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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 27, 1998
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: 937-495-6323
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 __ .
The number of Common Shares outstanding at September 27, 1998 was
102,746,479.
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<PAGE>
THE MEAD CORPORATION AND CONSOLIDATED SUBSIDIARIES
--------------------------------------------------
QUARTERLY PERIOD ENDED SEPTEMBER 27, 1998
-----------------------------------------
PART I - FINANCIAL INFORMATION
------------------------------
ITEM 1. FINANCIAL STATEMENTS
--------------------
THE MEAD CORPORATION AND CONSOLIDATED SUBSIDIARIES
- --------------------------------------------------
BALANCE SHEETS
- --------------
(All dollar amounts in millions)
Sept. 27, Dec. 31,
1998 1997
-------- --------
ASSETS
Current assets:
Cash and cash equivalents $ 38.2 $ 29.5
Accounts receivable 520.3 421.4
Inventories 454.4 424.4
Other current assets 94.0 75.9
-------- --------
Total current assets 1,106.9 951.2
Investments and other assets:
Investees 131.7 151.1
Other assets 509.0 493.5
-------- --------
640.7 644.6
Property, plant and equipment 5,680.2 5,465.1
Less accumulated depreciation and
amortization (2,325.9) (2,191.3)
-------- --------
3,354.3 3,273.8
Net assets of distribution segment 15.5 282.8
-------- --------
Total assets $5,117.4 $5,152.4
======== ========
LIABILITIES AND SHAREOWNERS' EQUITY
Current liabilities:
Accounts payable $ 238.8 279.2
Accrued liabilities 399.5 357.5
Current maturities of long-term debt 6.7 1.8
-------- --------
Total current liabilities 645.0 638.5
Long-term debt 1,364.8 1,428.0
Commitments and contingent liabilities
Deferred items 844.9 797.4
Shareowners' equity:
Common shares 153.2 154.9
Additional paid-in capital 65.1 53.5
Foreign currency translation adjustment (39.6) (20.5)
Retained earnings 2,084.0 2,100.6
-------- --------
2,262.7 2,288.5
-------- --------
Total liabilities and
shareowners' equity $5,117.4 $5,152.4
======== ========
See notes to financial statements.
<PAGE>
THE MEAD CORPORATION AND CONSOLIDATED SUBSIDIARIES
- --------------------------------------------------
STATEMENTS OF EARNINGS
- ----------------------
(All dollar amounts in millions, except per share amounts)
<TABLE>
<CAPTION>
Third Quarter Ended Three Quarters Ended
--------------------- ---------------------
Sept. 27, Sept. 28, Sept. 27, Sept. 28,
1998 1997 1998 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net sales $1,009.3 $1,031.4 $2,899.2 $2,862.3
Cost of products sold 811.7 829.8 2,326.1 2,309.2
-------- -------- -------- --------
Gross profit 197.6 201.6 573.1 553.1
Selling and administrative expenses 120.9 100.2 318.5 293.5
-------- -------- -------- --------
Earnings from operations 76.7 101.4 254.6 259.6
Other revenues (expenses) (0.5) 2.9 3.7 2.9
Interest and debt expense (27.1) (26.0) (82.5) (73.9)
-------- -------- -------- --------
Earnings from continuing
operations before income taxes 49.1 78.3 175.8 188.6
Income taxes 16.5 28.3 65.9 68.6
-------- -------- -------- --------
Earnings from continuing
operations before equity in
net earnings (loss) of investees 32.6 50.0 109.9 120.0
Equity in net earnings (loss)
of investees 2.8 4.8 (.7) 8.9
-------- -------- -------- --------
Earnings from continuing
operations 35.4 54.8 109.2 128.9
Discontinued operations (4.5) (28.0) (10.6)
-------- -------- -------- --------
Net earnings $ 35.4 $ 50.3 $ 81.2 $ 118.3
======== ======== ======== ========
Per common share - basic:
Earnings from continuing
operations $ .34 $ .52 $ 1.05 $ 1.23
Discontinued operations (.04) (.27) (.10)
-------- -------- -------- --------
Net earnings $ .34 $ .48 $ .78 $ 1.13
======== ======== ======== ========
Per common share - assuming
dilution:
Earnings from continuing
operations $ .34 $ .51 $ 1.04 $ 1.21
Discontinued operations (.04) (.27) (.10)
-------- -------- -------- --------
Net earnings $ .34 $ .47 $ .77 $ 1.11
======== ======== ======== ========
Cash dividends per
common share $ .16 $ .15 $ .48 $ .45
======== ======== ======== ========
Weighted-average number of common
shares outstanding (millions)
- basic 103.3 104.9 103.7 104.6
======== ======== ======== ========
Weighted-average number of common
shares outstanding (millions)
- assuming dilution 104.5 107.2 105.4 106.5
======== ======== ======== ========
</TABLE>
See notes to financial statements.
<PAGE>
THE MEAD CORPORATION AND CONSOLIDATED SUBSIDIARIES
- --------------------------------------------------
STATEMENTS OF CASH FLOWS
- ------------------------
(All dollar amounts in millions)
Three Quarters Ended
--------------------
Sept. 27, Sept. 28,
1998 1997
------- -------
Cash flows from operating activities:
Net earnings $ 81.2 $118.3
Adjustments to reconcile net earnings to
net cash provided by operating activities:
Depreciation and depletion of property, plant
and equipment 192.0 177.1
Depreciation and amortization of other assets 32.1 32.5
Deferred income taxes 28.4 24.3
Investees-earnings and dividends 9.5 (4.4)
Discontinued operations 28.0 10.6
Other 9.2 (15.4)
Change in current assets and liabilities:
Accounts receivable (97.6) (90.6)
Inventories (26.9) 49.5
Other current assets (4.2) 4.4
Accounts payable and accrued liabilities (15.1) (19.6)
Cash (used in) discontinued operations (7.8) (46.9)
------ ------
Net cash provided by operating activities 228.8 239.8
------ ------
Cash flows from investing activities:
Capital expenditures (277.1) (294.7)
Additions to equipment rented to others (23.7) (24.8)
Payment for acquired business (13.6)
Proceeds from sale of business 262.5
Other (20.2) (14.3)
------ ------
Net cash (used in) investing activities (72.1) (333.8)
------ ------
Cash flows from financing activities:
Additional borrowings 140.5 564.2
Payments on borrowings (200.6) (537.9)
Notes payable 114.2
Cash dividends paid (49.8) (47.1)
Common shares issued 13.4 41.9
Common shares purchased (51.5) (41.5)
------ ------
Net cash (used in) provided by financing (148.0) 93.8
activities ------ ------
Increase (decrease) in cash and cash equivalents 8.7 (0.2)
Cash and cash equivalents at beginning of year 29.5 20.6
------ ------
Cash and cash equivalents at end of third quarter $ 38.2 $ 20.4
====== ======
See notes to financial statements.
<PAGE>
THE MEAD CORPORATION AND CONSOLIDATED SUBSIDIARIES
- --------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
- -----------------------------
(All dollar amounts in millions)
A - FINANCIAL STATEMENTS
The balance sheet at December 31, 1997, is condensed financial information
taken from the audited balance sheet. The interim financial statements
are unaudited. In the opinion of management, all adjustments (which
consist only of normal recurring adjustments) necessary to present fairly
the financial position and results of operations for the interim periods
presented have been made.
B - ACCOUNTING POLICIES
On an interim basis, all costs subject to recurring year-end adjustments
have been estimated and allocated ratably to the quarters. Income taxes
have been provided based on the estimated tax rate for the respective
years after excluding infrequently occurring items whose specific tax
effect is reported during the same interim period as the related
transaction.
C - INVENTORIES
The amount of inventories is (principally last-in, first-out method):
Sept. 27, Dec. 31,
1998 1997
------- -------
Finished and semi-finished products $286.6 $242.4
Raw materials 92.9 99.3
Stores and supplies 74.9 82.7
------ ------
$454.4 $424.4
====== ======
D - INVESTEES
The summarized operating data for all investees is presented in the
following table:
Third Quarter Ended Three Quarters Ended
-------------------- ----------------------
Sept. 27, Sept. 28, Sept. 27, Sept. 28,
1998 1997 1998 1997
------- ------- ------- -------
Revenues $172.1 $173.4 $529.9 $545.7
====== ====== ====== ======
Gross profit $ 12.2 $ 27.0 $ 24.9 $ 65.1
====== ====== ====== ======
Net earnings $ 13.5 $ 11.8 $ 15.3 $ 24.8
====== ====== ====== ======
E - SHAREOWNERS' EQUITY
During the third quarter of 1998, the company repurchased approximately
1,135,000 common shares on the open market. The company has outstanding
authorization from the Board of Directors to repurchase up to ten million
common shares, of which almost 7.8 million shares have been repurchased as
of the end of the third quarter of 1998.
<PAGE>
F - COMPREHENSIVE INCOME
Effective January 1, 1998, the company adopted Statement of Financial
Accounting Standards (SFAS) No. 130, "Reporting Comprehensive Income."
The company's difference between net earnings and comprehensive income
relates to the changes in foreign currency translation adjustment.
Comprehensive income for the third quarters ended September 27, 1998 and
September 28, 1997, was $19.1 million and $45.1 million, respectively, and
for the three quarters ended September 27, 1998 and September 28, 1997,
comprehensive income was $62.1 million and $104.9 million, respectively.
G - ADDITIONAL INFORMATION ON CASH FLOWS
Three Quarters Ended
-------------------
Sept. 27, Sept. 28,
1998 1997
------- -------
Cash paid for:
Interest $108.5 $ 81.2
====== ======
Income taxes $ 25.7 $ 13.4
====== ======
H - DISCONTINUED OPERATIONS
On June 9, 1998, the Board of Directors approved a plan to discontinue
Zellerbach, the company's distribution segment. The company closed on the
sale of the Zellerbach business to International Paper Company on July 31,
1998. The company expects to sell the distribution segment's remaining
real estate of $15.5 million in the near term. Loss from operations from
January 1, 1998, through June 9, 1998, totaled $6.0 million, net of income
tax benefits of $3.1 million. Losses related to the sale of the segment
totaled $22.0 million, net of income tax benefits of $22.7 million.
Included in the loss on sale of the segment are operating losses from June
10, 1998, through July 31, 1998, of $3.2 million, net of taxes.
I - SEGMENT INFORMATION
Effective March 30, 1998, the company adopted Statement of Financial
Accounting Standards No. 131, "Disclosures about Segments of an Enterprise
and Related Information."
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. All prior periods have been restated to reflect
the discontinued segment (Note H). 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, Canada, Latin America and the Pacific Rim. The School and Office
Products operations are predominantly domestic and manufacture and
distribute school and office paper related products to retailers.
<PAGE>
<TABLE>
<CAPTION>
Year Ended Third Quarter Ended Three Quarters Ended
---------- -------------------- ------------------
Dec. 31, Sept. 27, Sept. 28, Sept. 27, Sept. 28,
1997 1998 1997 1998 1997
-------- -------- -------- -------- --------
Sales:
<S> <C> <C> <C> <C> <C>
Paper $1,797.8 $ 451.5 $ 472.3 $1,330.6 $ 1,345.1
Packaging and Paperboard 1,431.8 388.0 369.4 1,139.4 1,063.1
School and Office Products 516.2 169.8 189.7 429.2 454.1
-------- -------- -------- -------- --------
Total $3,745.8 $1,009.3 $1,031.4 $2,899.2 $2,862.3
======== ======== ======== ======== ========
Earnings from Continuing
Operations Before Income Taxes:
Paper $ 195.6 $ 45.7 $ 55.0 $ 152.4 $ 141.9
Packaging and Paperboard 129.6 39.6 42.5 106.8 94.1
School and Office Products 57.3 9.0 15.3 47.3 59.1
Corporate and Other (1) (140.5) (45.2) (34.5) (130.7) (106.5)
-------- -------- -------- -------- --------
Total $ 242.0 $ 49.1 $ 78.3 $ 175.8 $ 188.6
======== ======== ======== ======== ========
(1) Corporate and Other includes the following:
Other Revenues $ 13.0 $ 0.6 $ 3.4 $ 5.1 $ 6.6
Interest Expense (98.2) (27.1) (26.0) (82.5) (73.9)
Other Expenses (55.3) (18.7) (11.9) (53.3) (39.2)
-------- -------- -------- -------- --------
$ (140.5) $ (45.2) $ (34.5) $(130.7) $(106.5)
======== ======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
As of and for the Year Ended
December 31, 1997
Depreciation,
Identifiable Depletion and Capital
Assets (2) Amortization Expenditures
------------ ------------- ------------
<S> <C> <C> <C>
Paper $2,135.5 $111.2 $110.5
Packaging and Paperboard 1,941.3 149.1 293.8
School and Office Products 191.3 8.2 11.6
Intersegment Elimination (22.6)
Corporate and Other 906.9 14.0 21.4
-------- --------- --------
Total $5,152.4 $282.5 $437.3
======== ========= ========
</TABLE>
(2) Identifiable assets have not changed significantly at September 27,
1998, compared to December 31, 1997.
GEOGRAPHIC AREAS
The company has sales from foreign subsidiaries primarily in Europe,
Canada, Latin America and the Pacific Rim. No individual foreign
geographic area is significant to the company relative to total net sales,
earnings from continuing operations before taxes or identifiable assets.
<PAGE>
The following represent net sales and total assets related to the
company's foreign subsidiaries:
Year Ended
December 31, 1997 December 31, 1997
Identifiable
Net Sales Assets (3)
--------- ---------
Europe $ 309.1 $ 226.9
Canada 132.3 55.0
Pacific Rim 52.7 48.4
Latin America 40.5 35.5
--------- ---------
$ 534.6 $ 365.8
========= =========
(3) Identifiable assets have not changed significantly at September 27,
1998, compared to December 31, 1997.
J - SPECIAL CHARGES
During the second quarter of 1998, the company recorded pre-tax charges of
$31.5 million related to the writedown of certain assets including stores
and supplies inventory and other capital assets.
During the third quarter, the company recorded pre-tax charges of $22.0
million related to workforce reductions and other costs to improve
organizational performance.
K - ACCOUNTING PRONOUNCEMENT
In June 1998, SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities," was issued. The statement requires derivatives to be
recorded on the balance sheet as assets or liabilities, measured at fair
value. Gains or losses resulting from changes in fair value of the
derivatives are recorded depending upon whether the instruments meet the
criteria for hedge accounting. Adoption of this statement is not expected
to be material. This statement is effective for fiscal years beginning
after June 15, 1999.
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
-------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS
-----------------------------------
RESULTS OF OPERATIONS
- ---------------------
During the quarter Mead recorded a pre-tax charge of $22 million or $.13
per share for costs associated with previously announced workforce
reductions, severance and other costs related to upgrading performance.
The charges taken during the quarter reduced earnings in each of Mead's
three business segments. Also, during the third quarter, Mead completed
the sale of Zellerbach, a distribution business.
Net Sales
- ---------
Third quarter net sales were $1.01 billion, a decrease of 2% from the
$1.03 billion in the third quarter of 1997. Sales for both years exclude
the discontinued Zellerbach operation. In the third quarter of 1998,
sales were lower in coated paper, uncoated paper, and school and office
products compared with the third quarter of 1997, while sales increased in
packaging and corrugating medium over the prior year period.
Operating Costs and Expenses
- ----------------------------
Gross profit as a percentage of sales increased to 19.6% for the third
quarter of 1998 from 19.5% in the third quarter of 1997. Selling and
administrative expenses of $121 million increased from $100 million in
1997. The increase was primarily the result of the workforce reduction
program.
Interest and Debt Expense
- -------------------------
Interest and debt expense in the third quarter of $27.1 million increased
from $26 million in the third quarter of 1997 as a result of increased
debt levels. Interest expense was down $2 million from the second quarter
of 1998 as a result of a reduction in short term debt during the third
quarter.
Income Taxes
- ------------
The effective tax rate was 33.6% in the third quarter of 1998 compared
with 36.1% in the third quarter of 1997. For the first three quarters,
the effective tax rate was 37.5% in 1998 and 36.4% in 1997.
Equity in Net Earnings (Loss) of Investees
- ------------------------------------------
Mead's investees earned $2.8 million in the third quarter of 1998 compared
with earnings of $4.8 million in the third quarter of 1997, primarily as
a result of lower prices for lumber, plywood and pulp at its 50%-owned
Northwood companies. The decline was partially offset by higher shipments
of pulp and higher prices for oriented structural board. Northwood's
sawmills curtailed production about 10% during the quarter because of weak
overseas demand.
Discontinued Operations
- -----------------------
The loss from discontinued operations in the third quarter of 1997
represents the after-tax operating loss of the Zellerbach distribution
business, which was sold in the third quarter of 1998.
Financial Data by Business
- --------------------------
Paper segment
<TABLE>
<CAPTION>
Third Quarter Three Quarters
------------------------ ---------------------------
1998 1997 % Change 1998 1997 % Change
---- ---- -------- ---- ---- --------
(All dollar amounts in millions)
<S> <C> <C> <C> <C> <C> <C>
Net sales (to unaffiliated
customers and Zellerbach) $451.5 $472.3 (4)% $1,330.6 $1,345.1 (1)%
Segment earnings before
taxes 45.7 55.0 (17)% 152.4 141.9 (7)%
</TABLE>
Sales and earnings in the paper segment declined from the third quarter of
1997. Earnings of $45.7 million included $9.9 million in charges related
to workforce reductions and costs for upgrading organizational
performance. In the quarter, shipments of coated and uncoated paper
declined from the third quarter of 1997. Prices for coated and uncoated
paper declined during the quarter to end the quarter near prior-year
levels. Sales volume of carbonless paper during the third quarter was
essentially unchanged from the third quarter of 1997, although year- to-
date sales of carbonless paper were down slightly from the levels of the
<PAGE>
first three quarters of 1997. Order backlogs for coated paper remained at
low levels, and inventories remained above prior-year levels.
Productivity improved at the company's three coated paper mills and at the
specialty paper mill in South Lee, Massachusetts.
During the quarter, the scheduled shutdown of a paper machine at the
Rumford, Maine, mill was extended to 30 days, and operations of two other
coated paper machines were curtailed for nine days to bring inventories
more in line with current business conditions. During the fourth quarter,
the company's Rumford, Maine, and Escanaba, Michigan, paper mills expect
to take the equivalent of 30,000 tons of market-related downtime on
several machines. Future operating schedules will be evaluated to
determine if additional downtime will be necessary to balance inventory
levels.
Packaging and Paperboard segment
<TABLE>
<CAPTION>
Third Quarter Three Quarters
------------------------ -----------------------
1998 1997 % Change 1998 1997 % Change
---- ---- -------- ---- ---- --------
(All dollar amounts in millions)
<S> <C> <C> <C> <C> <C> <C>
Net sales (to unaffiliated
customers) $388.0 $369.4 5% $1,139.4 $1,063.1 7%
Segment earnings before
taxes 39.6 42.5 (7)% 152.4 141.9 13%
</TABLE>
Sales for the segment improved over the third quarter of 1997 on higher
sales volumes of containerboard and packaging. Earnings of $39.6
million included $7.1 million in charges related to workforce reductions
and costs for upgrading organizational performance. In the third
quarter, shipments of corrugating medium from the recently expanded
Stevenson, Alabama, mill increased 14% over the third quarter of 1997.
Shipments of boxes in the third quarter were below the third quarter of
1997. Prices for medium declined during the third quarter and ended the
quarter slightly above prior year levels.
Open market sales of coated paperboard decreased slightly compared to
the third quarter of 1998, although pricing of paperboard sold into the
open market was stable. Demand for Mead's multiple beverage packaging
improved in North America and Europe compared with the third quarter of
1997. The Mahrt mill improved its cost position and increased
production volume compared with the third quarter of 1997. Operating
performance improved at the Packaging division's converting facilities
compared to the third quarter of 1997.
Distribution and School and Office Products segment
<TABLE>
<CAPTION>
Third Quarter Three Quarters
------------------------ ----------------------------
1998 1997 % Change 1998 1997 % Change
---- ---- -------- ---- ---- --------
(All dollar amounts in millions)
<S> <C> <C> <C> <C> <C> <C>
Net sales (to unaffiliated
customers) $169.8 $189.7 (10)% $429.2 $454.1 (5)%
Segment earnings before
taxes 9.0 15.3 (41)% 47.3 59.1 (20)%
</TABLE>
Sales and earnings declined for the segment from the third quarter of
1997. Earnings of $9.0 million included $4.1 million in charges for
workforce reductions costs related to upgrading organizational
performance. The decline in sales and earnings reflected a generally
weaker back-to-school buying season in which retailers placed fewer
orders and tightly managed inventory levels. Order receipts during the
quarter were below prior year levels, and inventory levels at the end of
the third quarter were higher than that of the prior year. The
division's converting facilities operated well during the quarter, and
delivery performance improved over the same quarter of 1997.
LIQUIDITY AND CAPITAL RESOURCES
Working capital on September 27, 1998 was $461.9 million compared to
$312.7 million on December 31, 1997. The current ratio of 1.7 at the
end of the third quarter was higher than the 1.5 on December 31, 1997.
Consistent with Mead's seasonal School and Office Products business,
inventories and receivables increased during the first half of the year
and declined during the third quarter. Inventories of school and office
products and coated paper remained above the levels of the third quarter
of 1997.
<PAGE>
Borrowed capital (long-term debt) as a percentage of total capital
(long-term debt plus shareowners' equity) was 37.6% on September 27,
1998, and was 38.4% on December 31, 1997. The combination of proceeds
from the sale of Zellerbach and collections on back-to-school season
sales enabled the company to repay short-term borrowings.
Capital expenditures totaled $277.1 million for the first three quarters
of 1998 compared with $294.7 million in the first three quarters of
1997. The major project in both time periods was the expansion at the
Stevenson corrugating medium mill, which was completed during the second
quarter of 1998.
The company repurchased 1.1 million common shares during the quarter and
has repurchased almost 7.8 million common shares under the 10 million
share authorization approved by the Board of Directors in April 1995.
The company expects to complete its current authorized share repurchase
program by December 1999.
At the end of the third quarter, Mead paid a fixed rate or a capped rate
of interest on 79% 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 $.02 change in earnings per share for
the year. The estimated market value of long-term debt, excluding
capital leases, was $93.6 million more than book value at the end of the
third quarter.
OUTLOOK
- -------
On September 30, 1998, Mead sold Mead Ink Products of Anniston, Alabama,
a manufacturer of inks for the packaging industry for $21 million. The
sale will result in an estimated pre-tax gain of $15 million or $.09 per
share in the fourth quarter of 1998.
Year 2000 Readiness Disclosure
- -------------------------------
The Year 2000 issue concerns the inability of computerized information
and process control systems to properly recognize and process date-
sensitive information as the year 2000 approaches. Mead expects that
the Year 2000 issue costs will not have a material adverse impact on
results of operations, liquidity or capital resources.
Mead is engaged in a five step process in dealing with the Year 2000
issue: inventory; assessment, corrective action; testing; and
implementation. With regard to Information Technology systems (IT),
Mead has completed an inventory and an assessment of its IT systems
throughout the company. This effort includes all its major information
systems: financial; administrative; manufacturing; and, business systems
such as order entry and billing. These IT systems are comprised of
packaged software and some proprietary systems developed by Mead. In
early 1997, the company began a specific work plan to modify, upgrade or
replace affected systems. Most of this corrective action will be
completed in 1998 and the remainder will be substantially completed in
the first quarter of 1999. Systems testing began in 1998 and will be
completed in 1999.
The company's manufacturing and converting facilities also rely on non-
IT systems such as process control systems for monitoring and regulating
power, production, emissions and safety equipment. Some of these
systems include date-sensitive information. In 1998, Mead began an
inventory of process control equipment at its operating facilities,
coordinating this effort with vendors to identify at-risk devices. Mead
also has engaged a third-party consultant to assist in the inventory and
assessment. Mead has process control systems at its five major paper
mills, three smaller paper mills; and over 30 converting plants in its
packaging, containerboard and school and office products businesses.
The inventory has been completed for several of Mead's operating
facilities, and corrective action is under way. The remaining
inventories and plans for corrective action are expected to be completed
by year-end 1998. Corrective action and testing of critical systems
will be conducted throughout 1999.
In 1998, Mead also initiated efforts to evaluate the Year 2000 issue as
it relates to principal third parties, primarily customers and
suppliers. These efforts include communicating Mead's assurance to
major customers that it will meet sales commitments before and after
year-end 1999. Mead has identified its critical suppliers and is in the
process of seeking their assurance that contracts with Mead will not be
breached due to Year 2000 issues. Mead also is in the process of
contacting its major vendors of hardware, software and process control
systems to identify and resolve Year 2000 issues.
In 1998, Mead announced its intention to implement an enterprise
resource planning system across the company over the next three to four
years. Mead is not relying on the implementation of that system to
address Year 2000 issues.
<PAGE>
The costs associated with Mead's remediation of the Year 2000 issue
include amounts for upgrading and replacing non-compliant packaged
software and hardware IT and non-IT systems, the costs of fixing or
renovating proprietary IT and non-IT systems and the costs related to
the use of third-party Y2K solution providers. Through the third
quarter of 1998, total cost associated with Mead's remediation of Year
2000 issues was $8 million. This total included approximately $6
million in repair costs and $2 million in replacement costs. The total
estimated costs Mead expects to incur between 1997 and 2000 to complete
its assessment and remediation of the Year 2000 issue is $35-45 million
dollars. The majority of the estimated remaining incremental costs
relate to replacement or modification of affected process control
systems in the corporation's manufacturing operations. These costs will
be expensed as incurred, unless new systems are purchased that would be
capitalized in accordance with generally accepted accounting principles.
The company considers the risk to be low that its IT systems will be
disrupted by the Year 2000 issue, because it relies to a great extent on
packaged software for its major business systems at the corporate and
operating division levels. Mead is less reliant on proprietary systems,
which generally require greater time to correct. The company expects to
complete the repair or replacement of its proprietary systems by the
first quarter of 1999.
Mead currently considers there to be a higher level of uncertainty
related to the repair and replacement of non-IT systems such as process
control systems at its manufacturing and converting facilities. These
systems are more numerous, and the effort to identify and replace non-
compliant processors and hardware, which involves third-party vendors
and consultants, is more complex. The company began working with
vendors in 1997 as they acknowledged process control systems issues.
Efforts with vendors intensified in 1998, and an outside consultant was
retained to expedite the process. Failure to identify and correct non-
IT systems could result in interruptions in manufacturing, safety or
environmental systems. Mead fully expects to complete corrective action
and testing in 1999 to mitigate this uncertainty.
Mead relies on governmental services and third party suppliers for raw
materials, utilities, water, transportation and other key services.
Significant interruption caused by these parties could affect Mead
operations overall and its ability to deliver products and services to
its customers.
Mead continues efforts to assess the status of its critical suppliers
and develop alternatives where possible to reduce the risk of
interruption of services. If customers experience Year 2000
interruptions in their own operations, that could result in reduced
sales by Mead. Mead is working with major customers to determine risks
and alternatives to avoid any possible disruptions.
There is a risk that plans for achieving Year 2000 compliance may not be
completed on time. Failure to meet important milestones in the
company's plans would alert the company to take steps necessary to
notify customers, suppliers, employees and others.
Oversight of the company's Year 2000 efforts is the responsibility of
the Executive Business Council. The Council includes the Chief Financial
Officer, Chief Information Officer, General Counsel and Chief Purchasing
Officer. The CIO reports on the status of the company's readiness to
the Audit Committee of the Board of Directors.
The company is in the process of developing contingency plans within
each business unit for addressing the greatest areas of risk of
noncompliance or threats to business operations related to the Year 2000
issue. The company expects to finalize these plans by mid 1999.
THE ESTIMATES AND CONCLUSIONS STATED HERE CONTAIN FORWARD-LOOKING
STATEMENTS AND ARE BASED ON MANAGEMENT'S BEST ESTIMATES OF FUTURE
EVENTS. RISKS TO COMPLETING THE PLAN INCLUDE THE CONTINUED AVAILABILITY
OF RESOURCES FROM SUPPLIERS AND THIRD-PARTY CONTRACTORS, THE ABILITY OF
SUPPLIERS AND CUSTOMERS TO BE Y2K COMPLIANT, AND THE ABILITY TO IDENTIFY
AND COMPLETE CONTINGENCY PLANS FOR SYSTEMIC FAILURES NOT UNDER COMPANY
CONTROL.
CERTAIN STATEMENTS IN THIS REPORT ARE FORWARD-LOOKING STATEMENTS. THESE
STATEMENTS INCLUDE RISKS AND UNCERTAINTIES. ACTUAL RESULTS MAY DIFFER.
CERTAIN FACTORS THAT COULD CAUSE ACTUAL RESULTS TO DIFFER ARE DESCRIBED
IN THE COMPANY'S ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER
1, 1997 AND IN QUARTERLY REPORTS ON FORM 10-Q FILED IN 1998.
<PAGE>
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
----------------------------------------------------------
No material changes occurred during the quarter to information
previously provided in the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1997.
PART II - OTHER INFORMATION
---------------------------
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
--------------------------------
(a) Exhibits
(27.1) Financial Data Schedule Quarter 3, 1998.
(b) No current reports on Form 8-K were filed with the
Commission in the third quarter of 1998.
<PAGE>
SIGNATURE
Pursuant to the requirements 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.
Date: November 9, 1998
THE MEAD CORPORATION
- --------------------
(Registrant)
By: G. T. GESWEIN
__________________________________
G. T. Geswein
Vice President, Controller and
Chief Accounting Officer
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
QUARTERLY REPORT ON FORM 10-Q OF THE MEAD CORPORATION FOR THE QUARTERLY PERIOD
ENDED SEPTEMBER 27, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
THIS SCHEDULE SHALL NOT BE DEEMED TO BE FILED FOR PURPOSES OF SECTION 11 OF THE
SECURITIES ACT OF 1933, SECTION 18 OF THE SECURITIES EXCHANGE ACT OF 1934 AND
SECTION 323 OF THE TRUST INDENTURE ACT OF 1939, OR OTHERWISE SUBJECT TO THE
LIABILITIES OF SUCH SECTIONS, NOR SHALL IT BE DEEMED A PART OF ANY REGISTRATION
STATEMENT TO WHICH IT RELATES.
</LEGEND>
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<PERIOD-END> SEP-27-1998
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