --------- -------- -------- ------- -------- ------- Industry segments: Paper $1,243.3 $ 217.7 $1,156.8 $ 206.4 $1,111.4 $$ 169.0 Packaging and Paperboard 1,428.8 7.0 1,254.5 8.3 1,156.9 9.2 Distribution and School and Office Products 2,507.3 9.3 2,146.2 10.3 1,970.7 9.1 Intersegment elimination (234.0) (225.0) (187.3) -------- -------- -------- Total $5,179.4 $4,557.5 $4,239.0 ======== ======== ========
Earnings from Continuing Operations Depreciation, Before Income Taxes (2)(3)(4) Depletion and Amortization ------------------------------ -------------------------- Year Ended December 31 1995 1994 1993 1995 1994 1993 - -------------------------------- -------- -------- -------- ------- -------- ------- Industry segments: Paper $ 330.8 $ 72.0 $ 101.9 $ 72.3 $ 69.6 $ 94.2 Packaging and Paperboard 184.9 123.8 132.8 139.4 131.9 134.4 Distribution and School and Office Products 77.3 20.5 38.4 13.0 12.9 12.0 Corporate and other (105.3) (163.9) (138.1) 12.0 11.1 13.1 -------- -------- -------- ------- -------- ------- Total $ 487.7 $ 52.4 $ 135.0 $ 236.7 $ 225.5 $ 253.7 ======== ======== ======== ======= ======== =======
Capital Expenditures Identifiable Assets (5) (Including Capital Leases) ------------------------------ --------------------------- Year Ended December 31 1995 1994 1993 1995 1994 1993 -------- -------- -------- ------- -------- ------- Industry segments: Paper $1,425.6 $1,432.1 $1,345.7 $ 73.7 $ 175.7 $ 158.6 Packaging and Paperboard 1,631.6 1,457.9 1,405.7 165.0 111.8 114.6 Distribution and School and Office Products 471.0 541.9 510.2 8.3 8.0 22.6 Intersegment elimination (21.7) (29.5) (17.8) Corporate and other 866.3 1,460.2 829.5 16.0 20.1 10.3 -------- -------- -------- ------- -------- ------- Total $4,372.8 $4,862.6 $4,073.3 $ 263.0 $ 315.6 $ 306.1 ======== ======== ======== ======= ======== =======
54 (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. (4) Earnings from continuing operations before income taxes for "Corporate and other" includes the following: Year Ended December 31 1995 1994 1993 --------------------------- ------- ------- ------- Other revenues $ 25.9 $ (2.5) $ 3.7 Interest expense (69.4) (101.1) (94.6) Other expenses (61.8) (60.3) (47.2) ------- ------- ------- $(105.3) $(163.9) $(138.1) ======= ======= ======= (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. 55 S - 1994 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 L). 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. 56 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: 1995 $1,240.8 $1,442.2 $1,352.4 $1,144.0 $5,179.4 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 Gross profit: 1995 221.9 312.2 299.1 242.2 1,075.4 1994 162.5 204.3 201.6 183.3 751.7 1993 164.4 196.7 175.2 152.0 688.3 Earnings (loss) from continuing operations: 1995 61.7 102.2 104.5 74.1 342.5 1994 15.9 44.7 41.6 (12.6) 89.6 1993 22.3 42.3 19.1 12.0 95.7 Earnings before extraordinary item: 1995 61.7 102.2 104.5 81.6 350.0 1994 27.6 52.4 53.2 573.8 707.0 1993 25.6 47.2 30.0 21.3 124.1 Net earnings: 1995 61.7 102.2 104.5 81.6 350.0 1994 27.6 52.4 53.2 562.5 695.7 1993 25.6 47.2 30.0 21.3 124.1 Per common and common equivalent share:(1) Earnings (loss) from continuing operations: 1995 1.07 1.87 1.91 1.37 6.19 1994 .27 .74 .68 (.18) 1.52 1993 .38 .70 .32 .20 1.61 Earnings before extraordinary item: 1995 1.07 1.87 1.91 1.51 6.33 1994 .46 .86 .87 9.18 11.39 1993 .43 .78 .50 .36 2.08 Net earnings: 1995 1.07 1.87 1.91 1.51 6.33 1994 .46 .86 .87 9.00 (2) 11.21 1993 .43 .78 .50 (3) .36 2.08 Cash dividends per common share: 1995 .25 .28 .28 .28 1.09 1994 .25 .25 .25 .25 1.00 1993 .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, 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; 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. 