MeadWestvaco Corporation is a Delaware corporation formed for the purpose of consummating the business combination of The Mead Corporation and Westvaco Corporation, which was completed on January 29, 2002. Unless otherwise indicated or the context otherwise requires, the term "MeadWestvaco" refers to MeadWestvaco Corporation and its consolidated subsidiaries, including Mead and Westvaco, and the terms "Mead" and "Westvaco" refer to The Mead Corporation and Westvaco Corporation, respectively, in each case together with their consolidated subsidiaries. Because for accounting purposes the merger was treated as an acquisition of Mead by Westvaco, the historical financial statements of Westvaco became the historical consolidated financial statements of MeadWestvaco, the registrant. The accompanying consolidated statement of operations for the six months ended June 30, 2002 includes approximately five months of Mead's results and six months of Westvaco's results. Note 2 provides summary unaudited pro fo rma information and details on the merger accounting.

Effective January 29, 2002, Westvaco changed its fiscal year end from October 31 to December 31. For comparative purposes Westvaco's fiscal quarter and six months ended April 30, 2001 have been recast on a calendar year basis to reflect the results for the second quarter and six months ended June 30, 2001.

In the opinion of management, all adjustments (consisting of only normal recurring accruals) necessary to present fairly the financial position and the results of operations for the interim periods presented have been made. These results have been determined on the basis of generally accepted accounting principles and practices applied consistently with those used in the preparation of the consolidated financial statements included in the company's 2001 Transition Period Report on Form 10-K for the period ended December 31, 2001.

Certain information and footnote disclosures normally included in financial statements presented in accordance with generally accepted accounting principles have been condensed or omitted. The consolidated results of operations for interim periods are not necessarily indicative of the results to be expected for the full year. The accompanying consolidated financial statements should be read in conjunction with the financial statements and notes thereto incorporated by reference in the company's 2001 Transition Period Report on Form 10-K for the period ended December 31, 2001.

Certain prior years amounts have been reclassified to conform with the current presentation. 

On January 29, 2002, Westvaco and Mead consummated a merger of equals to create a global company with leading positions in packaging, coated and specialty papers, consumer and office products, and specialty chemicals. The merger was structured as a stock-for-stock exchange and was accounted for as a purchase transaction under the recent guidelines for business combinations. Under the terms of the transaction, Mead shareholders received one share of MeadWestvaco stock for each share of Mead stock held, and Westvaco shareholders received 0.97 shares of MeadWestvaco stock for each share of Westvaco stock held. Mead shareholders also received a cash payment of $1.20 per share (paid by Mead). Westvaco and Mead determined that the relative outstanding share ownership and the designation of certain senior management positions required Westvaco to be the acquiring entity for accounting purposes with the historical financial statements of Westvaco becoming the historical financial statements of MeadWestvac o. The assets and liabilities of the acquired business are included in the consolidated balance sheet at June 30, 2002. Results of Mead's operations have been included in the consolidated statement of operations for approximately five months since the date of the merger. The purchase price for the acquisition, including

transaction costs, has been allocated on a preliminary basis to assets acquired and liabilities assumed based on estimated fair values at the date of acquisition. During the second quarter, the company adjusted the purchase price allocation for the acquisition due to refinements of values of certain plant, property and equipment and certain liabilities with corresponding adjustments to goodwill and deferred income taxes. Further refinements may be made in the second half of 2002, as certain other matters are resolved. The stock-for-stock exchange resulted in the issuance of approximately 99.2 million shares of common stock to fund the value of the merger of $3.1 billion. The preliminary purchase price allocation as of June 30, 2002 is as follows:

MeadWestvaco has established accruals relating primarily to employee separation costs, facility closure costs and other actions relating to the integration of certain Mead operations into MeadWestvaco. Costs associated with these integration actions are recognized as a component of purchase accounting, resulting in an adjustment to goodwill. Accordingly, these costs do not impact current earnings and have not been allocated to segments. These integration actions include the following:

The following table summarizes, under the purchase method of accounting, selected unaudited pro forma information for the six months ended June 30, 2002 and 2001 as if the business combination between Westvaco and Mead had been completed at the beginning of the periods presented. The 2002 information includes five months of actual data and one month of pro forma data. This selected unaudited pro forma combined financial information is included only for the purposes of illustration, and it does not necessarily indicate what the operating results would have been if the business combination between Westvaco and Mead had been completed at the beginning of the periods presented. Moreover, this information does not necessarily indicate what the future operating results of the company will be.

