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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 March 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______________ to ______________
Commission File No. 1-2267
THE MEAD CORPORATION
(Exact name of registrant as specified in its charter)
Ohio 31-0535759
(State of Incorporation) (I.R.S. Employer Identification No.)
MEAD WORLD HEADQUARTERS
COURTHOUSE PLAZA NORTHEAST
DAYTON, OHIO 45463
(Address of principal executive offices)
Registrant's telephone number, including area code: 513-495-6323
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 March 31, 1996 was 52,722,826.
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THE MEAD CORPORATION AND CONSOLIDATED SUBSIDIARIES
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QUARTERLY PERIOD ENDED MARCH 31, 1996
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PART I - FINANCIAL INFORMATION
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ITEM 1. FINANCIAL STATEMENTS
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THE MEAD CORPORATION AND CONSOLIDATED SUBSIDIARIES
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BALANCE SHEETS
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(All dollar amounts in millions)
March 31, Dec. 31,
1996 1995
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ASSETS
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Current assets:
Cash and cash equivalents $ 137.8 $ 292.6
Accounts receivable 516.2 585.7
Inventories 524.2 410.5
Other current assets 92.8 78.5
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Total current assets 1,271.0 1,367.3
Investments and other assets:
Investees 134.8 141.0
Other assets 543.2 500.4
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678.0 641.4
Property, plant and equipment 4,377.9 4,318.7
Less accumulated depreciation and
amortization (1,993.9) (1,954.6)
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2,384.0 2,364.1
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Total assets $4,333.0 $4,372.8
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LIABILITIES AND SHAREOWNERS' EQUITY
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Current liabilities:
Accounts payable $ 299.5 $ 380.5
Accrued liabilities 332.1 359.3
Income taxes payable 16.9 9.0
Current maturities of long-term debt 73.7 73.0
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Total current liabilities 722.2 821.8
Long-term debt 726.0 694.8
Commitments and contingent liabilities
Deferred items 714.1 696.0
Shareowners' equity:
Common shares 157.3 157.8
Additional paid-in capital 2.1
Foreign currency translation adjustment (1.2) (.8)
Retained earnings 2,012.5 2,003.2
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2,170.7 2,160.2
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Total liabilities and
shareowners' equity $4,333.0 $4,372.8
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See notes to financial statements.
THE MEAD CORPORATION AND CONSOLIDATED SUBSIDIARIES
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STATEMENTS OF EARNINGS
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(All dollar amounts in millions, except per share amounts)
First Quarter Ended
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March 31, April 2,
1996 1995
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Net sales $1,067.2 $1,240.8
Cost of products sold 863.2 1,018.9
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Gross profit 204.0 221.9
Selling, and administrative expenses 134.9 136.7
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Earnings from operations 69.1 85.2
Other revenues - net 6.3 13.4
Interest and debt expense (14.7) (18.3)
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Earnings from continuing operations
before income taxes 60.7 80.3
Income taxes 22.5 30.6
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Earnings from continuing operations
before equity in net earnings (loss)
of investees 38.2 49.7
Equity in net earnings (loss)
of investees (7.3) 12.0
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Earnings from continuing operations 30.9 61.7
Discontinued operations 5.4
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Net earnings $ 36.3 $ 61.7
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Per common and common equivalent share:
Earnings from continuing operations $ .58 $1.07
Discontinued operations .10
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Net earnings $ .68 $1.07
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Cash dividends per common share $ .28 $ .25
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Average common and common equivalent
shares outstanding (millions) 53.5 57.7
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See notes to financial statements.