57 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, 21 and 22 of the Company's Proxy Statement, definitive copies of which were filed with the Securities and Exchange Commission ("Commission") on March 14, 1996. 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 22 of the Company's Proxy Statement (excluding the "Report of Compensation Committee on Executive Compensation" on pages 10 through 13 and the "Performance Graph" on page 19), definitive copies of which were filed with the Commission on March 14, 1996. 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 14, 1996. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Information pursuant to this item is incorporated herein by reference to pages 21 and 22 of the Company's Proxy Statement, definitive copies of which were filed with the Commission on March 14, 1996. 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. 58 2. Financial Statement Schedule Page ---- Schedule II --Valuation and Qualified Accounts............ 68 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 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); 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); and Amendment No. 3 thereto dated as of August 31, 1995 (incorporated by reference to Exhibit (4)(1) to Registrant's Quarterly Report on Form 10-Q for the Quarterly Period ended October 1, 1995). (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 59 (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 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). 60 (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). (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). 61 (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, Vincent L. Gregory, Jr., William E. Hoglund, James G. Kaiser, John A. Krol, Susan J. Kropf, 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, 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 62 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), amended for 1995 (incorporated by reference to Exhibit (10)(2) of Registrant's Quarterly Report on Form 10-Q for the Quarterly Period ended April 2, 1995). (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), amended for 1995 (incorporated by reference to Exhibit (10)(1) of Registrant's Quarterly Report on Form 10-Q for the Quarterly Period ended April 2, 1995). (xxvi) Form of Mead Executive Capital Accumulation Plan effective January 1, 1995 (incorporated by reference to Exhibit (10)(1) of Registrant's Quarterly Report on Form 10-Q for the Quarterly Period ended July 2, 1995.) (11) Statement re Computation of per Share Earnings. (12) Statements re Computation of Ratios. (21) Subsidiaries of the Registrant. (23) Consent of Independent Auditors. (27) Financial Data Schedule (b) REPORTS ON FORM 8-K No current reports on Form 8-K were filed during 1995. 63 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 22, 1996 By 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 22, 1996 By STEVEN C. MASON ---------------------------------- Steven C. Mason Director, Chairman of the Board, President and Chief Executive Officer Date: February 22, 1996 By WILLIAM R. GRABER ---------------------------------- William R. Graber Vice President and Chief Financial Officer (principal financial officer) Date: February 22, 1996 By GREGORY T. GESWEIN ---------------------------------- Gregory T. Geswein Controller (principal accounting officer) Date: February 22, 1996 By JOHN C. BOGLE ---------------------------------- John C. Bogle Director 64 Date: February 22, 1996 By JOHN G. BREEN ---------------------------------- John G. Breen Director Date: February 22, 1996 By WILLIAM E. HOGLUND ---------------------------------- William E. Hoglund Director Date: February 22, 1996 By JAMES G. KAISER ---------------------------------- James G. Kaiser Director Date: February 22, 1996 By JOHN A. KROL ---------------------------------- John A. Krol Director Date: February 22, 1996 By SUSAN J. KROPF ---------------------------------- Susan J. Kropf Director Date: February 22, 1996 By CHARLES S. MECHEM ---------------------------------- Charles S. Mechem, Jr. Director Date: February 22, 1996 By PAUL F. MILLER, JR. ---------------------------------- Paul F. Miller, Jr. Director Date: February 22, 1996 By WILLIAM S. SHANAHAN ---------------------------------- William S. Shanahan Director 65 Date: February 22, 1996 By THOMAS B. STANLEY, JR. ---------------------------------- Thomas B. Stanley, Jr. Director Date: February 22, 1996 By LEE J. STYSLINGER, JR. ---------------------------------- Lee J. Styslinger, Jr. Director 66 THE MEAD CORPORATION AND CONSOLIDATED SUBSIDIARIES SCHEDULE FURNISHED PURSUANT TO REQUIREMENTS OF FORM 10-K Years Ended December 31, 1995, 1994 and 1993 67 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, 1995: Allowance for doubtful accounts $ 23.9 $ 10.2 $ -0- $ 7.3 (A) $ 26.8 ========== ======== ======== ======== ======= Accumulated amortization of goodwill and other intangibles $ 34.0 $ 3.3 $ -0- $ -0- $ 37.3 ========== ======== ======== ======== ======= Reserve for asset impairment $ 60.0 $ -0- $ -0- $ 60.0 (B) $ -0- ========== ======== ======== ======== ======= Year Ended December 31, 1994: Allowance for doubtful accounts $ 22.5 $ 8.9 $ -0- $ 7.5 (A) $ 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 (A) $ 22.5 ========== ======== ======== ======== ======= Accumulated amortization of goodwill and other intangibles $ 28.1 $ 2.9 $ -0- $ -0- $ 31.0 ========== ======== ======== ======== =======
(A) Accounts charged off, net of recoveries. (B) Reserve of sold business. 68 THE MEAD CORPORATION EXHIBITS TO FORM 10-K ANNUAL REPORT FOR THE YEAR ENDED DECEMBER 31, 1995 69 EX-11.1 2 CALCULATION OF PRIMARY EARNINGS PER COMMON SHARE 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 ---------------------------- 1995 1994 1993 -------- -------- -------- NET EARNINGS APPLICABLE TO COMMON AND COMMON EQUIVALENT SHARES: $349,972 $695,725 $124,166 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 -------- -------- -------- $349,972 $701,386 $124,166 ======== ======== ======== AVERAGE NUMBER OF COMMON AND COMMON EQUIVALENT SHARES OUTSTANDING: Average number of common shares outstanding 54,380 59,333 59,021 Dilutive effect of stock options after application of treasury stock method 913 621 572 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 55,293 62,555 59,593 ======== ======== ======== PRIMARY NET EARNINGS PER COMMON AND COMMON EQUIVALENT SHARE $6.33 $11.21 $2.08 ======== ======== ========
70 EX-11.2 3 CALCULATION OF FULLY DILUTED EARNINGS PER COMMON SHARE 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 ---------------------------- 1995 1994 1993 -------- -------- -------- NET EARNINGS APPLICABLE TO COMMON AND COMMON EQUIVALENT SHARES $349,972 $701,386 $124,166 ======== ======== ======== AVERAGE NUMBER OF SHARES OUTSTANDING ON A FULLY DILUTED BASIS: Shares used in calculating primary earnings per share 55,293 62,555 59,593 Additional dilutive effect of stock options after application of treasury stock method 8 172 99 -------- -------- -------- AVERAGE NUMBER OF SHARES OUTSTANDING ON A FULLY DILUTED BASIS 55,301 62,727 59,692 ======== ======== ======== FULLY DILUTED NET EARNINGS PER COMMON AND COMMON EQUIVALENT SHARE $6.33 $11.18 $2.08 ======== ======== ========
(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%. 71 EX-11.3 4 CALCULATION OF FULLY DILUTED NET 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 ---------------------------- 1995 1994 1993 -------- -------- -------- NET EARNINGS APPLICABLE TO COMMON AND COMMON EQUIVALENT SHARES $349,972 $701,386 $124,166 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 -------- -------- -------- NET EARNINGS APPLICABLE TO COMMON AND COMMON EQUIVALENT SHARES ON A FULLY DILUTED BASIS $349,972 $701,386 $129,889 ======== ======== ======== AVERAGE NUMBER OF SHARES OUTSTANDING ON A FULLY DILUTED BASIS Shares used in calculating primary earnings per share 55,293 62,555 59,593 Dilutive effect of stock options after application of treasury stock method 8 172 99 Adjustment for other potentially dilutive securities - Dilutive effect of Convertible Subordinated Debentures as if converted at the beginning of the period 2,630 ======== ======== -------- AVERAGE NUMBER OF SHARES OUTSTANDING ON A FULLY DILUTED BASIS 55,301 62,727 62,322 ======== ======== ======== FULLY DILUTED NET EARNINGS PER COMMON AND COMMON EQUIVALENT SHARE $6.33 $11.18 $2.08 ======== ======== ========
(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. 72 EX-12 5 RATIO OF EARNINGS TO FIXED CHARGES EXHIBIT (12) THE MEAD CORPORATION AND CONSOLIDATED SUBSIDIARIES RATIO OF EARNINGS TO FIXED CHARGES (All dollar amounts in millions)
Year Ended December 31 ----------------------------------------------- 1995 1994 1993 1992 1991 ------- ------- ------- ------- ------- Earnings: The Mead Corporation earnings from continuing operations before income taxes $ 487.7 $ 52.4 $ 135.0 $ 15.8 $ 64.3 Mead's share of earnings (loss) of investees before income taxes 63.4 95.7 30.3 9.4 (31.1) Interest and debt expense 86.0 113.4 107.5 116.0 137.4 Amortization of capitalized interest: The Mead Corporation 4.5 4.6 6.5 4.9 4.9 Mead's share of investees .7 1.3 1.4 1.5 1.6 Portion of rental payments deemed to be interest 16.9 18.0 16.5 17.3 16.4 ------- ------- ------- ------- ------- $ 659.2 $ 285.4 $ 297.2 $ 164.9 $ 193.5 ======= ======= ======= ======= ======= Combined fixed charges: Interest and debt expense: The Mead Corporation $ 69.4 $ 101.1 $ 94.6 $ 99.5 $ 112.9 Mead's share of investees 16.6 12.3 12.9 16.5 24.5 ------- ------- ------- ------- -------- 86.0 113.4 107.5 116.0 137.4 ------- ------- ------- ------- -------- Capitalized interest - The Mead Corporation 2.0 5.7 2.6 2.3 4.5 ------- ------- ------- ------- -------- Portion of rental payments deemed to be interest: The Mead Corporation 16.4 17.6 16.2 17.3 16.3 Mead's share of investees .5 .4 .3 .1 ------- ------- ------- ------- -------- 16.9 18.0 16.5 17.3 16.4 ------- ------- ------- ------- -------- $ 104.9 $ 137.1 $ 126.6 $ 135.6 $ 158.3 ======= ======= ======= ======= ======== Ratio of earnings to fixed charges 6.3 2.1 2.3 1.2 1.2 ======= ======= ======= ======= ========
73 EX-21 6 SUBSIDIARIES OF THE MEAD CORPORATION 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 MCB Woodlands and Services, Inc. Alabama Mead Coated Board International, Inc. Delaware Mead Foreign Holdings, Inc. Ohio 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. 74 EX-23 7 CONSENT OF DELOITTE & TOUCHE LLP EXHIBIT (23) CONSENT OF DELOITTE & TOUCHE LLP We consent to the incorporation by reference in (i) the Form S-8 Registration Statement (No. 33-59007) 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 Statements (Nos. 33-43994 and 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 25, 1996, appearing in the Annual Report on Form 10-K of The Mead Corporation for the year ended December 31, 1995. DELOITTE & TOUCHE LLP /S/ DELOITTE & TOUCHE LLP ------------------------- Dayton, Ohio March 12, 1996 75 EX-27 8 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, 1995 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000,000 12-MOS DEC-31-1995 DEC-31-1995 293 0 586 27 411 1,367 4,319 1,955 4,373 822 695 0 0 158 2,002 4,373 0 5,179 0 4,104 552 0 69 488 184 304 8 0 0 350 6.33 0.00
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