The unaudited pro forma information includes adjustments for income taxes, interest expense, depreciation, depletion and amortization. Included in the results for the three and six months ended June 30, 2002 is a pretax charge of $34 and $88 million, respectively, for restructuring and other merger-related costs.

During the first half of 2002, MeadWestvaco recorded total pretax restructuring charges and other merger related costs of $88 million, of which $43 million and $45 million were recorded within cost of sales and selling, research and administrative expenses, respectively.

The following table and discussion presents additional detail of the charges by business segment:

During the three months ended June 30, 2002, MeadWestvaco recorded total pretax restructuring charges and other merger related costs of $34 million, of which $13 million and $21 million were recorded within cost of sales and selling, research and administrative expenses, respectively.

The following table and discussion presents additional detail of the charges by business segment:

Packaging: During the second quarter the company took actions to streamline its packaging operations through the disposal of a packaging plant in Richmond, VA and through other cost reduction measures. These actions resulted in a $5 million pretax charge covering approximately 120 former Westvaco employees. This charge is primarily due to the write down of long-lived assets and employee restructuring benefit costs. As of June 30, 2002, 92 employees had been separated, the remaining separations are expected to occur by the end of 2002.

Paper: As part of the company's planned integration strategy, MeadWestvaco announced the permanent closure of an older, high-cost coated paper machine at the Westvaco Luke, MD mill. Charges during the

first quarter associated with the shutdown included $11 million to write down the assets using an assets-to-be-disposed-of model. Integration of the Mead and Westvaco paper groups resulted in $3 million of restructuring benefit costs covering approximately 60 former Westvaco employees, of which $2 million was recorded in the second quarter of 2002. As of June 30, 2002, 28 employees had been separated. The remaining separations are expected to occur by the end of 2002. In addition, during the first quarter of 2002 the company recognized related inventory writedowns of $1 million.

Corporate and other: As part of the company's planned integration strategy, the reorganization of overlapping corporate and other business units, principally information technology, finance, forestry, purchasing and logistics and other functions resulted in current year charges that included $19 million of asset write-downs and $18 million of employee restructuring benefit costs covering about 371 employees, which the company expects to be substantially completed within a year. Of these amounts, $1 million of asset write-downs and $5 million of employee restructuring benefit costs were recorded in the second quarter of 2002.

Other merger and related costs includes charges for integration-related consulting and costs associated with relocating certain Westvaco functions which are expensed as incurred.

During the fiscal year ended October 31, 2001, Westvaco recorded total pretax restructuring charges of $57 million, including $5 million of inventory writedowns included within cost of sales. The charges were primarily recorded in the fourth quarter and were primarily attributable to realignment of the consumer packaging operations and the shut down of a paper mill in Tyrone, PA. As of June 30, 2002, all of the actions related to these charges were complete and the balance of the accruals for employee and other costs at June 30, 2002 were substantially utilized.

4. Goodwill and Other Intangible Assets:

Effective January 1, 2002, the company adopted the provisions of Statement of Financial Accounting Standards (SFAS) 142. The company has determined its reporting units to be: (1) packaging, (2) paper, (3) consumer and office products and (4) specialty chemicals. In accordance with SFAS 142 goodwill and indefinite lived intangible assets will no longer be amortized but will be tested for impairment upon adoption of the standard and annually thereafter. SFAS 142 requires that goodwill be tested for impairment using a two-step process. The first step is to identify a potential impairment and the second step measures the amount of the impairment loss, if any. SFAS 142 requires that indefinite lived intangible assets be tested for impairment using a one-step process which consists of a comparison of the fair value to the carrying value of the intangible asset. Goodwill is deemed to be impaired if the net book value of a reporting unit exceeds its estimated fair value. Intangible assets are deemed to be impaired if the net book value exceeds its estimated fair value. The company recorded an impairment charge of $352 million resulting from the transitional impairment tests which was reflected as the cumulative effect of a change in accounting principle in the accompanying consolidated statement of operations, effective as of the beginning of 2002. The resulting impairment charge was the same before and after taxes as the related goodwill cannot be deducted for tax purposes. The charge was determined by calculating the estimated fair value using a discounted cash flow methodology.

The impairment charge related to various consumer packaging businesses acquired during 2000 and 2001, before the onset of the current weak economic environment. The impairment charge reflects a more challenging economic and business environment than was expected when the businesses were acquired.