THE MEAD CORPORATION AND CONSOLIDATED SUBSIDIARIES
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STATEMENTS OF CASH FLOWS
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(All dollar amounts in millions)
First Quarter Ended
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March 31, April2,
1996 1995
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Cash flows from operating activities:
Net earnings $ 36.3 $61.7
Adjustments to reconcile net earnings to
net cash (used in) operating activities:
Depreciation, amortization and depletion of
property, plant and equipment 49.2 49.0
Depreciation and amortization of other assets 12.9 10.9
Deferred income taxes 7.1 13.3
Investees-earnings and dividends 6.8 (13.0)
Discontinued operations (5.4)
Other (8.7) (9.8)
Change in assets and liabilities:
Accounts receivable 69.5 (37.7)
Inventories (113.7) (60.0)
Other current assets (13.4) (12.3)
Accounts payable and accrued liabilities (103.6) (344.8)
Cash (used in) discontinued operations (1.2) (.9)
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Net cash (used in) operating activities (64.2) (343.6)
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Cash flows from investing activities:
Capital expenditures (77.6) (54.4)
Additions to equipment rented to others (13.0) (15.1)
Restricted funds 461.0
Proceeds from sale of business 19.6
Other (25.8) (1.9)
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Net cash provided by (used in) investing activities (96.8) 389.6
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Cash flows from financing activities:
Additional borrowings 32.8
Payments on borrowings (1.2) (144.9)
Cash dividends paid (14.8) (14.5)
Common shares issued 2.3 15.8
Common shares purchased (12.9) (241.5)
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Net cash provided by (used in) financing activities 6.2 (385.1)
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(Decrease) in cash and cash equivalents (154.8) (339.1)
Cash and cash equivalents at beginning of year 292.6 484.0
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Cash and cash equivalents at end of quarter $137.8 $144.9
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See notes to financial statements.
THE MEAD CORPORATION AND CONSOLIDATED SUBSIDIARIES
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NOTES TO FINANCIAL STATEMENTS
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(All dollar amounts in millions)
A - FINANCIAL STATEMENTS
The balance sheet at December 31, 1995 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):
March 31, Dec. 31,
1996 1995
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Finished and semi-finished products $376.9 $270.4
Raw materials 92.8 86.9
Stores and supplies 54.5 53.2
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$524.2 $410.5
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D - INVESTEES
The summarized operating data for all investees is presented in the
following table:
First Quarter Ended
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March 31, April 2,
1996 1995
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Revenues $145.2 $191.2
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Gross profit (loss) $(15.4) $ 46.3
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Net earnings (loss) $(13.6) $ 26.5
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E - ADDITIONAL INFORMATION ON CASH FLOWS
First Quarter Ended
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March 31, April 2,
1996 1995
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Cash paid for:
Interest $ 22.8 $ 28.2
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Income taxes $ 7.4 $308.4
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F - SHAREOWNERS' EQUITY
During the first quarter of 1996, the Company repurchased approximately
200,000 common shares on the open market. The Company has outstanding
authorization from the Board of Directors to repurchase up to five million
common shares, of which 1.1 million shares have been repurchased as of the end
of the first quarter of 1996.
G - DISCONTINUED OPERATIONS
Mead sold its previously discontinued Imaging business during the first
quarter of 1996. The sale resulted in a gain of $5.4 million, net of
income tax of $3.2 million.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
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AND RESULTS OF OPERATIONS
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RESULTS OF OPERATIONS
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Net Sales
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First quarter 1996 net sales of $1.07 billion were down 14% compared to
$1.24 billion for the same quarter of 1995, primarily due to lower volume. In
1995, Mead benefited from rising selling prices and strong demand. Those
conditions peaked late in 1995 and have since declined as customer and producer
inventories reached high levels. Furthermore, 1995 sales included those
of the fine paper mill in Kingsport, Tennessee that Mead sold early in the
second quarter of that year. Only Mead's Packaging Division and specialty paper
businesses posted sales gains over 1995. Sales during the quarter at
Mead's other operations were even with or below last year's levels.
Mead expects that market conditions for most of its businesses will stabilize in
the second quarter and begin to improve in the second half.
Operating Costs and Expenses
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Gross profit as a percentage of sales improved to 19.1% for the first
quarter of 1996 compared to 17.9% for the same period in 1995. This improvement
was made despite declining selling prices, some weather-related and other
operating problems, and charges to 1996 earnings related to severance
costs at the Chillicothe, Ohio, fine paper mill and the closing of
Mead's Fairless Hills, Pennsylvania, packaging operation. Though prices
have declined in 1996 from 1995 highs, they still averaged higher than the
first quarter of 1995 for many of Mead's businesses and, thus, margin
percentages were above 1995 levels overall. Looking forward to the second
quarter, 1996 gross margin percentages are expected to trail 1995 levels given
the assumed selling price trends.
Selling and administrative expenses declined slightly to $134.9
million for the first quarter of 1996 from $136.7 million for the first
quarter of 1995 in some respect due to declining sales. As a percentage
of sales these expenses increased to 12.6% in the first quarter of 1996
compared to 11.0% for the same quarter of 1995.
