Item 1. Business.
Mead's corporate headquarters are in Dayton, Ohio and its principal facilities are at the locations listed below:
/1/ Mead announced in 1994 its intention to seek a buyer for this facility
Item 3. Legal Proceedings
In September 1993 Mead signed a Consent Order with USEPA under Section 3008(h) of the Resource Conservation and Recovery Act with respect to a landfill (the Storage Depot Site) owned and operated by Mead Fine Paper division's Chillicothe, Ohio, mill. Pursuant to the terms of that Order, Mead will undertake certain investigative and remedial work designed to control releases of hazardous substances from the Site. Work has begun and is expected to continue through 1995. Mead believes that the U.S. Navy is legally responsible for the groundwater contamination at the Storage Depot Site, including the cost of implementing the Consent Order. In 1992, Mead filed a declaratory judgment action against the U.S. Navy seeking to have the Navy take responsibility for any required remediation. In 1993, both Mead and the U.S. Navy filed motions for partial summary judgment on the issue of liability, and allocation of responsibility for clean up costs, both of which motions were denied in January 1994. Attempts to mediate this proceeding ended in October 1993 without any resolution. Proceedings continue in court.
In March 1991, Mead was served with a complaint entitled Beazer East Inc. ---------------- v. The Mead Corporation, C.A. No. 91-0408, filed in the United States - ----------------------- District Court for the Western District of Pennsylvania. The complaint alleges that the USEPA seeks to require Beazer to conduct a site-wide environmental investigation regarding hazardous substances, wastes and constituents at the Woodward Facility located in Dolomite, Alabama, and to propose preferred corrective measures for the site. Mead acquired the Woodward Facility by merger in 1968, and in 1974 sold it to Koppers, Inc., which was later acquired by Beazer. The complaint alleges that Mead is liable to Beazer for contribution for past and future costs to be incurred by Beazer as a result of any corrective measures required at the site. In October 1992, the district court granted Mead's motion to dismiss all of plaintiff's allegations in this proceeding except those relating to alleged liability under CERCLA and alleged indemnity under the 1974 sale contract. In June 1993, the court granted Mead's motion for summary judgment and dismissed the case. This decision was reversed by the United States Court of Appeals for the Third Circuit in September 1994. Proceedings continue in court regarding Beazer's contribution claim. Although the extent of contamination and the method of remediation to be required are not known at this time, based on information currently available to Mead, after considering established reserves, rights to contribution and potential insurance coverage, Mead does not expect this proceeding will have a material adverse effect on the financial condition or results of operation of the Company.
The Tennessee Department of Environment and Conservation ("TDEC") advised Mead in September 1991 that a closed coke manufacturing facility located in Chattanooga, Tennessee (formerly owned by Mead) is a hazardous substance site within the meaning of the Tennessee Hazardous Waste Management Act, and that Mead may be a potentially responsible or liable party. In June 1994 Mead agreed with TDEC to commence a removal action at the closed coke plant site to permit demolition of structures, removal of asbestos, control of surface water ponding and repairs to fencing. The removal action was completed by December 1994. In August 1993, the federal Agency for Toxic Substances and Disease Registry ("ATSDR") issued a health advisory for a site identified as the Tennessee Products Site, which included the coke manufacturing facility formerly owned by
Mead. In January 1994, the USEPA proposed adding the Tennessee Products Site to the National Priorities List ("NPL"). Mead objected to the proposed listing on several grounds, but in particular because of the inclusion of the coke facility with non-contiguous, geographically distinct properties in the area, including the Chattanooga Creek. In November 1994, the USEPA sent special notice letters under CERCLA to several PRPs, including Mead, regarding the performance of a remedial investigation/feasibility study ("RI/FS") of the aggregated Tennessee Products Site. The PRPs, including Mead, have responded that they will not perform an RI/FS on the aggregated site. A preliminary PRP search by USEPA indicates that dumping in Chattanooga Creek occurred when the coke plant was doubled in size to meet World War II government requirements. The coke plant was owned by the Defense Plant Corporation during World War II and sold by the War Assets Administration in 1946. Woodward Iron Company, formerly a division of Mead, acquired the coke plant in 1964, and Mead sold the coke plant site to third parties in 1974. Although the extent of contamination and the possible methods of remediation are not known at this time, based on information currently available to Mead, after considering established reserves, rights to contribution and potential insurance coverage, Mead does not believe that this proceeding will have a material adverse effect on the financial condition or results of operation of the Company.
In March 1994, Mead received a Notice of Violation from USEPA for alleged violations of the Ohio State Implementation Plan ("SIP") under the Clean Air Act and an Order to conduct a compliance test on one of its boilers. USEPA had alleged that on two occasions emissions of particulate matter from one of the boilers at the Mead Fine Paper mill in Chillicothe, Ohio exceeded levels allowed under the SIP. Subsequent tests have demonstrated compliance. No penalties were assessed and Mead does not anticipate any further action in this proceeding.
Mead has been informed by Ohio EPA that it is contemplating an enforcement action seeking penalties from Mead for various alleged, unrelated air violations at the Mead Fine Paper mill in Chillicothe, Ohio dating back to 1989. The alleged violations concerned particulate emissions from a coal-fired boiler in 1989, the absence of a permit for the facility's chlorine unloading station and the untimely installation of equipment to control odors. Ohio EPA and Mead are discussing these allegations, and Mead does not believe that any such proceeding will have a material adverse effect on the Company.
Additional information is included in Part I, Item 1, "Business-- Environmental Laws and Regulations," Note M on page 47 and Note Q on page 54.
Mead is involved in various other litigation and administrative proceedings arising in the normal course of business, which, in the opinion of management, after considering established reserves, will not have a material adverse effect on the financial condition or results of operations of Mead.
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable.
Executive Officers of the Company
The Executive Officers of Mead as of February 1, 1995, their ages, their positions and offices with Mead, and the principal occupation (unless otherwise stated, position is with Mead) of such Executive Officers during the past five years are as follows:
All Executive Officers of Mead are elected annually by the Board of Directors.
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:
The number of Common shareowners of record as of February 28, 1995, was 57,941,098. See Note H on page 42 for information regarding the amount of retained earnings available for dividends.
Item 6. Selected Financial Data Five-Year Data on Operations, Liquidity, Financial Condition and Capital Resources
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
REVIEW OF OPERATIONS --------------------
OVERVIEW OF 1994 - ----------------
Mead's earnings (excluding the effect of significant items) improved over 1993 and 1992 levels. Driving the continued earnings growth were significantly improved results from Mead's Northwood affiliates; the Fine Paper division's Chillicothe, Ohio, paper mill; the Coated Board, Containerboard, Specialty Paper, and School and Office Products divisions; and the positive effect of a change in depreciable lives of most paper mill equipment. Earnings from Mead's Packaging and Zellerbach divisions were lower than in 1993 and 1992.
Sales increased on higher sales volumes in nearly all Mead's businesses. Pricing, which had remained at depressed levels in most businesses for several years, began to strengthen in 1994. For pulp and containerboard, prices began to improve by mid-year. In paper and coated board, price increases began to improve near year-end, with average prices for the year still below 1993 levels for most grades.
Pulp prices recovered in 1994 for Mead's affiliate, Northwood Forest Industries, though a sharp increase in fiber costs delayed earnings increases from pulp operations until late in the year. Prices for wood products, which had been very strong in 1993, moderated somewhat during the year.
Within Mead's paper operations, sales volumes increased modestly over 1993 and 1992 levels. Strong volume growth and further productivity improvements, especially at Chillicothe, drove earnings improvement. Price increases in coated paper began to be realized in the fourth quarter.
Mead Coated Board continued sales volume growth over 1993 and 1992, increasing earnings through cost control despite lower average prices for coated board. Sales at Mead Packaging rebounded from a drop in 1993, but competitive pressures on pricing and generally weaker foreign markets for most of the year resulted in lower earnings. For the Containerboard division, demand and prices improved significantly. Strong converting volume and mill operations at the Stevenson, Alabama, mill led to an earnings improvement over 1993.
Sales grew at Zellerbach in all three of its business units, printing paper, packaging and industrial supplies, as the market began to strengthen in the second half of the year. However, margins did not improve due to higher operating costs and restructuring charges which reduced results compared to 1993 and 1992.
School and Office Products continued its growth in sales and earnings over 1993 and 1992 levels. Strong operating results were driven by growing sales in its fashion lines of school and office supplies and the successful introduction of new licensed products.
OPERATING RESULTS - -----------------
Sales from continuing operations increased to $4.558 billion in 1994, compared to $4.239 billion in 1993 and $4.208 billion in 1992. The gains in 1994 over 1993 came primarily from volume increases, with pricing improvements in most products coming after mid-year.
In 1994, the Company realized a gain of $10.05 per share from the sale of Mead Data Central. Discontinued operations also included Mead Data Central's operating earnings through the sale date; adjustments affecting Mead's discontinued reinsurance business; and charges related to environmental matters at Mead's previously discontinued Industrial Manufacturing segment. The extraordinary item in 1994 was for losses associated with the extinguishment of debt. The company also recorded a number of other significant items totaling $.77 per share. Those items included charges for the estimated loss from the sale of the Kingsport, Tennessee, paper mill, facilities consolidation and related severance primarily at Zellerbach, the negative effect of an unusually large dollar amount of pension settlement payments and other smaller matters. Also included in significant items is the positive effect of an amount for Mead's share of Northwood's earnings due to refunds of countervailing duties on lumber exports from Canada in prior years.
In 1994, effective January 1, the depreciable lives of certain paper mill equipment were changed to 20 years from 16 years to more closely reflect the current service lives of the assets. The change increased net earnings by $27 million or $.42 per share for the year.
In 1992, earnings from continuing operations were reduced by a provision for a comprehensive performance improvement program which resulted in an after tax charge of $53 million or $.90 per share related to continuing operations, and by a $18 million after tax or $.30 per share charge on a loss on the sale of the Ampad office products business.
In 1992, Mead adopted Statement of Financial Accounting Standards (SFAS) No. 109, requiring the determination of all income tax liabilities at current rates. The effect of adopting the new standard was an increase in net earnings of $34 million, or $.58 a share.
Depreciation, amortization and depletion of property, plant and equipment amounted to $188 million in 1994, compared with $222 million in 1993 and $211 million in 1992.
PAPER
Mead's paper segment earnings before significant items and income taxes improved 35% versus 1993, driven by increased volume and stronger operating results, especially at the Chillicothe and Specialty paper mills, and a $28.7 million reduction in depreciation expense due to a change in depreciable lives of most paper mill equipment. Sales increased by 4% in 1994 to $1.157 billion. Sales volume growth came from increases in both production and shipments from inventory. In 1993, earnings before significant items and income taxes improved 19% over 1992 on a 2% increase in sales and an 11% volume growth.
Prices, which had been at depressed levels for several years, began to show improvement in the second half of the year as demand for paper strengthened rapidly. Prices began to improve after mid-year for uncoated paper, and near year-end in coated grades.
Industry capacity for coated papers is expected to increase less than 2% annually from 1995-97. In 1995, continued economic strength in the United States and Europe is expected to keep demand for paper high.
Segment earnings for 1994 also include a charge for the estimated loss on the sale of the Kingsport, Tennessee, mill and other smaller items.
Mead Publishing Paper - ---------------------
The Publishing Paper division produces more than 500,000 tons of medium-weight coated paper annually for book and magazine publishers, and catalog and commercial printers.
Sales volume ran slightly ahead of last year. However, prices, which had been falling since 1991, fell even further during the first half of 1994. Prices began to improve after mid-year, though average selling price for the year was below 1993. Continued productivity improvement partially offset the price decline, and earnings were ahead of 1993. Sales and earnings in 1993 increased over 1992.
An overall strengthening of the domestic and European economies at mid-year began to firm demand for coated paper. Orders and backlogs grew, and, by the fourth quarter, paper was on allocation and prices began to recover. Strong demand is expected to continue in 1995 along with further strengthening of prices. Paper is expected to remain in tight supply as no major capacity additions have been announced in the marketplace.
Substantial progress was made on two major capital programs. Following paper machine modifications completed in 1994, the division introduced a new coated paper product, Vision(TM), based on proprietary technology that improves the quality of the printing surface. Another capital project, to be completed in 1995, will improve grade mix by enabling the mill to produce double coated web and sheet grade paper of superior quality. These capital programs will be completed for less than $100 million.
Mead Fine Paper - ---------------
Mead Fine Paper produces both coated and uncoated papers for business and specialty uses and is a leading producer of carbonless paper.
Division sales improved modestly, and operating earnings before significant items and income taxes improved as a result of strong operations at the Chillicothe, Ohio, mill. Continued productivity improvements that included improved mix of coated and carbonless grades, higher production volume and good cost control combined to offset weak pricing which existed for most of the year. In 1993, weak market conditions held sales growth to a modest increase over 1992, but earnings improved significantly over 1992 levels through improved productivity and cost controls.
Weak market conditions and depressed prices during 1992 and 1993 continued through the first half of 1994. Demand and prices began to strengthen in the second half for uncoated paper and near year-end for coated paper. Continued market strength and further price improvement should drive sales and earnings growth in 1995. Increases in fiber costs are expected to be more than offset in 1995 by higher pricing, improved grade mix and volume as well as other cost reductions at the Chillicothe mill.
The $111 million capital investment project which is upgrading coated paper quality at Chillicothe is on schedule and will be completed early in 1995. During 1994, new carbonless paper products were introduced.
Mead announced in October its plans to sell the Kingsport, Tennessee, mill which primarily produces uncoated papers and some coated label grades. The mill's sales have remained flat since 1992. Operating results in 1994 and 1993 were significantly below 1992 results.
Mead Specialty Paper - --------------------
Mead Specialty Paper manufactures saturating papers for decorative laminates used in commercial and home construction, remodeling and furniture; and, specialty grades in various industrial applications, including automobiles.
The division's earnings improved sharply in 1994 over 1993. The improvement was driven by increased volume in strengthening markets and significant productivity improvements. The U.S. housing market, both in housing starts and remodeling expenditures, which had begun to improve in 1993, strengthened further in 1994. The U.S. automotive market was strong, and European markets also recovered in 1994.
Growth continued during the year for the division's products in low pressure laminates and in overlay used in flooring applications. With continued market strength, the division's current high volume is expected to remain in 1995. However, recent cost increases in market pulp and other raw materials may be only partially offset by expected productivity gains.
1993 sales increased over 1992, but earnings declined as a result of higher operating costs during the year.
Gilbert Paper - -------------
The Gilbert Paper division produces high-quality communications papers, including cotton-content bonds, and specialty text and cover papers.
Gilbert reported sales even with 1993, with lower earnings as a result of higher pulp costs, a less profitable product mix and some operating inefficiencies.
Strengthening prices, along with planned improvements in operating efficiency, should offset higher pulp costs this year and lead to improved performance in 1995. A new line of super-premium ink jet papers introduced late in 1994 will be in retail markets early in 1995. Sales to catalog and export markets continue to grow. In 1993, the division reported a slight decline in sales and earnings compared to 1992.
PACKAGING AND PAPERBOARD
Sales increased 8% in 1994 on higher volume in all businesses in the segment. However, pricing pressures continued on coated board and converted cartons most of the year, resulting in lower average pricing and reduced earnings for the segment, despite a $14.0 million reduction in depreciation expense due to a change in depreciable lives. In 1993, sales were flat with 1992, and earnings before significant items and income taxes decreased.
Production volume and overall shipments increased at the Stevenson, Alabama, containerboard mill, and the Mahrt coated board mill in Alabama. Sales volume was also higher for packaging converting operations and container plants. While pricing improved in containerboard markets during the year, it remained at depressed levels for coated board and converted packaging.
A strengthened world economy is expected to continue to drive demand for paperboard packaging in 1995.
Mead Containerboard - -------------------
Mead's Containerboard division produces corrugating medium used in shipping containers and operates eight corrugated container plants.
Sales and earnings improved sharply for the division. Markets improved significantly in 1994, leading to improved prices for medium and containers which had been depressed in 1993.
Operating improvements led to further increases in annual production over 1993 and 1992. Converting volume grew faster than the overall market in 1994. Spending controls helped offset a sharp rise in recycled fiber costs during the year.
1993 sales were about even with 1992, though 1993 earnings fell below 1992 as cost controls and strong converting volume growth could not offset deteriorating prices.
Four of the division's container plants obtained ISO 9001 certification by meeting a set of international standards designed to improve product quality and consistency. The medium mill obtained ISO 9002 certification in 1993.
Mead Coated Board - -----------------
Mead Coated Board manufactures coated paperboard for use in multiple packaging and folding cartons. Customers include folding carton manufacturers in North America and Europe, in addition to Mead Packaging's worldwide business.