MEADWESTVACO CORPORATION
and Consolidated Subsidiary Companies

Market multiples for valuation purposes are also lower due to lower stock market values. The businesses acquired hold market-leading positions in:

Since the acquisitions were made, sales of CD's in Europe and in the U.S. have been flat to down, whereas growth trends above 5%, which prevailed prior to the acquisitions were expected. It is not known whether growth rates for CD's and CD packaging for recorded music will resume, but the company's market position has remained strong in Europe and in the U.S. Revenues and profit relative to sales of DVD's both for games and films have been equal to or greater than expectations at the time of the acquisitions. Sales and earnings in cosmetics packaging have been hurt by weaker than expected economic conditions since the acquisitions, as well as the lingering effects of the events of September 11, 2001. The company has maintained its strong position as a provider of packaging to many of the world's leading cosmetic companies and continues to create innovative packaging to meet the needs of these global companies. In pharmaceutical and healthcare packaging, results have been below expectations at the time of the acquisition. The major factors are (i) situations where United States Food and Drug Administration (FDA) approvals for certain customers were delayed; (ii) more competitive pricing for folding cartons and (iii) operating inefficiencies resulting in part from the introduction of new equipment. In 2001, the company put in place a new management team to improve operations in the pharmaceutical packaging business and began to successfully market a proprietary new product for use in pharmaceutical packaging. Results have improved and the company believes that the pharmaceutical packaging business will yield improved profitability over the long term based on:

The changes in the carrying amount of goodwill for the six-months ended June 30, 2002 are as follows:

Due to the significance of the Westvaco and Mead merger, the allocation of goodwill to reporting units is still in process and is expected to be completed by the end of the year. The merger accounting has resulted in recording approximately $483 million of goodwill. Such goodwill was not subject to the impairment analysis performed as of January 1, 2002 because the transaction closed on January 29, 2002.

The following table summarizes and reconciles net income for the three and six months ended June 30, 2002 and 2001, adjusted to exclude amortization expense recognized in such periods related to goodwill that is no longer amortized:

The company recorded amortization expense of $7 million and $12 million for the three and six months ended June 30, 2002, respectively, relating to amortizing intangible assets.

Based on the current value of intangible assets subject to amortization, the estimated amortization expense for the current year and each of the succeeding 5 years are as follows: 2002: $15 million; 2003: $28 million; 2004: $28 million; 2005: $27 million; 2006: $26 million; and 2007: $23 million. As acquisitions and dispositions occur in the future and as purchase price allocations are finalized, these amounts may vary.

During the first six-months of 2002, the company acquired the following intangible assets as a part of the merger with Mead:

5. Current Assets
Cash equivalents of $8 million ($23 million at December 31, 2001) have maturities of three months or less and are valued at cost, which approximates market.

Inventories included in the consolidated balance sheet consist of the following:

6. Other Assets
Included in other assets at June 30, 2002 are cash surrender values of life insurance of $190 million, identifiable intangibles of $323 million, investment in investees of $98 million, equipment rented to others of $57 million, an investment in convertible debentures of $53 million (including an embedded derivative), capitalized software of $87 million and other miscellaneous assets of $114 million.

Equipment rented to others and capitalized software are being amortized using the straight-line method over their estimated useful lives. The convertible debentures were received by Mead as part of the consideration for the sale of an equity investee in 1999. The debentures are classified as available-for-sale securities and are carried at fair value with unrealized gains or losses, net of tax, reported in other comprehensive income [loss]. The fair value of the securities is based on an independent valuation. The securities are convertible to common shares of the issuer at any time, redeemable by the issuer beginning in November 2002 and mature in November 2006. In addition, the debentures included an embedded option which qualifies as a derivative under SFAS 133, Accounting for Derivative Instruments and Hedging Activities, as amended.

7. Net Income Per Common Share
Basic earnings per share for all the periods presented have been calculated using the weighted average

shares outstanding. In computing diluted earnings per share, net incremental shares issuable upon the assumed exercise of stock options have been added to the weighted average shares outstanding. For the quarter and the six-months ended June 30, 2002, the weighted average number of shares outstanding was 200 million and 184 million, respectively. These averages reflect 101 million shares for January when Westvaco only results are reflected and approximately 200 million shares for periods following the merger. For the three months and six months ended June 30, 2001, options of 6.0 million and 6.0 million, respectively, for the exercise of common stock were not included in the calculation of weighted average shares for diluted EPS because their effects would have been antidilutive.

The company's existing treasury shares were retired and cancelled in connection with the merger and, accordingly, did not participate in the merger exchange.

Commencing with the first quarter ended March 31, 2002, MeadWestvaco's principal business segments are (1) packaging, (2) paper, (3) consumer and office products, and (4) specialty chemicals.