Other Revenues
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Other revenues were $6.3 million in the first quarter of 1996 compared to
$13.4 million earned in the same quarter of 1995. The higher level of
other revenues in 1995, reflected income earned on the temporary investment of
the proceeds received from the late 1994 sale of its Electronic Publishing
business. By the end of the first quarter of 1995, a substantial portion
of these proceeds had been used for debt reduction, taxes, common share
repurchases and other corporate purposes.
Interest and Debt Expense
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First quarter interest and debt expense declined from $18.3 million in the
first quarter of 1995 to $14.7 million for 1996. Several factors
contributed to the decrease including the repayment of medium-term notes and
other debt during 1995, less miscellaneous debt costs in 1996, and more interest
capitalized in 1996.
Income Taxes
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Federal and state taxes on income decreased from $30.6 million in the first
quarter of 1995 to $22.5 million for the first quarter of 1996. The effective
tax rate was 37.1% for the first quarter of 1996 compared to 38.1% for
first quarter of 1995. The improvement in the rate is due primarily to lower
taxes related to foreign operations.
Discontinued Operations
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Mead sold its Imaging business during the first quarter of 1996. The sale
resulted in an after-tax gain of $5.4 million, or $.10 per share.
Equity in Net Earnings of Investees
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Mead's investees, made up primarily of its 50% owned Northwood companies,
recorded a loss of $7.3 million for the first quarter of 1996 compared
with earnings of $12.0 million for the same quarter of 1995. World pulp
markets, strong throughout 1995, collapsed at the start of 1996. Northwood
experienced weak sales volume and selling prices for pulp and severe
weather-related operating problems. It also recorded a lower-of-cost-or-market
inventory write-down in the first quarter of 1996 to reflect the lower
selling prices. Additionally, demand for and selling prices of wood products
continue to be weak. During the quarter, Northwood's pulp and wood operations
took 15.5 and 5 days of market related downtime, respectively. Additional
downtime has been scheduled for the second quarter.
Financial Data by Business
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Paper Segment
First Quarter
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1996 1995 % Change
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(All dollar amounts in millions)
Net sales (to unaffiliated
customers) $269.4 $329.3 (18)%
Segment earnings before taxes 46.6 62.6 (26)%
First quarter net sales and earnings for the paper segment decreased from
1995 levels due primarily to lower sales volume. Also, the 1995 amounts
include the results of the Kingsport, Tennessee, fine paper mill that was sold
early in the second quarter of 1995. Selling prices declined steadily
throughout the first quarter of 1996, a trend that began in late 1995.
In contrast, selling prices rose steadily throughout the first quarter of 1995,
reaching a peak late in the year. Sales from Mead's Escanaba, Michigan,
publishing paper mill were down significantly from the prior year.
However, strong operations permitted this mill to post earnings that were down
approximately 10% from 1995. First quarter 1996 sales for the Chillicothe,
Ohio, fine paper mill were even with those of the same quarter of 1995.
Temporary operating problems and severance related expenses during the quarter,
however, reduced Chillicothe's first quarter 1996 earnings. Mead's specialty
paper mills at Menasha, Wisconsin and South Lee, Massachusetts, performed well
during the first quarter of 1996. By the end of the first quarter of 1996,
there were some signs that the market inventory adjustment is ending, but Mead
expects that 1996 will not see a return to the robust markets that prevailed
throughout 1995.
Packaging and Paperboard segment
First Quarter
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1996 1995 % Change
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(All dollar amounts in millions)
Net sales (to unaffiliated
customers) $325.8 $317.7 3%
Segment earnings before taxes 29.2 33.1 (12)%
First quarter 1996 net sales for the Packaging business were significantly
higher than those of the same quarter of 1995 for both foreign and
domestic operations. Segment earnings include a one-time charge related to the
recently announced closing of Packaging's Fairless Hills, Pennsylvania,
plant. 1996 sales for Mead's Alabama-based Coated Natural Kraft business were
virtually unchanged from the prior year, however, earnings were down
slightly. The second and third quarters are traditionally stronger for the
Coated Board system due to seasonal strength of the beverage packaging business.
Mead expects this business to perform at or above 1995 levels for the remainder
of 1996. Lower prices and weak demand for corrugating medium and reduced
volume in the converting operations caused Containerboard's 1996 first quarter
sales to trail those of the prior year. Containerboard's first quarter 1996
earnings were also affected by weather-related operating problems. Selling
prices for medium are not expected to increase until late second quarter
or early third quarter of 1996 due to current inventory levels. Converting
volume may continue to be weak for the remainder of the year.
Distribution and School and Office Products segment
First Quarter
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1996 1995 % Change
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(All dollar amounts in millions)
Net sales (to unaffiliated
customers) $472.0 $593.8 (21)%
Segment earnings before taxes 8.0 8.1 (1)%
For Zellerbach, Mead's distribution business, first quarter 1996 sales
were below last year in each of its three business units, but particularly in
its Printing Business Unit, for essentially the same reasons that impacted the
Paper Segment. Low volume caused 1996 earnings to be below those of 1995.
However, margins remained steady during the quarter, and paper mills have
indicated that shipments are now matching production levels and inventory
build is expected to stop. The first quarter of the year is typically a
slow quarter for Mead School and Office Products. The back-to-school season is
concentrated in the second and third quarters of the year. In 1995, there
was a tight supply for paper, and prices were rising. Retailers placed orders
early to obtain products ahead of announced price increases. Those
conditions do not exist in 1996 and, therefore, 1996 first quarter sales for
Mead School and Office Products are slightly below last year's levels. First
quarter 1996
earnings for this division, however, exceeded 1995 amounts due to improved
margins on certain commodity items and favorable operating performance.
LIQUIDITY AND CAPITAL RESOURCES
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Working capital was $548.8 million at March 31, 1996 compared to $545.5
million at December 31, 1995. The current ratio increased to 1.8 at the
end of the first quarter of 1996 from 1.7 at the previous year end.
Inventories at the end of the quarter are higher than at year end and the end of
the first quarter of 1995. Part of the increase is due to the annual build in
anticipation of Mead School and Office Product's back-to-school season but
part is also due to the weaker demand for many of Mead's products. Lower
sales volume has also caused accounts receivable to be lower than at
December 31, 1995.
Capital expenditures totaled $77.6 million for the first quarter of 1996
compared to $54.4 million for the same quarter of 1995. Some of the
increase is attributable to the previously announced $185 million expansion at
Mead's Stevenson, Alabama, corrugating medium mill.
Borrowed capital (long-term debt) as a percent of total capital (long-term
debt plus shareowners' equity) was 25.1% at March 31, 1996 compared to
24.3% at December 31, 1995. In connection with the Stevenson expansion, Mead
borrowed $25 million pursuant to a tax-exempt financing. Mead also
completed a $7 million tax exempt financing related to projects at the Coated
Board Mahrt mill. During the first quarter of 1996, Mead repurchased 234,500
shares of its common stock under an April, 1995 Board of Directors
authorization. Thus far, Mead has repurchased more than 1.1 million shares
under that program.
At the end of the first quarter, Mead paid a fixed rate or a capped rate
on 85% 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 earnings per share for the year. The estimated
market value of long-term debt, excluding capital leases, was $8.7 million more
than the book value at the end of the first quarter of 1996.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
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(a) Exhibits
(3) (ii) Regulations of The Mead Corporation effective April
25, 1996.
(10) Material Contracts:
(1) Corporate Annual Incentive Plan for 1996 in which
executive officers participate.
(2) Corporate Long Term Incentive Plan effective 1996 in
which executive officers participate.
(3) Section 415 Excess Benefit Plan dated January 1, 1996
which executive officers participate.
(4) Excess Earnings Benefit Plan dated January 1, 1996
which executive officers participate.
(5) 1996 Stock Option Plan dated April 25, 1996 in which
directors and executive officers participate.
(6) Restricted Stock Plan effective December 10, 1987, as
amended through April 25, 1996, in which directors and
executive officers participate.
(11.1), (11.2) Calculations of Net Earnings per Share.
(27) Financial Data Schedule
(b) No current reports on Form 8-K were filed with the Commission in
the first quarter of 1996.
SIGNATURE
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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: May 13, 1996
THE MEAD CORPORATION
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(Registrant)
By G. T. GESWEIN
_________________________
G. T. Geswein
Controller and
Chief Accounting Officer