Division earnings continued to improve despite lower average prices for the year. Earnings were driven primarily by higher volume, an improving product mix, further cost reductions, and strong sawmill operations.
Production continued to increase over previous years, moving up 3% over 1993; first quality coated board production increased 6%. Shipments outstripped production as inventories fell sharply during the year. A grade simplification program combined two folding carton grades into one, which will reduce overall costs. The division also introduced a new wet strength additive for the beverage carton grade, making it more recyclable.
Results in 1995 are expected to be driven by improvements in product mix and by a recovery in prices for open market grades that began late in 1994. The effect of improved pricing will be offset somewhat by rising raw materials costs. Production volume is essentially sold out for 1995.
Sales and earnings have continued to increase since the Mahrt mill expansion was completed in 1990. 1994 sales increased 11% over 1993; 1993 sales were up 6% over 1992.
Mead Packaging - --------------
Mead Packaging is a leading supplier of multiple beverage packaging and packaging systems. It also provides multiple packaging for food and other products. Customers include large and small brewers, soft drink bottlers, food and other consumer products companies.
Increased volume, especially in the North American soft drink market, and a strengthening economy in Europe late in the year led to an increase in worldwide sales. Earnings, however, were lower compared to 1993. Sales and earnings in 1993 were lower than in 1992.
In the North American market, lower earnings in 1994 resulted from higher production and freight costs associated with meeting a surge in demand among beverage customers, continued pricing pressures and costs related to business growth.
International sales were about even with last year. Weak economies in Japan and in Europe for much of the year increased pricing pressures, and costs of business growth in Latin America led to reduced earnings.
As part of its growth strategy, Packaging acquired a leading paperboard packaging converter in Spain and began operations in Argentina, Chile and Poland.
With further strengthening in world economies, packaging volume is expected to continue to grow at a significant rate worldwide in 1995, especially in the North
American market. Volume growth, firming prices and on-going cost reduction efforts should drive improved performance in 1995.
DISTRIBUTION AND SCHOOL AND OFFICE PRODUCTS
Sales increased 9% to $2.146 billion for the Distribution and School and Office Products segment. Earnings before significant items and income taxes decreased slightly. In 1993 sales were up slightly, but earnings before significant items and income taxes were down 16% from 1992.
The School and Office Products division had strong growth in sales and earnings. While sales increased in all three business units at the distribution division, Zellerbach, continued pressure on margins and costs associated with a major reorganization negatively impacted 1994 results.
Zellerbach - ----------
Zellerbach is a distribution business with three units: printing papers; packaging materials and equipment; and, industrial/commercial supplies. It serves markets throughout much of the United States.
Sales increased in all three business units over 1993, primarily in the second half of the year. Margins declined from 1993 and 1992 levels, and operating results were lower. The division's results were also reduced by costs for a major reorganization and facilities consolidation. These actions are intended to improve performance in 1995 by reducing operating expenses as consolidations and closures are made.
Market strengthening which began late in 1994, is expected to continue in 1995, though at a lesser rate. Recent price increases in paper products passed through to customers are expected to result in higher sales and improved performance in 1995.
School and Office Products - --------------------------
Mead's School and Office Products division is the nation's largest converter of paper-based school supplies. It also provides stationery products for home and office use, and is an industry leader in fashion and product design.
The division's sales grew approximately 7% in 1994 and 6% in 1993, excluding sales related to the liquidation of inventory purchased from Union Camp's school supply business in 1993. Growth in 1994 was driven by increased sales of Five Star(R), Five Star(R) First Gear(R) and Cambridge(R) product lines, as well as introduction of a new line of school supplies licensed through Nike, Inc.
Earnings for School and Office Products increased over 1993 levels reflecting volume growth and controlled spending. Earnings growth was limited somewhat when the division was unable to pass along major increases in tablet paper prices late in the year. 1993 earnings increased over 1992 due to strong sales and operating performance.
The division implemented a fully-integrated system for production planning, inventory control, purchasing and accounts payable that is expected to reduce costs over the long term.
On November 30, 1994, the division acquired the assets of Hilroy (a division of Abitibi-Price Inc.), the leading converter of paper-based school supplies in Canada, providing Mead the opportunity to expand into the Canadian market.
In 1995, continued growth is expected in value-added school supplies and the Cambridge line of office products. Introduction of new licensed products with the sports logos of NFL, NBA and NHL teams is planned for the back-to-school season.
Investees - ---------
Mead's primary investees are Northwood Forest Industries Ltd., a large producer of bleached softwood kraft pulp and wood products in British Columbia, Canada, and Northwood Panelboard Company, an oriented structural board (OSB) mill at Bemidji, Minnesota. Both are 50%-owned by Mead and Noranda Forest Inc. of Canada. Pulp from Northwood is sold throughout the world by Mead Pulp Sales. Wood products sales are handled by Noranda Forest Sales Inc.
Northwood's 1994 sales were up 22% from 1993. Mead's share of 1994 earnings of all investees was $59.8 million, up from $18.4 million in 1993. Mead's share of 1992 results was $6.0 million.
After declining for three straight years, pulp prices on a constant dollar basis ended 1993 at a record low level. Prices rebounded sharply in 1994 on stronger overseas demand for pulp and low producer and consumer inventories. Five announced increases during the year pushed prices up 59% from the beginning of the year. The average price for 1994 was up 54% from the prior year. Higher prices for pulp was offset somewhat by higher wood chip costs.
Improving paper markets should keep pulp demand strong in 1995. Continued strong demand and tight supply, from low pulp inventories and minimal capacity increases for northern softwood pulp, could result in further price improvement. Chip costs are expected to continue to increase, partially offsetting gains from pulp price increases. Full realization of pulp price increases announced in 1994 should generate higher sales in 1995.
In wood products, prices remained strong for a second consecutive year. Lumber prices were up modestly from 1993, and OSB prices increased 15% from the prior year. Higher log costs and lower prices in 1995, are expected to lead to reduced earnings from wood products.
In addition to stronger operations and improving prices, Northwood, like similarly situated Canadian companies, was advised that a refund was to be made of export duties related to lumber shipments into the United States and it was booked in the fourth quarter. Of the refund, $14.5 million ($9.1 million after tax) of Mead's share related to years prior to 1994.
Selling, Administrative and Research Expenses - ---------------------------------------------
Selling, administrative and research expenses rose by 16% in 1994 compared to a 13% decrease from the prior year in 1993. Both 1992 and 1994 contained significant items affecting selling, administrative and research expenses. These charges include costs of a comprehensive performance improvement program in 1992, and, in 1994, facilities consolidation and related severance, primarily related to Zellerbach, the negative impact of an unusually large dollar amount of pension settlements, and other smaller matters.
Excluding the effect of these significant items in those years, selling, administrative and research expenses increased by 11% in 1994, while 1993 expenses were essentially even with 1992 levels. Most of the 1994 increase came from higher sales-related expenses at Zellerbach and Mead Packaging; start-up expenses at Mead Packaging in new markets, particularly in Latin America and the Pacific Rim; and restructuring costs at several divisions.
In 1993, administrative expenses decreased from 1992 levels as a result of Mead's performance improvement program announced in 1992. Selling expenses in 1993 were up slightly over 1992 levels.
Interest and Debt Expense - -------------------------
Interest and debt expense rose to $101 million in 1994 from $95 million in 1993. Although long-term debt levels were lower at year-end 1994 than at year-end 1993, $958 million compared with $1,360 million, average debt levels during 1994 were higher than average debt levels in 1993. That, coupled with higher interest rates in 1994, caused the increase in interest and debt expense. The 1993 reduction from the 1992 levels of $100 million reflected lower average interest rates in 1993 than in 1992.
FINANCIAL REVIEW ----------------
Cash provided by operations was $327 million in 1994 and 1993, and $304 million in 1992.
Working capital at year-end 1994 amounted to $807 million, compared with $380 million at the end of 1993 and $375 million at the end of 1992. The 1994 increase resulted primarily from the sale of Mead's Electronic Publishing segment, Mead Data Central. The current ratio was 1.7 at the end of 1994 compared with 1.6 at the end of 1993 and 1992.
Inventory levels declined to $382 million in 1994, compared with $439 million in 1993 and $421 million in 1992. At the end of 1994, the replacement value of inventories exceeded their LIFO value by $184 million. Adjusted for LIFO, Mead's current ratio would be 1.8 at year-end.
Some of the proceeds from the sale of Mead's electronic publishing division, Mead Data Central, were used to reduce debt levels in the fourth quarter of 1994 by approximately $480 million, with an additional reduction of $130 million taking place in early 1995. At the end of 1994, Mead's long-term debt stood at $958 million, compared with $1,360 million and $1,318 million at the end of 1993 and 1992, respectively.
The Company's ratio of long-term debt to total capital was 30.5% at the end of 1994, compared with 46% at the end of 1993 and 47% at the end of 1992. The 1994 ratio is in the Company's target ratio range of 30% to 40%. As Mead completes its Board-authorized repurchase of $350 million of common stock ($44 million of which was repurchased in December of 1994), the ratio will rise. The ratio would also rise further as warranted by borrowings for strategic opportunities.
During 1993, Mead issued $150 million ($148.8 million net of discount) of 8-1/8% debentures due February 1, 2023, and $150.0 million ($148.3 million net of discount) of 7-1/8% debentures due August 1, 2025. The proceeds of both issues were used to retire short-term borrowings previously classified as long-term. Also, during 1993, Mead reduced the amount of its bank credit agreements from $750 million to $550 million. That action was taken to reflect debenture issues which lowered the size of the credit line needed and to reduce expense. The $550 million bank credit agreement was extended in 1994 to May 1998.
At the end of 1994, the Company paid a fixed rate or a capped rate on 78% of its debt and paid a floating rate of interest on the remainder. A change of 1% in the floating interest rate, on an annual basis, would result in a $.04 change in net earnings per share for the year. The estimated market value of long-term debt, excluding capital leases, was $27.6 million less than the book value at the end of 1994.
In the fourth quarter of 1994, Mead recorded a number of significant items affecting continuing operations, reducing the carrying value of certain assets, accruing for certain expenses and reflecting actual cash payments. Of the significant items, approximately $74 million relates to asset writedowns, $14 million was accrued with payments expected to be made over the next year, and $5
million of cash payments were made in 1994. Neither the cash payments made in 1994 nor those expected to be made in later years are expected to have a materially adverse affect on Mead's liquidity.
Mead has filed shelf registration statements with the Securities and Exchange Commission that would permit the Company to offer up to $300 million of debt securities. Up to $154 million of medium-term notes are currently authorized to be issued as part of this registered debt offering.
Mead common stock has paid a quarterly dividend of $.25 a share since June 1990. Annual dividends have totaled $1.00 a share since that date.
CAPITAL EXPENDITURES ANALYSIS - -----------------------------
CAPITAL SPENDING - ----------------
Capital spending totaled $316 million in 1994, compared to $306 million in 1993 and $218 million in 1992. The $211 million investment in the coated paper operations at Chillicothe, Ohio, and Escanaba, Michigan, will be completed in 1995. At Chillicothe, this investment totaled $111 million, of which $57 million was spent in 1994. At Escanaba, this investment totaled under $100 million, of which $44 million was spent in 1994. These projects will be completed in the first half of 1995.
Mead plans capital spending in 1995 in the range of $325-375 million. It expects that funds to finance these projects will be internally generated. The Company announced in 1994 an $85 million investment in coated board operations at the Mahrt mill in Alabama. This project is expected to be completed in 1997.
ENVIRONMENTAL PROCEEDINGS - -------------------------
Mead has been notified by the United States Environmental Protection Agency ("USEPA") and by several state or local governments that it may be liable under federal environmental laws or under applicable state or local laws with respect to the cleanup of hazardous substances at 13 sites currently operated or used by Mead. Mead is also currently named a potentially responsible party ("PRP"), or has received third party requests for contributions, in several superfund proceedings under federal, state and local laws with respect to at least 18 sites sold by Mead over many years or owned by contractors used by Mead for disposal purposes. There are other former Mead facilities and those of contractors which
may contain contamination or which may have contributed to potential superfund sites but for which Mead has not received any notice or claim. Mead's potential liability for all these sites will depend upon several factors, including the extent of contamination, the method of remediation, insurance coverage and contribution by other PRPs. Although the costs that Mead may be required to pay for remediation of all these owned and unowned sites are not certain at this time, Mead has established reserves of approximately $40 million relating to current environmental litigation and proceedings which it believes are probable and reasonably estimable. Expenditures in 1995 from this reserve are expected to be less than $5 million.
In 1993, the USEPA issued proposed regulations under the Clean Air Act and Clean Water Act intended to reduce air and water discharges of specific substances from U.S. paper and pulp mills, and other proposed regulations implementing the Federal Great Lakes Critical Programs Act. At present, these regulations are in the proposal stage, and are not expected to be finalized until early 1996. However, if enacted in their present form, these regulations would significantly increase Mead's capital spending and operating costs over the next five years.
EFFECTS OF INFLATION - --------------------
Inflation remained at a moderate level in 1994 and is not expected to have a significant effect over the long term. While it is true that inflation increases the replacement cost of long-lived facilities and equipment, higher selling prices and the repayment of borrowings with cheaper dollars would work to maintain satisfactory cash flow.
Item 8. Financial Statements and Supplementary Data
INDEPENDENT AUDITORS' REPORT
Board of Directors The Mead Corporation Dayton, Ohio
We have audited the accompanying balance sheets of The Mead Corporation and consolidated subsidiaries as of December 31, 1994 and 1993, and the related statements of earnings, shareowners' equity and cash flows for each of the three years in the period ended December 31, 1994. Our audits also included the financial statement schedule listed in the Index at Item 14(a)2. These financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material respects, the financial position of The Mead Corporation and consolidated subsidiaries at December 31, 1994 and 1993, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1994, in conformity with generally accepted accounting principles. Also, in our opinion, such financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.
The Company changed its method of accounting for income taxes in 1992 (Note L).
DELOITTE & TOUCHE LLP
Dayton, Ohio January 26, 1995
THE MEAD CORPORATION AND CONSOLIDATED SUBSIDIARIES
STATEMENTS OF EARNINGS (All dollar amounts in millions, except per share amounts)
See notes to financial statements
THE MEAD CORPORATION AND CONSOLIDATED SUBSIDIARIES
BALANCE SHEETS (All dollar amounts in millions)
See notes to financial statements
LIABILITIES AND SHAREOWNERS' EQUITY
THE MEAD CORPORATION AND CONSOLIDATED SUBSIDIARIES
STATEMENTS OF SHAREOWNERS' EQUITY (All dollar amounts in millions, except per share amounts; all share amounts in thousands)
See notes to financial statements
THE MEAD CORPORATION AND CONSOLIDATED SUBSIDIARIES
STATEMENTS OF CASH FLOWS (All dollar amounts in millions)
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
See notes to financial statements
THE MEAD CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
A - Accounting Policies
CONSOLIDATION. The accompanying statements include the accounts of the Company and all significant wholly-owned subsidiaries. Investments in investees are stated at cost plus the Company's equity in their undistributed net earnings (loss) since acquisition. All significant intercompany transactions are eliminated.
CASH AND CASH EQUIVALENTS. The Company considers all highly liquid investments with an original maturity of three months or less when purchased to be cash equivalents.
INVENTORIES. The inventories of finished and semi-finished products and raw materials are stated at the lower of cost or market, determined on the last-in, first-out (LIFO) basis. Stores and supplies are stated at cost determined on the first-in, first-out (FIFO) basis.
OTHER ASSETS. Included in other assets are goodwill and other intangibles which are being amortized using the straight-line method over their estimated useful lives of ten to 40 years.
DEPRECIATION AND DEPLETION. For financial reporting purposes, depreciation, including amortization of capital leases and land improvements, is calculated using the straight-line method over the estimated useful lives of the properties. The rates used to determine timber depletion are based on projected quantities of timber available for cutting.
INTEREST RATE AND FOREIGN EXCHANGE FINANCIAL INSTRUMENTS. Amounts currently due to or from interest rate swap counterparties are recorded in interest expense in the period in which they accrue. The premiums paid to purchase interest rate caps, as well as gains or losses on terminated interest rate swap and cap agreements, are included in long-term liabilities or assets and amortized to interest expense over the shorter of the original term of the agreements or the life of the financial instruments to which they are matched. Gains or losses on foreign currency forward contracts are recognized currently through income and generally offset the transaction losses or gains on the foreign currency cash flows which they are intended to hedge.
ENVIRONMENTAL LIABILITIES. The Company records accruals for environmental costs based on estimates developed in consultation with environmental consultants and legal counsel in accordance with the requirements of Statement of Financial Accounting Standards No. 5. The estimated costs to be incurred in closing existing landfills, based on current environmental requirements and technologies, are accrued over the expected useful lives of the landfills.
NET EARNINGS PER COMMON AND COMMON EQUIVALENT SHARE. Net earnings per common and common equivalent share are computed by dividing net earnings by the weighted average number of common shares and the dilutive effect, if any, of common share equivalents (convertible subordinated debentures and stock options) outstanding during each year. Net earnings have been adjusted by adding back interest expense (net of tax) on the debentures when dilutive. Fully diluted net earnings per share data are substantially the same.
B - Inventories
(All dollar amounts in millions)
For purposes of comparison to non-LIFO companies, inventories valued at current replacement cost would have been $183.8 million and $194.0 million higher than reported at December 31, 1994 and 1993, respectively.
C - Investees
The Company's principal investee is the 50%-owned Northwood Forest Industries Ltd., which manufactures bleached softwood kraft pulp, lumber and plywood. Under an agreement with Northwood, Mead is entitled to purchase the pulp it requires.
Total investments in investees are as follows:
(All dollar amounts in millions)
The summarized operating data for all investees is presented in the following table: (All dollar amounts in millions)
The summarized balance sheet data for all investees is as follows:
(All dollar amounts in millions)
D - Other Assets
(All dollar amounts in millions)
E - Property, Plant and Equipment
The Company changed the remaining estimated useful lives of certain machinery and equipment as of January 1, 1994 to more closely reflect the current service lives of the assets. The useful lives of this machinery and equipment increased from 16 years to 20 years. The effect of the change was to increase earnings before extraordinary item and cumulative effect of change in accounting principle and net earnings for 1994 by $26.5 million ($.42 per share).
F - Long-Term Debt
(All dollar amounts in millions)
The variable-rate Industrial Development Revenue Bonds and the variable-rate Escanaba tax-exempt bonds are supported by letters of credit. The interest rates on the variable-rate tax-exempt bonds closely follow the tax-exempt commercial paper rate.
In January 1994, the Company prepaid the $165.5 million Purchase Note, due in 1998. In December 1994, the Company prepaid the 6-3/4% convertible subordinated debentures and called the 9% debentures. The loss on extinguishment of debt, net of $6.9 million income tax benefit, is included in the statement of earnings as an extraordinary item and represents call premiums on these debentures and the write-off of related financing expenses. As of December 31, 1994, the Board of Directors has restricted cash balances for use in the retirement of the 9% debentures, which were paid January 9, 1995.
The 8-1/8% and 7-1/8% debentures are callable by the Company at approximately 103% beginning in 2003.
The Company has an unused $550 million bank credit agreement that extends until May 1, 1998. This agreement contains restrictive covenants and requires commitment fees in accordance with standard banking practice.
Maturities of long-term debt for the next five years are $16.1 million in 1995, $101.8 million in 1996, $15.9 million in 1997, $7.3 million in 1998 and $8.5 million in 1999.
Property, plant and equipment carried at $98.5 million is pledged as collateral under the above debt (principally capital leases).
The Company has guaranteed obligations of certain affiliated operations and others totaling approximately $43.8 million at December 31, 1994. In addition, the Company has a 50% interest in a partnership with Scott Paper Company which has borrowed $300 million under a loan agreement with The Sumitomo Bank, Limited, New York Branch, which matures in 1998. The loan, one-half of which has been guaranteed by the Company, may be prepaid at any time either in cash or by delivery of notes receivable from Georgia-Pacific Corporation held by the partnership as part of the consideration from the 1988 sale of Brunswick Pulp and Paper Company, a former affiliate. It is not practicable to estimate the fair value of the above guarantees, however, the Company does not expect to incur losses as a result of these guarantees.
G - Financial Instruments
The Company uses various derivative financial instruments as part of an overall strategy to manage the Company's exposure to market risks associated with interest rate and foreign currency exchange rate fluctuations. The Company uses foreign currency forward contracts to manage the foreign currency exchange rate risks primarily associated with its international operations. The Company is exposed to interest rate risks on its debt instruments, including the reset of interest rates on variable rate debt, and utilizes interest rate swap and cap agreements to diversify its portfolio. The Company does not hold or issue derivative financial instruments for trading purposes.
The risk of loss to the Company in the event of nonperformance by any counterparty under the derivative financial instrument agreements is not significant. All counterparties are rated A or higher by Moody's and Standard and Poor's with the majority of the contracts executed with counterparties rated AA or higher by both agencies. Although the derivative financial instruments expose the Company to market risk, fluctuations in the value of the derivatives are mitigated by expected offsetting fluctuations in the matched instruments.
As part of an overall strategy to maintain an acceptable level of exposure to the risk of interest rate fluctuation, the Company has developed a targeted mix of fixed-rate and cap-protected debt versus variable-rate debt. To efficiently manage this mix, the Company utilizes interest rate swap, cap and option agreements to effectively convert the debt portfolio into an acceptable fixed- rate, capped rate and variable-rate mix.
Under interest rate swap agreements, the Company agrees with other parties to exchange, at specified intervals, the difference between fixed-rate and variable-rate interest amounts calculated by reference to an agreed-upon notional principal amount. The fair value of the interest rate swap agreements is estimated using quotes from brokers and represents the cash requirement if the existing agreements had been settled at year end.
Selected information related to the Company's interest rate swap agreements is as follows:
(All dollar amounts in millions)
The Company utilizes interest rate cap agreements to reduce the impact of increases in interest rates on its floating rate debt. The interest rate cap agreements require premium payments to counterparties based upon a notional principal amount. Interest rate cap agreements entitle the Company to receive from the counterparties the amounts, if any, by which the selected market interest rates exceed the strike rates stated in the agreements. The fair value of the interest rate cap agreements is estimated by obtaining quotes from brokers and represents the cash requirement if the existing contracts had been settled at year end.
Selected information related to the Company's interest rate cap agreements is as follows:
(All dollar amounts in millions)
The Company has no written interest rate options outstanding at December 31, 1994. For written options outstanding at December 31, 1993, the Company received a premium at the outset and then bore the market risk, beyond the premium received, of an unfavorable change in the value of the financial instruments
underlying the options. Written options were used to increase the Company's exposure to fixed- or variable-rate debt, within defined limitations, as part of the Company's overall interest rate risk management strategy. Included in written options were options which would have allowed counterparties to enter into interest rate swap agreements at terms unfavorable to the Company. There were $175.0 million notional amount of written options outstanding at December 31, 1993, with a fair value and carrying amount of $(8.3) million.
The Company utilizes foreign currency forward contracts to reduce exposure to exchange rate risks primarily associated with transactions in the regular course of the Company's international operations. The forward contracts establish the exchange rates at which the Company will purchase or sell the contracted amount of local currencies for specified foreign currencies at a future date. The Company utilizes forward contracts which are short-term in duration (generally one month) and receives or pays the difference between the contracted forward rate and the exchange rate at the settlement date. The major currency exposures hedged by the Company include the German mark, Canadian dollar, Dutch guilder, French franc and British pound. The contract amount of foreign currency forwards at December 31, 1994 and 1993, is $133.2 million and $114.4 million, respectively. The carrying amount and fair value of these contracts are not significant.
Foreign currency options were used by the Company as part of an overall strategy to collar the Company's exposure to specific foreign currency exchange rate fluctuations. The Company has no purchased or written foreign currency options outstanding at December 31, 1994. At December 31, 1993, the notional amounts of purchased and written foreign currency options were $56.5 million and $36.2 million, respectively. The fair values for the purchased and written foreign currency options at December 31, 1993 were an unrealized gain of $2.5 million and an unrealized loss of $(.2) million, respectively. No carrying amounts were recorded for these options.
The fair value of the Company's long-term debt is estimated based on quoted market prices for the same or similar issues or on current rates offered to the Company for debt of the same remaining maturities. The fair value of long-term debt, excluding capital leases, was $782.0 million and $1,253.8 million at December 31, 1994 and 1993, respectively, and the related carrying amounts were $809.6 million and $1,210.0 million, respectively.
At December 31, 1994, the Company held short-term investments which are included in cash and cash equivalents and restricted cash. The carrying amount of these short-term investments is a reasonable estimate of fair value.
H - Shareowners' Equity
The Company has authorized 300 million no par common shares. There were 58,649,495 and 59,184,894 common shares outstanding at December 31, 1994 and 1993, respectively. In 1994, the Board of Directors authorized the Company to purchase up to $350 million of common shares on the open market, of which $44.4 million of common shares were purchased through December 31, 1994. The Company also has outstanding authorization from the Board of Directors to purchase up to an additional 1,594,708 common shares for corporate purposes. A total of 6,334,852 and 5,405,292 common shares were held in treasury at December 31, 1994 and 1993, respectively.
Each outstanding common share presently has one right attached which trades with the common share. Generally, the rights become exercisable and trade separately ten days after a third party acquires 20% or more of the common shares or commences a tender offer for a specified percentage of the common shares. In addition, the rights become exercisable if any party becomes the beneficial owner of 10% or more of the outstanding common shares and is determined by the Board of Directors to be an adverse party. Upon the occurrence of certain additional triggering events specified in the Rights Agreement, each right would entitle its holder (other than, in certain instances, the holder of 20% or more of the common shares) to purchase common shares of the Company (or, in some cases, a potential acquiring company) or other property having a value of $180 for $90, the initial exercise price. The rights expire in 1996 and are presently redeemable at $.025 per right. At December 31, 1994, there were 73,376,392 common shares reserved for issuance under this plan.
The Board of Directors has approved termination benefits for certain key executives and a severance plan for all other salaried employees and established a Benefit Trust in connection with the Company's unfunded supplemental retirement plan, deferred compensation plan, directors retirement plan and excess benefits plan to preserve the benefits earned thereunder in the event of a change in control of the Company.
A Restricted Stock Plan provides for the issuance of restricted common shares to certain selected employees and to directors who are not officers or employees of the Company. As of December 31, 1994, 41,358 common shares are issued and outstanding under the plan. There were 413,069 common shares reserved for issuance under this plan at December 31, 1994.
The Company has preferred shares authorized but unissued as follows: 61,500 undesignated cumulative preferred, par value $100; 20,000,000 undesignated voting cumulative preferred, without par value; 20,000,000 cumulative preferred, without par value; and 295,540 cumulative second preferred, par value $50.
At December 31, 1994, undistributed net earnings of investees and partially- owned foreign affiliates of $96.3 million are included in retained earnings. At December 31, 1994, there is $1,311.6 million available for common dividends which represents the maximum amount of additional indebtedness that can be incurred solely to pay common dividends while remaining in compliance with certain debt covenants.
I - Stock Options and Rights
Officers and key employees have been granted stock options under various plans. Options as to 1,256,818 shares are accompanied by limited rights which may be exercised in lieu of the option under certain circumstances. The exercise price of all options equals the market price of the Company's stock on the date of the grant. The options and rights have a maximum term of ten years and vest after one year. There are 5,158,443 common shares reserved for issuance under these plans.
The following summarizes the Company's stock option plans and the status of the plans:
J - Comprehensive Performance Improvement Program
In 1992, the Company recorded a $95.0 million provision in connection with a comprehensive performance improvement program, of which $85.8 million is included primarily in selling, administrative and research expenses and $9.2 million is included in discontinued operations. The provision was principally comprised of employee severance and related benefits. The Company expended $24.0 million in 1992, $58.0 million in 1993, and the remainder in 1994.
K - Other Revenues (Expenses) - Net
(All dollar amounts in millions)
In 1994, the Company recorded a charge to earnings to reflect the estimated loss on sale of its Kingsport, Tennessee, facility.
The Company incurred a loss in 1994 on derivatives used to manage the Company's exposure to interest rate risks, including the termination of certain leveraged interest rate options entered into in conjunction with swap transactions.
Results of operations of the subsidiary sold in 1992 were not material.
L - Income Taxes
Effective January 1, 1992, the Company adopted Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" and recognized a cumulative effect to that date of the change of $34.0 million ($.58 per share). The effect of adopting Statement No. 109 for the year ended December 31, 1992 was not material.
The principal current and non-current deferred tax assets and (liabilities) are as follows:
(All dollar amounts in millions)
The significant components of income tax expense are as follows:
(All dollar amounts in millions)
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)
At December 31, 1994, no domestic income taxes have been provided on Mead's share of the undistributed net earnings of corporate investees and overseas operations. Those earnings totaled $200.5 million, including foreign currency translation adjustments. The aggregate amount of unrecognized deferred tax liability is approximately $10.0 million at December 31, 1994.
As of December 31, 1994, the Board of Directors has restricted cash balances of $331.0 million, included in other current assets, for use in the payment of current tax liabilities related to the gain on the sale of the Electronic Publishing segment and other matters.
M - Discontinued Operations
Discontinued operations consist of the following:
(All dollar amounts in millions)
In December 1994, the Company sold its Electronic Publishing segment (Mead Data Central) for $1.5 billion in cash. The financial statements and notes have been reclassified for all periods presented to reflect this segment as a discontinued operation. Revenues of the Electronic Publishing segment were $565.2 million for the period January 1, 1994 through November 30, 1994, and $551.3 million and $494.8 million for the years ended December 31, 1993 and 1992, respectively.
In 1986, the Company adopted a plan to discontinue the insurance business which had been conducted through its wholly-owned insurance subsidiaries and wrote off its investment. These subsidiaries were put in a "runoff" position whereby they ceased underwriting activities but continued to settle claims. The remaining unsettled insurance claims are long term in nature. During the fourth quarter of 1994, the Company revised its runoff strategy in view of the long-term nature of the payout for claim settlements and sold one subsidiary and settled a significant portion of the outstanding claims liability. The revised strategy includes the disposition of the remaining insurance operations in the near term. As a result, an additional provision for loss on the disposition of the remaining insurance operations has been provided in the statement of earnings. The net liabilities of the insurance operations at December 31, 1994, include total assets of $92.9 million and claims and other reserves of $143.3 million.
The provision for losses in the previously discontinued Industrial Manufacturing segment is a result of environmental liabilities. Late in 1994, the U.S. Court of Appeals for the Third Circuit reversed the opinion of a District Court which had found the Company not responsible to the current owners for environmental liabilities at a former plant. At another former plant, the Company was named, in the fourth quarter, a potentially responsible party with regard to alleged contamination of a nearby creek. As a result of these two factors, an additional provision for losses for these estimated liabilities has been provided in the statement of earnings.
In 1990, the Board of Directors approved a plan to curtail further development of the Company's imaging products. The remaining assets and liabilities of these operations are not material.
N - Pension Plans
The Company has pension plans that cover substantially all employees. Pension benefits for bargaining employees are primarily based upon years of credited service. Benefits for salaried and other non-bargaining employees are based upon years of service and the employee's average final earnings. Mead's funding policy is to contribute amounts to the plans sufficient to meet or exceed the minimum requirements of the Employee Retirement Income Security Act. Summary information on the Company's funded plans is as follows:
(All dollar amounts in millions)
The projected benefit obligation for the Company's two unfunded plans was $16.8 million and $20.4 million at December 31, 1994 and 1993, respectively, of which $13.1 million and $15.6 million represent the accumulated benefit obligation. Of the projected benefit obligation, $9.2 million and $14.2 million at December 31, 1994 and 1993, respectively, is subject to later amortization. Unfunded
accrued pension cost is $7.6 million and $6.2 million at December 31, 1994 and 1993, respectively.
The components of net pension (income) expense for all plans are as follows:
(All dollar amounts in millions)
Included in net pension (income) expense for 1994 is a charge of $11.5 million, recorded in accordance with SFAS No. 88, as a result of significant settlements of pension liabilities. The expected long-term rate of return on plan assets used in determining net pension income was 9.5% in 1994 and 10% in 1993 and 1992. The net impact of the change in the long-term rate of return was to increase net pension expense by approximately $4.0 million in 1994.
The Company's pension plans require the allocation of excess plan assets to plan members if the plans are terminated, merged or consolidated following a change in control (as defined) of the Company opposed by the Board of Directors of the Company. Amendment of these provisions after such a change in control would require approval of plan participants.
O - Postretirement Benefits Other than Pensions
The Company funds certain health care benefit costs principally on a pay-as-you- go basis, with the retiree paying a portion of the costs. Certain retired employees of businesses acquired by the Company are covered under other health care plans that differ from current plans in coverage, deductibles and retiree contributions.
Summary information on the Company's plans is as follows:
(All dollar amounts in millions)
The components of net periodic postretirement benefit cost are as follows:
(All dollar amounts in millions)
The expected long-term rate of return on plan assets used in determining the net periodic postretirement benefit cost was 8% in each year. The assumed health care cost trend rate used in measuring the accumulated postretirement benefit obligation was 13% in 1994 and 14% in 1993, declining by 1% per year to an ultimate rate of 6%.
If the health care cost trend rate assumptions were increased by 1%, the accumulated postretirement benefit obligation as of December 31, 1994, would be increased by 11%. The effect of this change on the sum of the service cost and interest cost components of net periodic postretirement benefit cost for 1994 would be an increase of 10%.
P - Leases
At December 31, 1994, future minimum annual rental commitments under noncancelable lease obligations are as follows:
(All dollar amounts in millions)
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)
The majority of rent expense is for operating leases having terms of up to 25 years which are for office, warehouse and manufacturing facilities and delivery, manufacturing and computer equipment. A number of these leases have renewal
options. Rent expense was $52.8 million, $48.5 million and $51.9 million in 1994, 1993 and 1992, respectively.
The Company has additional subleases of property recorded under capital leases. Total additional rentals to be received in future years are approximately $16.8 million at December 31, 1994.
Q - Litigation and Other Proceedings
The Company is involved in various litigation generally incidental to normal operations, as well as proceedings regarding equal employment opportunity matters, among others. The Company has also been identified as a potentially responsible party in 31 environmental proceedings. It is not possible to determine the ultimate liability, if any, in all these matters. The Company has established reserves of approximately $40 million relating to environmental matters, including those related to discontinued operations, which it believes are probable and reasonably estimable. Expenditures in 1995 relating to these environmental liabilities are expected to be less than $5 million. In the opinion of management, after consultation with legal counsel and after considering established reserves, the resolution of pending litigation and proceedings is not expected to have a material effect on the financial condition or results of operations of the Company.
R - Additional Information on Cash Flows
(All dollar amounts in millions)
S - Reclassifications
Certain reclassifications have been made in the 1993 and 1992 financial statements to conform to the classifications used in 1994. These reclassifications had no impact on net earnings or shareowners' equity as previously reported.
T - Industry Segments
The company operates in a number of industry segments. The PAPER segment includes the manufacture and sale of printing, writing, carbonless copy, publishing and specialty paper and pulp. The PACKAGING AND PAPERBOARD segment includes the manufacture and marketing of beverage and food packaging materials, corrugated shipping containers and paperboard. The DISTRIBUTION AND SCHOOL AND OFFICE PRODUCTS segment includes the distribution of a full line of paper products and the manufacture and distribution of school and office products.
(All dollar amounts in millions)
(1) Intersegment sales are made at substantially the same prices and on the same terms as to unaffiliated customers.
(2) The earnings from continuing operations before income taxes includes the effect of the change in the depreciable lives of certain paper mill equipment (Paper - $28.7, Packaging and Paperboard - $14.0) in 1994.
(3) Earnings from continuing operations before income taxes in 1994 include the provision for loss on the sale of a facility, costs of severance and closing costs for certain warehouses and office facilities and costs of pension settlements. The effect of the above charges by segment is Paper - $65.9, Packaging and Paperboard - $6.9, Distribution and School and Office Products -$17.3 and Corporate and other - $2.7. Included in 1992 are costs of a performance improvement program and a loss on the sale of a subsidiary. The effect of these charges by segment is Paper - $22.3, Packaging and Paperboard -$23.8, Distribution and School and Office Products - $16.3 and Corporate and other - $45.9.
(4) Earnings from continuing operations before income taxes for "Corporate and other" includes the following:
(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.
U - Fourth Quarter Operations (Unaudited)
During the fourth quarter of 1994, the Company recorded several significant transactions, including the sale of the Electronic Publishing segment, a charge for additional losses in its discontinued insurance operations and a provision for environmental remediation costs at two sites formerly part of Mead's previously discontinued Industrial Manufacturing segment (Note M).
The Company recorded a charge to earnings of $60.0 million to reflect the estimated loss on sale of its Kingsport, Tennessee, facility. The Company announced its intent to sell the facility in October 1994. In addition, the Company recorded charges to earnings of $21.3 million, principally for severance and closing costs for certain warehouses and office facilities at its Coated Board and Zellerbach operations; a charge for settlements of pension liabilities of $11.5 million and an extraordinary loss on the extinguishment of debt of $11.3 million (after tax).
Reflected in earnings of equity investees is $9.1 million (after-tax) of refunds from duties levied on lumber exported from Canada by Northwood Forest Industries Ltd. in prior years.
Selected Quarterly Financial Data (unaudited) (All dollar amounts in millions, except per share data)
(1) The number of shares used in the calculation of per share data varies from period to period since stock options and convertible debentures are included in the calculations only for the periods in which they are dilutive; therefore, the sum of individual quarterly earnings per share may not equal the annual computation.
(2) Includes a charge of $.92 per share related to asset impairments, restructuring and related severance charges and pension settlement charges; a $.15 per share gain on refund of countervailing duties; a gain of $10.04 per share on sale of Mead Data Central division; a $.79 per share charge related to discontinued insurance operations and environmental matters; and, a charge of $.18 per share for extinguishment of debt.
(3) Includes $.12 per share charge related to the revaluation of deferred income taxes at January 1, 1993, resulting from 1993 income tax legislation.
(4) Includes a charge of $.90 per share for other expenses related to a comprehensive performance improvement program and a charge of $.30 per share related to the sale of a subsidiary.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
Not applicable.
PART III
Item 10. Directors and Executive Officers of the Registrant
Information pursuant to this item is incorporated herein by reference to pages 3 through 5, 22 and 23 of the Company's Proxy Statement, definitive copies of which were filed with the Securities and Exchange Commission ("Commission") on March 16, 1995. Information concerning executive officers is also included in Part I of this report following Item 4.
Item 11. Executive Compensation
Information pursuant to this item is incorporated herein by reference to pages 9 through 23 of the Company's Proxy Statement (excluding the "Report of Compensation Committee on Executive Compensation" on pages 10 through 14 and the "Performance Graph" on page 20), definitive copies of which were filed with the Commission on March 16, 1995.
Item 12. Security Ownership of Certain Beneficial Owners and Management
Information pursuant to this item is incorporated herein by reference to pages 9 and 10 of the Company's Proxy Statement, definitive copies of which were filed with the Commission on March 16, 1995.
Item 13. Certain Relationships and Related Transactions
Information pursuant to this item is incorporated herein by reference to pages 22 and 23 of the Company's Proxy Statement, definitive copies of which were filed with the Commission on March 16, 1995.
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) 1. Financial Statements
The financial statements of The Mead Corporation and consolidated subsidiaries are included in Part II, Item 8.
Investee
The consolidated financial statements and financial statement schedules of Northwood Forest Industries Ltd. are included herein. This investee meets the conditions for filing separate financial statements for the year ended December 31, 1994. Financial statement schedules not listed in the following index have either been shown in the related financial statements or notes thereto or are not applicable and have therefore been omitted.
2. Financial Statement Schedules
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), and Amendment No. 2 thereto dated as of May 1, 1994 (incorporated by reference to Exhibit (10)(1) to Registrant's Quarterly Report on Form 10-Q for the Quarterly Period ended July 3, 1994).
(ii) Indenture dated as of July 15, 1982 between the Registrant and Bankers Trust Company, as Trustee, First Supplemental Indenture dated as of March 1, 1987 (incorporated by reference to Exhibit (4)(iv) of Registrant's Annual Report on Form 1O-K for the year ended December 31, 1987), Second Supplemental Indenture dated as of October 15, 1989 (incorporated by reference to Exhibit (4) to Registrant's Current Report on Form 8-K dated October 11, 1989) and Third Supplemental Indenture dated as of November 15, 1991 (incorporated by reference to Exhibit (4)(ii) to Registrant's Annual Report on Form 10-K for the year ended December 31, 1991).
(iii) Indenture dated as of February 1, 1993 between Registrant and The First National Bank of Chicago, as Trustee (incorporated by reference to Exhibit (4)(iii) to Registrant's Annual Report on Form 10-K for the year ended December 31, 1992).
The total amount of securities authorized under other long-term debt instruments does not exceed 10% of the total assets of the Registrant and its subsidiaries on a consolidated basis. A copy of each such instrument will be furnished to the Commission upon request.
(10) Material Contracts:
(i) Agreement dated as of April 24, 1964 between Northwood Mills Limited, Canamead, Inc., the Registrant and Noranda Mines, Limited and Supplemental Agreements relating thereto dated as of July 2, 1964, April 5, 1965, March 15, 1966, February 1, 1967, December 15, 1970 and April 1, 1974 (incorporated by reference to Exhibit (10)(v) of Registrant's Annual Report on Form 1O-K for the year ended December 31, 1980 included in File No. 1-2267 in the Public Reference Room of the Securities and Exchange Commission in Washington, D.C.).
(ii) Pulp Purchase Agreement dated as of April 1, 1965 among Northwood Pulp Limited, the Registrant, Northwood Mills Ltd. and Noranda Mines Limited (incorporated by reference to Exhibit (10)(vi) of Registrant's Annual Report on Form 1O-K for the year ended December 31, 1980 included in File No. 1-2267 in the Public Reference Room of the Securities and Exchange Commission in Washington, D.C.).
(iii) Rights Agreement dated as of November 1, 1986 between Registrant and The First National Bank of Cincinnati, as Rights Agent, as amended December 29, 1987 and December 9, 1988 (incorporated herein by reference to Registrant's Amendment No. 1 on Form 8, dated
November 28, 1986 and Exhibits 28(a) and 28(b) to Registrant's Current Report on Form 8-K dated December 9, 1988).
(iv) Amended Board Purchase Agreement dated as of January 4, 1988 among the Registrant, Georgia Kraft Company and Inland Container Corporation (incorporated by reference to Exhibit (1O)(xviii) of Registrant's Annual Report on Form 1O-K for the year ended December 31, 1987).
(v) Indemnification Agreement dated as of January 4, 1988 among the Registrant, Mead Coated Board, Inc., Temple-Inland Inc., Inland Container Corporation I, Inland Container Corporation, GK Texas Holding Company and Georgia Kraft Company (incorporated by reference to Exhibit (1O)(xix) of Registrant's Annual Report on Form 1O-K for the year ended December 31, 1987).
(vi) Lease Agreement between The Industrial Development Board of the City of Phenix City, Alabama and Mead Coated Board, Inc., dated as of December 1, 1988, as amended (incorporated by reference to Exhibit (10)(xviii) to Registrant's Annual Report on Form 10-K for the year ended December 31, 1989 and Exhibit (10)(xviii) to Registrant's Annual Report on Form 10-K for the year ended December 31, 1991).
(vii) Lease Agreement between The Industrial Development Board of the City of Phenix City, Alabama and Mead Coated Board, Inc., dated as of June 1, 1993 (incorporated by reference to Exhibit (10)(3) to Registrant's Quarterly Report on Form 10-Q for the Quarterly Period ended April 3, 1994).
(viii) Purchase Agreement dated October 4, 1994 between The Mead Corporation and Reed Elsevier plc. (incorporated by reference to exhibit (10)(1) to the Registrant's Quarterly Report on Form 10- Q filed for the Quarterly Period ended October 2, 1994), as amended (incorporated by reference to Exhibit (2) to the Registrant's Current Report on Form 8-K dated December 2, 1994).
The following are compensatory plans and arrangements in which directors or executive officers participate:
(ix) 1984 Stock Option Plan of the Registrant, as amended and restated as of January 25, 1990 (incorporated by reference to Exhibit (10)(v) to Registrant's Annual Report on Form 10-K for the year ended December 31, 1989), and Amendment dated January 23, 1992 (incorporated by reference to Exhibit 10(iv) to Registrant's Annual Report on Form 10-K for the year ended December 31, 1991).
(x) 1991 Stock Option Plan of the Registrant (incorporated by reference to Exhibit (10)(xxi) to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1990).
(xi) Incentive Compensation Election Plan of the Registrant as amended November 17, 1987 (incorporated by reference to Exhibit (10)(viii) to Registrant's Annual Report on Form 10-K for the year ended December 31, 1987), as amended October 29, 1988 (incorporated by reference to Exhibit (10)(vi) to Registrant's Annual Report on Form 10-K for the year ended December 31, 1988).
(xii) 1985 Supplement to Registrant's Incentive Compensation Election Plan, as amended November 17, 1987 (incorporated by reference to Exhibit (1O)(xi) to Registrant's Annual Report on Form 10-K for the year ended December 31, 1985 and Exhibit (10)(ix) of Registrant's Annual Report on Form 10-K for the year ended December 31, 1987), and as further amended October 29, 1988 (incorporated by reference to Exhibit (10)(vii) to Registrant's Annual Report on Form 10-K for the year ended December 31, 1988).
(xiii) Excess Benefit Plan of the Registrant (1988 Restatement), dated October 29, 1988 (incorporated by reference to Exhibit (10)(vii) to Registrant's Annual Report on Form 10-K for the year ended December 31, 1990).
(xiv) Supplemental Executive Retirement Plan (formerly The Mead Management Income Parity Plan) effective January 1, 1985, as amended and restated as of July 1, 1992 (incorporated by reference to Exhibit (10)(xiii) to Registrant's Annual Report on Form 10-K for the year ended December 31, 1992).
(xv) Form of Indemnification Agreement between Registrant and each of John C. Bogle, John G. Breen, William E. Hoglund, Barbara C. Jordan, John A. Krol, Steven C. Mason, Charles S. Mechem, Jr., Paul F. Miller, Jr., William S. Shanahan, Thomas B. Stanley, Jr. and Lee J. Styslinger, Jr. (incorporated herein by reference to Exhibit (10)(xiv) of Registrant's Annual Report on Form 10-K for the year ended December 31, 1986).
(xvi) Form of Severance Agreement between Registrant and Steven C. Mason (incorporated herein by reference to Exhibit (10)(xvi) of Registrant's Annual Report on Form 10-K for the year ended December 31, 1986 and Exhibit (10)(xii) of Registrant's Annual Report on Form 10-K for the year ended December 31, 1988).
(xvii) Form of Severance Agreement between Registrant and each of William R. Graber, Elias M. Karter, Raymond W. Lane, Charles J. Mazza, Wallace 0. Nugent, Thomas E. Palmer, Jerome F. Tatar and other key employees (incorporated by reference to Exhibit (10)(xiii) of Registrant's Annual Report on Form 10-K for the year ended December 31, 1988).
(xviii) Benefit Trust Agreement dated January 9, 1987 between Registrant and Society Bank, National Association (incorporated herein by reference to Exhibit (1O)(xviii) to Registrant's Annual Report on Form 1O-K for the year ended December 31, 1986), as amended October 29,
1988 (incorporated by reference to Exhibit (10)(xiv) of Registrant's Annual Report on Form 10-K for the year ended December 31, 1988) and January 24, 1991 (incorporated by reference to Exhibit (10)(xiii) to Registrant's Annual Report on Form 10-K for the year ended December 31, 1990).
(xix) Restricted Stock Plan effective December 10, 1987, as amended through July 23, 1992 (incorporated by reference to Exhibit (10)(xviii) to Registrant's Annual Report on Form 10-K for the year ended December 31, 1992), as amended through April 28, 1994 (incorporated by reference to Exhibit (10)(2) of Registrant's Quarterly Report on Form 10-Q for the Quarterly Period ended April 3, 1994).
(xx) Deferred Compensation Plan for Directors of the Registrant, as amended through October 29, 1988 (incorporated by reference to Exhibit (10)(xix) of Registrant's Annual Report on Form 10-K for the year ended December 31, 1989).
(xxi) 1985 Supplement to Registrant's Deferred Compensation Plan for Directors, as amended through October 29, 1988 (incorporated by reference to Exhibit (10)(xx) of Registrant's Annual Report on Form 10-K for the year ended December 31, 1989).
(xxii) Directors Retirement Plan, effective October 27, 1990 (incorporated by reference to Exhibit (10)(xx) of Registrant's Annual Report on Form 10-K for the year ended December 31, 1990).
(xxiii) Form of Executive Life Insurance Policy for Key Executives (incorporated by reference to Exhibit (10) of Registrant's Quarterly Report on Form 10-Q for the Quarterly Period Ended March 31, 1991).
(xxiv) The "Direction 2000" Executive Incentive Plan, dated April 21, 1993 (incorporated by reference to Exhibit 10(i) of Registrant's Quarterly Report on Form 10-Q for the Quarterly Period Ended April 4, 1993), amended for 1994 (incorporated by reference to Exhibit (10)(2) of Registrant's Quarterly Report on Form 10-Q for the Quarterly Period ended July 3, 1994).
(xxv) Mead Management Incentive Plan for 1994 (incorporated by reference to Exhibit (10)(i) of Registrant's Quarterly Report on Form 10-Q for the Quarterly Period Ended April 3, 1994).
(11) Calculation of Earnings per Share.
(12) Ratio of Earnings to Fixed Charges.
(21) List of significant subsidiaries of the Registrant.
(23) Consent of Independent Auditors.
(27) Financial Data Schedule
(b) Reports on Form 8-K
A Form 8-K was filed on December 14, 1994 reporting under Item 2