The Packaging segment manufactures, markets and distributes bleached paperboard, coated natural kraft, containerboard and saturating kraft and packaging for consumer products markets. The Packaging segment also manufactures printed plastic packaging and injection-molded products used for packaging DVDs and CDs. In addition, the packaging segment designs and produces multiple packaging and packaging systems primarily for the beverage take-home market. This segment's products are manufactured at five domestic mills and two mills located in Brazil; paper, board and plastic are converted into packaging products at plants located in the United States, Brazil, Japan and Europe. These products are sold primarily in North America, with additional markets located in South and Latin America, Europe, Asia and the Pacific Rim. See Note 15 for additional discussion regarding the planned sale of the Stevenson AL, corrugated medium mill.

The Paper segment is engaged in the manufacturing and marketing of coated, carbonless and specialty papers. This segment's products are manufactured at seven domestic mills and one mill located in the United Kingdom. 

The Consumer and Office Products segment operations are conducted predominantly in North America and manufacture and distribute school, office, envelopes and time-management products to retailers and commercial distributors.

The Specialty Chemicals segment manufactures products at four domestic locations. Major product groups are: activated carbon products and services; printing ink resins and lignin-based surfactants; tall oil fatty acid, rosin and derivative products.

Corporate and other includes the company's forestry operations and income and expense items and other activities not directly associated with segment operations, including corporate support staff services and related assets and liabilities, including goodwill.  

The segment profits are measured before goodwill write-downs, restructuring charges, net pension credits, interest expense, income taxes, extraordinary items and cumulative effect of accounting changes. Sales between the segments are recorded generally at terms intended to approximate market prices.

Comprehensive income [loss] reflects changes in equity that result from transactions and economic events from non-owner sources. Comprehensive earnings [loss] for the three months June 30, 2002 and 2001, were $[7] million and $10 million; respectively. Comprehensive earnings [loss] for the six months and ended June 30, 2002 and 2001, were $[427] million and $12 million; respectively. The difference between net loss and comprehensive loss for the three and six months ended June 30, 2002 primarily relates to the change in foreign currency translation adjustment.

The company uses various derivative financial instruments as part of an overall strategy to manage exposure to market risks associated with interest rate and foreign currency exchange rate fluctuations. 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 derivative financial instrument agreements is not considered material by management. 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.

The convertible debentures recorded in Other Assets include an embedded option which has been bifurcated from the debenture and not designated as a hedge. The fair value of the derivative was $6.8 million at June 30, 2002.

The company utilized interest rate swap agreements to hedge some of the interest rate characteristics (risks) of a portion of its outstanding fixed rate debt. The company's goal is to create a prudent balance between fixed and floating rates. At June 30, 2002, MeadWestvaco had interest rate swaps with a total notional amount of $634.3 million designated as fair value hedges of certain fixed rate borrowings. This resulted in approximately 29% of MeadWestvaco's debt being subject to variable interest rates. The maturity dates on these swaps match the maturity dates of the underlying debt in 2004, 2007, 2009, 2027 and 2028. During the three and six months ended June 30, 2002, the amount recorded associated with the ineffectiveness of fair value hedges of interest rate risk was not material. The company also has an interest rate swap with a notional amount of $50 million and remaining life of four years, designated as a cash flow hedge. There was no ineffectiveness recorded for this hedge for the three an d six months ended June 30, 2002. The fair value of the company's interest rate swap agreements at June 30, 2002 is a net asset of $13.8 million. In order to minimize counterparty credit risk, the company entered into interest rate swap contracts only with major financial institutions with strong credit ratings.

The company is exposed to price changes in raw materials, components, and items purchased for resale. The prices of some of these items can vary significantly over time due to changes in the markets in which the company's many suppliers operate. The company's selling prices often change in a similar fashion, although often to a greater or lesser degree. The company currently uses a limited amount of derivative

financial instruments to manage its exposure to changes in certain commodity prices. For this purpose, the company has entered into swap transactions, which expire in 2002 and 2003. These contracts are designated as cash flow hedges of the forecasted purchases of old corrugated containers and forecasted sales of medium. There is no ineffectiveness associated with these contracts as the terms of the swap contracts and the items they are hedging, match. The fair values of these commodity contracts and the impact of the change in fair values were not material as of June 30, 2002.

The company uses foreign currency forward contracts to manage some of the foreign currency exchange risks associated with its international operations. The company utilizes forward contracts, which are short-term in duration, and receives or pays the difference between the contracted forward rate and the exchange rate at the settlement date. The forward contracts, which are not designated as hedging instruments under SFAS 133, are used to hedge the impact of the variability of exchange rates on the company's cash flows. The fair values of these foreign currency forward contracts were not material as of June 30, 2002.

Long-term debt consists of the following at: